Good Financial Advice: Five Questions to Ask, Including the F-Word

Last Updated May 26, 2009 10:35 AM EDT

It seems like everybody is in the financial advice-business, but how do you know if someone is qualified to help you? You don't need to grill the financial professional to determine a few key factors that might help you decide whether or not to engage him or her. The responses will help define what kind of relationship you can expect in the future.

My Memorial Day started with an appearance on The Early Show, where I spoke to Harry Smith about this topic.

If you are interviewing financial pros, print out these five questions -- and don't be shy!

1) What is your training in this subject matter? I know plenty of stock brokers who are great at what they do, but have never had formal training. Similarly, there are credentialed folks who stink. That said, I would prefer to know up front whether someone has worked hard and diligently to attain a degree or designation and continues to fulfill ongoing continuing education requirements.
  • Designations include:CFP (Certified Financial Planner) CFA (Chartered Financial Analyst) or CPA (Certified Public Accountant). The CFP is the one that indicates a holistic approach to planning and personal financial management, but the other two are equally rigorous.
2) How are you licensed? This is a big one because it can determine if the advice-giver is registered with the SEC as a "fiduciary." I like to call this the "F-word" because it's so loaded. In a fiduciary relationship, your interests must come before the advisor's and/or the firm for whom he works. It's all about you and what's best for your financial life.

Did you know that most professionals in the financial-advice business aren't required to put you first? They don't have a fiduciary responsibility. In fact, the standard under which most brokerage and insurance firm employees operate is the broader and less rigorous concept of "suitability," which may or may not be in your best interest.

That means that your broker does not need to tell you if a cheaper investment alternative exists to the mutual find he is selling or whether the 529 plan in your own state is a better alternative to the one which pays him a commission. This has created tension and a legal battle between the Financial Planning Association and the SEC.

3) How much are you getting paid for making this recommendation? This is the verbal equivalent of looking at the price tag and is important if the pro is not a fiduciary. Often, investors are prudish about asking, but you need to know the cost. If the advice-giver says, "nothing", then be wary.

4) Are there cheaper ways to do the same thing? Can I buy a cheaper mutual fund? Is there a lower cost insurance policy that will cover me? Can I use the 529 Plan offered directly through my state?

5) How much am I at risk? Spend some time on this one -- you need to understand what you stand to gain and lose by making any investment. It's OK to decide that the downside risk outweighs the upside potential.

In the end, if you don't understand the answers to any of these questions, or if you feel like the potential advisor is evasive, just walk away. Also, think over any major decision or sales pitch. Take a few days and ask if it still seems like a good idea once you're out of the advice-giver's presence? If so, then you can move forward. If not, trust your gut and keep interviewing others.

More on getting good financial advice from my MoneyWatch colleagues:
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    Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

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