How asking the right questions can help you identify the right financial adviser Featured

7:01pm EDT January 31, 2012
How asking the right questions can help you identify the right financial adviser

When choosing an investment adviser, many people are quick to hand over their money without asking questions. But failing to ask the right questions can lead to choosing an adviser whose philosophy doesn’t match yours and could cost you money, says Patrick Griffin, senior vice president, Lorain National Bank.

“Too often, the first question people ask an adviser is, ‘What should I buy?’” says Griffin. “What you should be asking is, ‘Who am I doing business with?’ This is the person to whom you are turning over your life savings. You have to ask the right questions to find the best person who fits your comfort level.”

Smart Business spoke with Griffin about the six Ps — profile, philosophy, people, process, performance and price — that can help you identify the right adviser for your needs.

When interviewing a prospective adviser, where do you start?

Start with the profile of the organization with which you are potentially going to do business. How much in assets is it responsible for? How many locations does it have? How many clients does the adviser have, and what other resources are available?

If you’re considering a jack of all trades, explore that person’s capabilities and the resources available for helping you with your portfolio. Also ask how many people are employed in the organization and what their roles are.

Finally, the single biggest question is how will your account be impacted if the person you are working with leaves the company? With a smaller organization, if that person leaves, all of that expertise goes out the door. A larger organization might offer greater continuity.

What does an investor need to know about a potential adviser’s philosophy?

This is the single most important thing investors fail to explore. Or if they do ask, the investment person responds, ‘My philosophy is to make you money.’ However, that’s a goal, not a philosophy. The bigger question is how are you going to make me money? Are you going to take risky positions and jeopardize my money? Are you gong to be ultraconservative and never meet my goals? Advisers should be able to clearly articulate their investment philosophy and how they operate their business.

It’s essential to find an adviser whose philosophy matches yours. If you are risk averse, an adviser who purchases gold is not a good fit. If you’re conservative, find a conservative adviser. If you like speculation, you need an ultra-aggressive investment firm.

What questions should an investor ask about people?

Ask about experience, education, professional designations and licenses. Then ask about structure. How are people’s responsibilities and efforts segregated? Is the person a jack of all trades, or is there a division of labor among selling, investing, researching and administration? Also, ask who you will be dealing with once the account is opened. Will it be the person who opened the account or someone else? How many other clients are they responsible for? If it’s hundreds, are you going to get the attention you need?

What is the next step?

The next step is process. Where is your money going to be invested? What is the process? Too often, advisers simply say you should buy X. But how do they know that if they don’t know what you need?

The first thing a professional should do is a needs assessment. Before recommending anything, that person needs to determine your requirements for liquidity, how much you have on hand, your time horizon, your tax situation and your expectations.

Next is an assessment of risk tolerance. What is your appetite for risk? Are you comfortable if your portfolio fluctuates? Are there any constraints on your investments? What will the asset allocation be? What are you going to invest in, and how much? How often will that allocation be rebalanced? Is the adviser going to buy the portfolio and forget it, or will your account be rebalanced so the original allocation remains consistent?

Finally, ask about the decision-making process. There are thousands of companies and mutual funds, so how will the adviser decide what to buy for your portfolio? And what are the criteria for selling?

What does an investor need to know about performance?

Look at the performance over time of the person managing your money and of the investments because, otherwise, you may be building on short-term anomalies that could send you in the wrong direction.

Second, how is performance communicated? By law, the adviser must send statements, but too many companies rely on that alone. Does the adviser meet with you about performance, or do you have to decipher the statement on your own? Will you receive additional information, such as how your portfolio has performed relative to the indices? If you lost 5 percent, but the market is down 20 percent, your adviser has done a good job of protecting your money.

How important is price?

The first thing people ask is what an adviser charges. Everyone gets paid, so if someone says there is no charge, it should be a red flag.

There are three ways to pay. With transactional fees, you pay every time you buy or sell. With asset-based fees, money managers charge a percentage of the value of the account. With advisory fees, the adviser gets a flat fee for advice but doesn’t do the actual investing.

Also ask about fees that you won’t see that may impact your account, such as withdrawal and redemption fees, fund expenses and bond commissions.

If you are handing over your life savings, you have to overcome the awkwardness of asking questions, because you won’t know something is wrong if you don’t ask.

Patrick Griffin is senior vice president at Lorain National Bank. Reach him at (440) 244-7119 or