I spent the first twenty years of my career at Smith Barney and Merrill Lynch, and I have spent the sixteen since running an independent firm. I have been the advisor a client was choosing, and I have sat across from people deciding whether to leave the advisor they had. So I will tell you at the start that this guide is written by someone with an interest in the outcome, and I will try to make it useful anyway, by telling you the things I would want a friend to check before hiring anyone, including me.
First, the words
The industry uses its titles loosely, which is the first problem a person choosing an advisor runs into.
“Financial advisor” is not a regulated term. Anyone can print it on a card. “Wealth manager” is not regulated either; it usually means an advisor whose clients have more money and whose services extend beyond the portfolio into tax, estate and business matters, but there is no line and no test. “Financial planner” is likewise unregulated, though a CERTIFIED FINANCIAL PLANNER™ has passed an exam, met an experience requirement and agreed to a fiduciary standard, which is more than the bare word promises.
The terms that do mean something are regulatory. An investment adviser representative works for a registered investment advisor, a firm registered with the SEC or a state and held to a fiduciary duty. A registered representative works for a broker-dealer and is held to a best-interest standard when recommending a product, which is a real standard but a different one. Many people are both, at the same time, and which hat they are wearing in a given conversation determines which duty they owe you. If a person is dually registered, ask them which capacity they are acting in for you, and expect a clear answer.
What fiduciary means and what it does not
A fiduciary must put your interest ahead of their own. That obligation covers every account a registered investment advisor manages and every recommendation it makes under its advisory agreement. It is the reason independent advisory firms exist, and it is why I left the wirehouse model in 2010.
Here is the exception people are rarely told about. Being a fiduciary does not mean an advisor has no conflicts of interest. It means the advisor must disclose them and must not let them override your interest. Every registered investment advisor files a document, the Form ADV, that lists its conflicts. My firm’s lists several: we have an affiliated insurance agency, our advisors earn commissions when a policy is placed through it, our portfolio models come from a company my husband owns, and I am compensated by private funds the firm advises. Each is disclosed, each has a rule around it, and none of it makes us less of a fiduciary. It does make us a firm with conflicts, and you should know that about any firm you consider, because a firm claiming to have none is either very unusual or not being straight with you.
Fee-only, fee-based, and commission
Advisors are paid in three ways, and the words for them are close enough to be confusing on purpose.
Fee-only advisors are paid only by their clients: a percentage of assets, a flat fee, or an hourly rate. They receive no commissions from anyone.
Fee-based advisors are paid primarily by client fees but can also receive commissions, usually on insurance products. SkyOak Capital is fee-based. Our advisory fee schedule is published, and the insurance commissions are the reason we are not fee-only.
Commission-based advisors are paid by the products they sell. This is the traditional brokerage model and it still exists.
None of these is dishonest. The question to ask is how much of an advisor’s income comes from each source, and whether the products that pay commissions are the ones being recommended to you. An advisor who earns 10 percent of income from insurance commissions and 90 percent from fees is a different proposition from one whose ratio runs the other way. The Form ADV Part 2B tells you, for each advisor, roughly what share of their income comes from outside activities. Read it.
How to read the documents
Every registered investment advisor has a public record, and reading it takes twenty minutes. It is the single most useful thing you can do before a first meeting.
- Go to the SEC’s Investment Adviser Public Disclosure site and search the firm’s name.
- Read the Form CRS, a two-page summary of services, fees, conflicts and disciplinary history that every firm must give you. It is written for you, not for lawyers.
- Open the Form ADV Part 2A, the firm’s brochure. Read Item 5 (fees), Item 10 (other financial industry activities, which is where affiliates and conflicts live), and Item 9 (disciplinary information).
- Open the Form ADV Part 2B for the specific advisor you would work with. It lists their education, work history, outside business activities and any disciplinary events.
- Search the individual advisor on the same site, or on FINRA BrokerCheck if they are also a registered representative, for any customer complaints or regulatory actions.
If you find a disclosure, ask about it directly. A complaint is not the same as a finding, and a settlement is not the same as an admission, but an advisor who cannot explain their own record plainly is telling you something.
What your advisor should be doing for you
This is the part most guides skip, because it is about the relationship after the hire. Whatever an advisor promises in the first meeting, here is what a good one delivers in the second year.
- A written plan, not a portfolio. If you have been a client for a year and there is no written document that says what the money is for and how it is supposed to get there, you have an account manager, not an advisor.
- A fee you can state. You should be able to say, in one sentence, what you pay and how it is calculated. If you cannot, the fee is being hidden from you, probably not on purpose.
- An annual review that changes something. Not a performance report. A meeting that revisits the plan against what changed in your life and produces at least one decision.
- Coordination with your other professionals. Your CPA and your estate attorney should know your advisor exists and should have talked to them at least once. Most estate plans fail on the accounts, not the documents, and the advisor is the one watching the accounts.
- Responsiveness in the bad weeks. Anyone is available in a rising market. The test is who calls you in the week the market drops 8 percent, and whether they say anything more useful than “stay the course.”
- Honesty about what they do not do. An advisor who says “I do not prepare tax returns, and here is who I recommend” is more trustworthy than one who implies they do everything.
If you are retiring
Retirement changes what you need from an advisor, and an advisor who was right for your accumulation years is not always right for the next thirty.
The skills that matter after retirement are specific: sequencing withdrawals across taxable, tax-deferred and Roth accounts; timing Social Security for both spouses; managing the income thresholds that set Medicare premiums two years out; planning required minimum distributions before they arrive; and, if a move is possible, understanding what a change of state does to all of it. Ask a prospective advisor how they would sequence withdrawals from three account types, and listen for whether the answer is a process or a shrug.
Retirees also have less time to recover from a mistake, which is why the fiduciary question and the fee question matter more, not less, at that stage. A 1 percent difference in fees is a rounding error at 35 and a year of spending at 75.
Questions to ask in the first meeting
The SEC publishes a list of conversation starters that every Form CRS must include. They are good questions, and an advisor who has read their own CRS will expect them. To those I would add:
- Are you a fiduciary on every account and every recommendation, or only some? Which ones are not?
- How are you paid, in dollars, if I bring you a $1 million account? What else could you be paid for?
- What is in your Form ADV that you would rather I not notice?
- Who is my advisor if you are unavailable, and who supervises you?
- What will you tell me to do that I will not want to hear?
- Show me a written financial plan you built for someone in a situation like mine, with the name removed.
The last one is the one that separates planners from salespeople. A firm that has plans can show you one. A firm that has products can only describe them.
A note on what we are
Since you have read this far: SkyOak Capital is a fee-based fiduciary registered investment advisor. Our fees are on the fees page, our conflicts are on the disclosures page, our Form ADV is on the site, and every advisor’s profile links to their public record. The first conversation is thirty minutes and free, and we will tell you if we are not the right fit, which happens. What I would ask of you is the same thing I have asked throughout this guide: check the record, ask the hard questions, and hire the firm that answers them plainly.
Jennifer Davis, CFP®, is the founder and CEO of SkyOak Capital, a fee-based fiduciary registered investment advisor with offices in Las Vegas, Medford, Oregon and San Francisco.
This article is general information, not personalized advice. SkyOak Capital does not provide tax or legal advice. See the firm’s Disclosures and Form ADV.