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Looking for a Financial Professional?

Here are 10 Questions You Should be Asking

It can be hard to know where to start when you’re looking for a financial professional - there are so many variables, questions and qualifications that you have to weigh before making an informed decision.  Before committing to a financial advisor, make sure you ask these ten questions of your prospective financial planner. 

1. Are you a fiduciary?

The sad truth is most financial professionals are not fiduciaries (a person who holds a legal or ethical relationship of trust with one or more other parties; typically, a fiduciary prudently takes care of money or other assets for another person). These non-fiduciaries aren’t required to place your best interests ahead of theirs.  Instead, these professionals are held to what’s known as a “suitability” standard, which means their advice only needs to be “suitable”--not necessarily the best.  In this world, the advice may be “suitable,” but not the best the professionals has to offer, and you end up paying the cost for that. This can lead to what’s known as “conflicting advice,” where a professional gives you a recommendation that conflicts with your best interest, usually because the professional stands to gain on the transaction.   One study pegged the cost of such conflicting advice at $17 billion each year.

A higher threshold is what’s known as the “fiduciary” standard.  The Securities and Exchange Commission (SEC) requires fiduciaries like HCM to put their client’s interests above their own. The fiduciary standard exists to ensure a level of responsibility, loyalty and care from the professional to their client.  Fiduciary professionals are prohibited from buying or selling securities for themselves ahead of their clients, they must ensure any advice given is as thorough and accurate as possible, they must disclose any potential conflicts of interest, and they must strive to trade securities with the best combination of low cost and efficient execution. HCM Wealth Advisors believes in being fiercely loyal to its clients, and as such is proud to be a fiduciary financial professional firm.   

2. What credentials do you have?

Technically there’s no licensing requirement to call oneself a financial advisor, but there are several designations in the field that are advantageous and appealing to investors.  To find a quality advisor, you should restrict your search to people who have CFP®, CPA/PFS, CFA or ChFC certifications. It is important to ask what their specialized service offerings are. Make sure what they’re offering fits your needs. 

If you’re looking for a financial planner, it’s important to seek out one with the proper credentials.  For example, planners with the CFP® certification have thousands of hours of training, must pass rigorous examinations, and are bound by an ethical code to put their clients’ interests before their own as fiduciaries.  A Certified Public Accountant/Personal Financial Specialist (CPA/PFS) has similar ethical obligations as training as a CFP®, but with the benefit of having additional knowledge regarding tax, accounting, and business management.

One easy way to check out an advisor’s record is to examine their Form ADV. (A Form ADV is the uniform form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities.) Most advisors will provide you with this early on in the process; consider it a red flag if they don’t. 

3. What is your investment philosophy?

Your advisor’s approach to investing is a crucial feature of your investment and retirement security. When looking for a wealth management advisor, you should have a clear understanding and belief in your investment advisor’s philosophy.  Don’t invest with an advisor whose approach you just can’t seem to understand. 

Does your financial advisor believe in active or passive investment?  How does your advisor prioritize aggressive growth versus asset preservation?  What about providing reliable income during retirement?  Knowing what your advisor prioritizes, and the tradeoffs that may require, is essential to understanding how your money will be invested and what returns you’re likely to see. 

Does your advisor select individual stocks, or do they use mutual funds and ETFs? If the advisor uses mutual funds, are they active or passive?  How much extra cost do the mutual funds bring to your portfolio? These are just some of the questions that can help you better understand your advisor’s investment philosophy. Above all, make sure it aligns with your long-term philosophy and goals for the future.

4. How do you get paid?

One of the most crucial financial advisor questions is how you get paid. Broadly speaking, there are three models of payment for financial advisors: commission-only, fee-based, and fee-only.  A commission-only financial professional will receive a commission, or sales charge, off the top of any investment.  For example, if you were to invest $5,000 at 5% commission, the advisor would take $250 off the top and the remaining $4,750 would be invested in the given product.  The worry with this model is that the advisor may be incentivized to maximize his return, not yours.  In this scenario, the advisor may seek out an investment product with a 7% commission when one with a no commission would have been more suitable for you.  As a result, you may receive suboptimal returns.

A fee-based financial advisor is a hybrid, taking both commissions and fees for service.  This “double-dipping” sets up the same possible conflict of interest that a commission-only advisor would have.

Fee-only advisors, specifically fee-only Registered Investment Advisors, don’t sell products and don’t take commissions, but they do operate as fiduciaries.  Fee-only wealth management advisors are compensated by the client and the client alone. HCM Wealth Advisors believes the fee-only model provides for the best services and is in the best interests of the client.  As such, HCM is a fee-only Registered Investment Advisory Firm.

5. How will you invest my money?  

Asset allocation has to do with the mix of equities, fixed-income products, and cash and equivalents that your portfolio is holding.  In general, equities (stocks) are the most aggressive and volatile, cash and equivalents are the least aggressive and volatile, and fixed income products (bonds) fall somewhere in between.  Although there are no universal rules when it comes to asset allocation, in general, you want a well-diversified portfolio. When looking for a financial advisor, be wary of anyone who only invests in a certain stock sector; your portfolio should include domestic and international stocks, and small-, mid-, and large-cap companies.

When investing for retirement, it’s important to take an age-based asset allocation approach.  Broadly speaking, this involves taking a more aggressive (stock-focused) approach during your accumulation years, progressively scaling back toward a less aggressive allocation (bonds, cash, and equivalents) as you age, and focusing on income production when you’ve retired.   This has to do with the nature of each type of investment.  Stocks offer both a higher risk and a higher return; over the long term, you can expect to do quite well invested in stocks, but there can be short-term volatility that can cause issues.  You want to be invested in these early on, while you’re still making money, but tapering down on them as you get closer to retirement.  In retirement, your investments become a source of income; thus a more conservative asset allocation makes sense as you get closer to retirement, to account for market volatility.  Making yourself less vulnerable to potential swings in the market offers you a more secure retirement.

