Advice is cheap and plentiful, especially lousy advice.  Good advice, while hard to find, can be extremely valuable for your financial plan.  How can you tell if the advice you’re getting is good or bad?   You need to understand the source.  Meaningful, unbiased advice is out there.  Asking your advisor these 12 questions will help you evaluate the advice being given to you.

1 – What investment license do you have?

There are 3 basic licenses that permit someone to give investment advice.

Life insurance license – You might be asking how a life insurance agent can recommend investments.  Well, the life insurance industry has come up with its own investments to sell.  They’re called segregated funds.  These investments are mutual funds with a principal guarantee.  They are considered to be ‘insurance products’ therefore they’re sold by life insurance agents.  This is great for the insurance industry because life agents can now manage your life savings.  Segregated funds have turned insurance salespeople into investment advisors.  It’s fine if your advisor has a life insurance license – but not if it’s his only license.

Mutual Fund License – Some financial planners are only able to provide mutual funds to you because that’s all their license lets them provide.  Mutual funds can be great investments in many circumstances, but not in all circumstances.  If your advisor is only mutual fund licensed, you ARE missing opportunities, and you’re guaranteed to own only one kind of investment: mutual funds.

Securities License – This is the license to look for.  It allows your advisor to deal with stocks, bonds, mutual funds, principal protected notes, preferred shares, flow-through shares, ETF’s, you name it.  He can offer you the whole spectrum of investments.  Why would you let your advisor limit your choices?  Your financial advisor must have a securities license.  If your advisor does not carry this license, find one who does.

2 – What education do you have?
If your advisor is securities licensed, he must have some financial knowledge, but he’s not necessarily an expert.  He took some financial courses to get his license, and in order to maintain his license he’s forced to keep taking financial courses.  The securities industry provides a multitude of courses that give advisors continuing education credits.  Some of which are excellent, some aren’t.    Having the license isn’t necessarily enough to guarantee your advisor has enough education.

That’s why you want to be dealing with someone who is a Certified Financial Planner.  Look for the CFP designation.  Other financial planning designations are OK and there are lots of them, but the CFP designation is the gold standard.

Remember, just because someone carries the CFP designation doesn’t mean they do any REAL financial planning, but it’s a good place to start.

3 – How many clients do you have?
Let me tell you a story to show you why this is an important question to ask.

Several years ago I was at a birthday party for my nephew.  I got to chatting with a guy I met there named Steve.  He asked me what I did for a living, I told him I was a financial planner and the firm I was with.  Steve told me he was a client of the firm.   It turned out that his advisor was a guy I knew well.  His name was Jerry; his office was down the hall from mine.  I asked Steve how long he’d been a client of Jerry’s.  Steve said, “About 8 or 9 years”.

The next day at the office I ran into Jerry and told him I met a client of his.  Jerry said, “Who is he again, I can’t remember him”.  With 1100 clients, Jerry had far too many clients.

A financial planner can’t manage more than 200 clients.  I don’t care how automated his office is, or how many assistants he has, it is impossible to manage any more than 200 and do it well.

4 – Will you show me the type of planning you do BEFORE I buy in?
Before I took on any new client, I gave them an outline of their financial plan first.  They knew exactly what their financial plan was ahead of time.  I explained where their financial opportunities and obstacles were and what they needed to do about them.  They knew this BEFORE I knew if they were even going to become clients.  I gave away the framework of their plan ahead of time.  Sometimes, after I gave away the advice, people would run off and try to do it themselves.  Why did I take this risk?

It was the only way I could demonstrate that I knew my stuff, and the only way the clients could know what they were getting into.

Many financial planners avoid showing you the financial plan before you become a client.  They’re scared you’ll do it yourself once you’ve got the information.  But more often, there’s no plan to show you.  Most financial planners are just salespeople; they’re financial planners in name only.  Sure, they love to talk about investments and their money management skills but that’s not doing financial planning, it is just ‘selling’.

You need to know ahead of time if there even IS a plan.  How are you going to save tax?  What strategies will be used?  What investment vehicles will be included?  What investments will be ignored and why?  What rate of return do you need to earn to reach your goals?  How will the plan earn it?  How does the plan reduce risk?  What other advisors like a lawyer or accountant might be needed?  What financial issues are being tackled first?  Which issues are the most urgent?  Do RRSPs make the most sense or will the plan focus on alternatives to RRSPs?  How does the plan maximize the efficiency of your cash-flow?  How are your estate goals going to be achieved?

The only way you can know what he can really do for you, if anything at all, is to review his financial plan for you.  Ask to review the plan first.   If he isn’t willing to do this, walk away.

5 – Will you force me into proprietary investments?
Some financial planners work for firms that have in-house proprietary products.  Some firms ONLY sell their own proprietary in-house products.  If you’re advisor is with a proprietary, in-house products only firm, your choice of investments will be severely limited.

