Evaluating Professional Advice: 11 Questions to Answer Before You Commit

Financial professionals differ in their philosophy, processes, services, education, experience, and their ability to add value. Here are questions that can help you make a good choice.


Obtaining professional advice is a significant step and should not be approached lightly. As with investors and their objectives and constraints, financial professionals also differ in their philosophy, processes, services, education, experience, and their ability to add value.

Financial professionals work in many fields and hold various titles, such as investment professional, financial planner, accountant, estate planner, insurance agent, and stockbroker. Over the last few years, most financial professionals have seen their roles expand and now the lines among them have become greatly blurred. Today it is now commonplace to meet an insurance agent who is also registered as an investment professional or a stockbroker who engages in the practice of estate planning.

With so many potential financial professionals to choose from, the process can seem daunting. Remember, not all financial professionals are equal! Some professionals may say the same things as others, but when you investigate further you will discover significant differences. The following are 11 questions you should investigate when evaluating a potential financial professional.

Question 1: What financial services do the professionals offer?

It is important to first determine what services you are seeking: investment counseling, total financial planning, estate planning, and/or tax preparation. When you know that, you should investigate whether or not they offer these services. This is important because most professionals do not offer a complete array of services. It is common for professionals to either to have relationships with outside professionals who can address the areas not serviced or, if their firm is large enough, to have someone else in their firm handle separate services.

Question 2: Do the financial professionals offer customized portfolio solutions or more of a cookie cutter solution?

Regardless of your financial objectives and constraints, some financial professionals only offer one or two approaches to managing wealth, specifically portfolio management. For instance, you may find professionals who build practically the same portfolio for all of their investors without taking into consideration their ability or willingness to tolerate risk. Most financial professionals realize that customized portfolios provide the best way to achieve investors' goals and objectives. However, be cautious and ask how tailored their portfolio solutions are.

Question 3: What are the specific qualifications of the financial professional?

What education do the investment professional have? Bachelor's? Master's? Find out what their degree is in: finance, accounting, marketing, economics, literature? You would be surprised at the number of practicing financial professionals who have either no bachelor's degree or a degree in a field unrelated to finance and investing. You should also investigate whether or not the financial professional have earned professional designations, such as CPA (Certified Public Accountant), CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), or ChFC (Chartered Financial Consultant). Having a designation illustrates commitment and very specialized knowledge that can separate the top financial professionals from the rest of the pack.

Question 4: How much and of what type of experience do the financial professionals have?

You should find out how long the professionals have been in practice and how long they have been in their present role. A follow-up question could address the financial professionals specific work experience. Also, do not be fooled by age. Many professionals who enter the business late in their careers have as much (or as little) to offer as someone straight out of college.

Question 5: How ethical and trustworthy are the financial professionals?

This question is obviously very subjective and not always easy to answer when you first meet potential financial professionals. A good way to approach this question is to investigate their backgrounds, specifically whether a regulatory organization or private association to which they belong has publicly disciplined them. To check on an professionals regulatory records, you should contact FINRA (Financial Industry Regulatory Authority, Inc.) or any association the financial professional may be a member of, such as the Certified Financial Planning Board of Standards or the CFA Institute.

Question 6: What are the financial professionals' investment process and investment philosophy?

Some professionals have been known to "wing it" when designing portfolios because they either have no philosophy or fail to adopt one. You should ensure that those you are considering incorporate asset allocation into their investment philosophy and apply it to their portfolio management process. Also, you should consider investigating whether or not they adopt some sort of plan for building an optimal portfolio. Asking questions at this point is very wise and will minimize issues going forward.

Question 7: What is the professionals' tax management philosophy?

Financial professionals approach the tax management issue from different viewpoints. Some underemphasize tax management while others overemphasize it. Specifically, ask about the general degree of turnover, how they incorporate tax management into the rebalancing phase, whether or not they can incorporate tax losses or gains generated outside of the portfolio, and how they approach the issues of loss-harvesting and exchange strategies.

Question 8: What are the fees and by what method are the professionals paid?

There are many ways a financial professional can be compensated: commission, a percentage of a portfolio's market value (asset-sized fee), hourly fees, fees for individual services performed, or any combination. There is no right or wrong fee structure. The best fee structure is what makes sense and is the best fit for you. Most professionals will be able to provide the investor with a written document outlining their fees. If they cannot provide this, move on. Don't be afraid to ask about fees up front.

Question 9: What is the long-term performance or track record of the financial professional?

The vast majority of financial professionals can provide you with some sort of performance composite for you to review. When reviewing performance information, be sure to learn which benchmark(s) are employed (such as the S&P 500), how well the financial professional performed against the benchmark(s), the consistency of performance over long periods of time, the volatility of performance [especially in relation to the benchmark(s)], the growth of assets under management, and the statement of whether or not the performance conforms to CFA Institute standards. If any of these items are not voluntarily provided, ask the professional to provide them. If the performance was not created according to CFA Institute standards, ask why. Performance is suspect when the financial professional has not conformed to any standards, especially the tough CFA Institute standards. The CFA Institute is the organization that oversees the Chartered Financial Analyst (CFA) designation.

Question 10: What is the profile of their typical investor?

Your goal here is to find out whether or not the financial professional under investigation is knowledgeable about your objectives, constraints, problems, and solutions. Some professionals work with everyone, thus are jacks-of-all-trades, whereas others work only with specialized groups of people, such as affluent investors; thus they are exposed day in and day out to the issues faced by that group and how best to deliver a targeted solution.

Knowing the typical clientele gives you a good idea of the type of problems and solutions the financial professional is most experienced with. Since some people require very specific financial solutions, knowing the typical investor will help you to discover whether or not that professional can effectively work with you.

Question 11: Is there a personality fit?

The last question deals with whether or not you can work with the professial. This question is more intuitive-oriented rather than objective-oriented. Usually after the first meeting you will know if there is a fit or not. Is the financial professional more serious or humorous? Are they intense or low-key? Is he or she more professional or down-to-earth? Does he or she play golf? Did a friend refer you? Are your interests similar? Questions like these will help you determine if your personalities mesh, which makes dealing with each other so much easier.

In addition to the questions presented, another good way to evaluate an investment professional is to review what is called Form ADV Part II. This form is required by the Securities and Exchange Commission (SEC) or the state of domicile of all investment professionals. In addition, all investment professionals are required to provide this document to prospects before any services are provided. If you are not given one, be sure to ask for it.

Excerpted from Understanding Asset Allocation by Scott Frush. Copyright © 2007 by The McGraw-Hill Companies.

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