Because everyone’s situation is different (pension/no pension, inheritance/no inheritance, big 401k/no employer plan, need health insurance/don’t need health insurance, retiring early/retiring late), discussing a plan with your financial advisor before you invest is critical.  At HCM, we assess your risk tolerance and capacity, your need for income, your legacy planning goals, and only then create an investment plan that fits your needs. With continued, active management, we adjust the plan accordingly, depending on life changes, market stress, and new opportunities.  You should look for an advisor who doesn’t just set a plan and forget it, but one who re-evaluates it periodically to ensure it’s the best for your situation.

Another aspect of investing includes using dividend paying stocks and low-cost exchange traded funds to build portfolios. Additionally, your financial advisor should be mindful of taxes and how rebalancing and moves within your portfolio affect your tax situation each year.

6. Where will my money be held?  

It’s important that your money be held by a third party that can provide independent statements.  If your money is being held by your financial advisor, there’s no third-party check to verify statements or performance reports prepared by your advisor.  For reference, Bernie Madoff acted as his own custodian, and as a result was able to defraud his clients of billions of dollars. 

The best financial advisors--the only advisors you should be working with--will have a third party to hold your funds. Clients who utilize a third-party custodian have that independent check in place.  Most custodians provide online access, allowing you to verify your account balances at your discretion.  A quality custodian, like Schwab is for our HCM clients, should be a reputable company that regularly sends you statements and provides online access to a variety of services.  They will also invest heavily in online security.  Be sure to verify that your advisor works with a quality custodian, get the name of that custodian, and do some research on them yourself to ensure they’re top of the line.

7. How do you measure success?

Success in wealth management can be hard to define, but you know it when you “feel” it.  Sure, everyone wants competitive investment returns and reliable income in retirement, but success requires more.  It requires a trusting relationship that includes technical expertise to co-ordinate tax and financial and estate planning.  It requires the attention to details that will allow you to sleep at night knowing you have financial matters taken care of.

Success must be defined holistically.  Success is more than the accumulation of money; it requires a state of well-being and peace of mind. At HCM, we believe success means financial freedom.  Does your advisor understand that, and can they help you build a plan to achieve true success? 

8. How will you manage my account with regards to taxes?

Nearly every financial decision you make will have tax implications either now or in the future.  The best financial advisors will be ones who consider these tax consequences when helping you plan for your financial future.   Will they need to outsource tax questions to a third party?  Is this even a concern for the advisor you’re talking to?  Between taxable, tax-deferred, and tax-free assets and knowing when to best recognize income or take deductions, optimizing these decisions to reduce your tax liability can mean the difference between good and poor after-tax returns. At HCM, when giving financial advice, taxes are front of mind: we consider the tax implications of the investment in different types of securities, when we rebalance our portfolios, and when we harvest deductible losses and taxable gains. We believe it’s not what you make, but what you keep that counts.  And with keeping taxes in mind when making decisions, we help you to hold on to more of what you make.

Tax law is constantly changing, and approaches to tax planning must evolve.  Most brokers suggest that you consult your tax advisor.  At HCM we have a team of CPA-tax advisors on our team and they participate in your planning.

9. How will you communicate?

There are many things that are out of your financial advisor’s control, including the behavior of the markets and laws governing finances.  But communication is one thing that your advisor does have complete control over, so make sure they do it well. 

First, determine how and how often you’d like to hear from your financial advisor.  Do you want a casual phone call once a year, do you want in-depth presentations on your assets quarterly, or do you want more frequent communications?  Many people hire an advisor so they don’t have to think about their portfolio; others want to be involved every step of the way.  Know which type you are and seek out a communication style that fits you. 

Second, what is your preferred method of communication and does you advisor communicate that way?  If you prefer phone calls, but the advisor only emails, you may want to look elsewhere. Also, look for someone who proactively communicates with you, rather than an advisor who only engages when you reach out.  Additionally, you should seek out an advisor who makes you more knowledgeable and empowered to make financial decisions, rather than someone who confuses or overwhelms you with information.  Good advisors are good teachers, and they’ll make sure you understand what’s going on with your money. 

At HCM, we pride ourselves on the communication we have with our clients. If you want to learn more, we have newsletters, blogs, and market analysis. If you like social media, you’ll find us on Twitter, Facebook, and LinkedIn. If you want meetings, we proactively invite you to meet with your advisor either via the phone or in person. We invite you to be a part of our community in whatever way makes you the most comfortable. 

10. Have you ever received any disciplinary actions?

Finally, it’s important to know whether your financial advisor has been sanctioned, disciplined, or convicted of any previous wrongdoing.  Depending on what lies in an advisor’s past, there could be major red flags you’d want to avoid. Whether it is something egregiously criminal like a Ponzi scheme, or something relatively minor like tax errors or malfeasance, these are things you should be well aware of before hiring someone to manage your money for you.

Fortunately, this information isn’t too hard to find. Advisors are required to disclose their firm’s history in their Form ADV. If you have issues getting it from the advisor, the SEC has it on file as well.  You can also check FINRA’s website for any past misdeeds.  Moreover, any financial planner who is a CFP® will be monitored by the CFP® Board and subject to disciplinary action if they violate the Board’s standards.

You can review HCM’s Form ADV Part 1 and Part 2 here

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