You should NEVER settle for a proprietary investment.  Most proprietary investments are characterized by high fees and low performance.  Don’t be steered into in-house investments.  You want your advisor to be objective and your investments to be excellent.

If your advisor works for a proprietary investment only company, find a new advisor.

6 – What ways can I pay you?
There are 3 ways financial advisors work with clients. (Read: How You Pay For Advice Matters)

Commission or Transaction Based – You pay a commission when you buy or sell an investment.  Your advisor is compensated from these transactions and from mutual fund trailer fees. This is usually the least expensive way, but can be the least objective.  Sometimes advisors churn clients’ accounts, needlessly buying and selling investments to increase their compensation.  It all depends on the integrity of your advisor.

Fee Based – You pay an annual fee to your advisor based on the amount of money he’s managing for you.  You pay this fee whether you have a lot of transactions or none at all.  This model might appear more objective because your advisor will lack motivation to churn your account.  However, this model guarantees a minimum income to your advisor, regardless of his performance or his effort.

Fee For Service – With this model, you pay for your financial plan directly.  The financial advice (financial plan) is separated from the implementation of the plan.  Under this model, you buy the advice from one person, and the investments from someone else.  You can pay for fee for service advice either hourly or as a packaged fee.  This way is usually the most objective way to pay for advice, but it is the most expensive.  Under this model, you pay once to get the advice, and again when you implement the advice.

What’s the best way?

There is no best way, but some ways are better than others, it depends on your situation.  How often will you trade investments and how much financial advice do you need.  Your advisor should give you the choice of all three models and let you decide.

7 – How much will it cost me?
You’d think that everybody would ask this question before signing on, but not everyone does.  Some people think it’s impolite.  Think of it this way; if you hired someone to build you a new deck, you’d ask how much it was going to cost you.  You should ask how much you are going to have to pay before you hire a financial planner or investment advisor.

How much you’d expect to pay depends on what way you are working with your financial planner.

A transaction/commission based account should never cost you more than 3.0% per year in total fees.  This includes hidden management fees in mutual funds.

A fee based account should never exceed 3.5% per year in total fees.  Make sure you are looking at total fees.  Fee based accounts can have mutual funds in them, in which case you will need to include management fees on your mutual funds when calculating your overall fees.

A fee for service financial plan can cost anywhere from $2,000 to $15,000 for the plan.  It all depends on how complicated your situation is and how much work there is to do.  The majority of financial plans end up being at the lower end of this range.

8 – What car do you drive?
Why ask this question?  The car a person drives often tells you a lot about them.  You and your advisor need to have the same core values and beliefs about money.   A person that drives an exotic sports car has different financial values than someone who drives a smart car.

Asking your advisor what he drives is one way to try to understand if you share the same values about money and wealth.

9 – Can I talk to your clients?
Always ask for references.

Very few clients ever do, every client should.  Simply, ask to speak to three clients.  Always ask the reference: Is your Advisor doing what he claimed he would do?  How often does he meet with you?   In your meetings, does he talk about tax planning and estate planning ideas or just new investments he wants to sell you?

One reference request I got from a potential client stands out in my memory more than any other.  The prospect specifically wanted a reference from a previous client of mine – not a current client.  Every advisor has had clients leave for one reason or another.  He believed that a former client would be more honest than a current one and share more information.

10 – What experience do you have?
When I first started in the business I didn’t think that a whole boat load of experience was that important because every year we’re in a new world.  The government changes tax rules all the time and the market changes daily.  I believed that experience from 10 years ago was irrelevant because what made sense to do 10 years ago is likely different today.

But the truth is that I’m a better advisor today for living through several market corrections and market crashes.  Managing money and emotions is different during a recession than in periods of economic expansion.  I lived through different cycles and learned during each one.

Your advisor needs at least 5 years experience.  Don’t be a casualty of an advisor that’s learning on the job.

11 – Do you have an assistant?
There will always be times that you need to speak to your advisor in a hurry and you can’t wait until tomorrow playing phone tag.  Assistants are always available and can help you right away with most issues.  If it’s an emergency, the assistant always knows how to reach the advisor in a hurry.

Insist on an advisor who has an assistant.   A financial planner can’t effectively handle a book of clients without one.

12 – What’s in your portfolio?
How do you know if your advisor is selling you a bunch of bunk?  Ask him to show you his portfolio.  Only a few clients ever asked me to show them mine.  People don’t want to be nosey.   But this is a perfectly reasonable question, and I was happy to show my portfolio.

Don’t be shy.  It’s like asking a car salesperson to see his car.  He understands the question and should be happy to show you too.  Your advisor should be completely transparent.