It's your financial adviser's job to study up on you as a new client, so one of the first things you'll do together is complete something called a Know Your Client form.
But what about your adviser's background? You should know as much about your adviser as he or she does about you, but posing the right questions is beyond most people because they don't know what to ask.
Introducing the new online Know Your Adviser form, a tool developed by financial blogger and fund industry executive Preet Banerjee for people to use while interviewing prospective advisers. You simply ask some key questions, score the answers using Mr. Banerjee's rating system and then use the final tallies to help you pick the right adviser.
Next step: You and your new adviser tackle the Know Your Client (KYC) form on the way to building the financial plan of your dreams. Or not.
KYC forms typically look at the amount of time you intend to keep your investments, the amount of risk you can stand, your objectives as an investor and your level of knowledge about investing. The idea is to build a profile that ensures the client interests are served by the portfolio their adviser designs.
Mr. Banerjee, an ex-broker who works in the mutual fund industry while maintaining the Where Does All My Money Go blog ( wheredoesallmymoneygo.com), has a more skeptical view of the KYC form.
"I'm sure it does protect the client to a certain extent," he said. "But in my experience and my training, it was more to protect the adviser. If the investor complains about a transaction, you can say, no, this was in your risk tolerance."
The Know Your Adviser form serves only the interests of you, the client. In fact, there's an opportunity for people like you to have a say in what it's final version looks like.
A draft version of the KYA form can be viewed on Where Does All My Money Go, which Globe readers have voted their favourite investing blog ( read about it here). Care to collaborate on building the final version? Both individual investors and advisers are invited to comment or provide additional questions that may be used to improve the form.
As it stands now, there are 20 questions divided into four categories.
The first section is designed to help you discern whether you're dealing with a provider of financial advice or just a seller of investment products.
The most controversial question in this section delves into the way in which the adviser is compensated. Three choices are provided - fee only (a flat or hourly fee), fee-based (something like 1 to 1.5 per cent of your investment assets per year) and commissions and fees generated by the sale of products.
The scoring system awards a maximum of five points for each question. In this particular case, fee-only advisers get five, fee-based gets three and commission, by far the most common way advisers are paid, gets zero.
Mr. Banerjee said he prefers the fee-only model because it's transparent and free of the conflicts of interest that can potentially arise when someone is paid through the sale of products. He also said he will provide commentary in the final version of the form explaining that some advisers and firms are only able to serve smaller clients if they use the commission model.
"It's meant to be food for thought," Mr. Banerjee said of the way the on his KYA form treats commission-based advisers. "It's not a definitive 'I can't deal with this guy.'"
Another question meant to distinguish between advisers and sellers focuses on disclosure of commissions and fees associated with recommended investment products. The KYA form awards five points to the adviser who provides full disclosure for all recommendations. Zero points go to the adviser who answers your query about fees by either saying you're focusing on the wrong questions, or that such information is not provided.
The second section, covering qualifications and competence, is broken down into separate parts for investment management and financial planning. Some advisers are well qualified in both areas, others in one or the other. The point here is to ensure that the adviser does have one or more recognized designations.
The KYA's gold standard on the investment management side is the chartered financial analyst (CFA), which requires something like 750 hours of study and covers securities analysis, financial accounting, ethics and, increasingly, financial planning. Fewer points are awarded for the Canadian Investment Manager (CIM), the Fellow of the Canadian Securities Institute (FCSI), the Derivatives Market Specialist (DMS) and others.
On the financial planning side, the preferred designations include the Registered Financial Planner (RFP), Chartered Life Underwriter (CLU), Certified Financial Planner (CFP), Chartered Financial Consultant (CH.F.C.) and Chartered Professional, Strategic Wealth (Ch.P.).
Mr. Banerjee's blog has explanations of what these designations mean. You can also use the website of the Canadian Securities Institute ( csi.ca/student/), which oversees a variety of designations, or try this roundup of designations I wrote a year ago.
For more about advisers read Ted Rechtshaffen's Adviser Secrets series:
There's an element of subjectivity here about which designations are better than others (Note Mr. Banerjee has the DMS and strongly believes options strategies have a place in portfolio management). Above all, establish that an adviser has earned a designation, and find out what it signifies.
The third section of the KYA form covers the client services that are offered. The most important question here asks what kind of financial plan clients receive (tip from Mr. Banerjee: ask to see a sample). Top marks go to a plan that covers investments, budgeting, estate and tax planning and insurance. Zero marks go to the adviser who provides nothing written down.
The final section of the form, called "Preet's Smell Test," includes three skill-testing questions, plus a query about whether the adviser's firm makes index funds available.
Index investing is a low-cost and effective alternative to mutual funds, which many advisers use extensively because they pay well (full disclosure: Mr. Banerjee works for a company, Pro-Financial Asset Management, that offers a kind of index fund). Both indexing and traditional funds are defensible approaches - what you're on guard for is someone who trashes indexing for reasons of self-interest.
Mr. Banerjee's plan is to have a version of the KYA that you can complete online, or print and fill out while interviewing advisers. While he welcomes input from advisers, he's prepared for them to criticize the initiative.
"There's going to be some backlash for sure," he said. "But the good advisers are going to welcome it. They're going to say thank you for helping us differentiate ourselves from everyone."
Know Your Adviser
Here is a summary of some questions that appear on a form designed by financial blogger Preet Banerjee to assist people interviewing prospective financial advisers. You can comment or submit ideas for additional questions on Mr. Banerjee's blog, at wheredoesallmymoneygo.com.
Sales Person or Financial Adviser?
1. Are you a full-time adviser, or do you have a part-time job not related to financial advice? Ideal answer: Full-time adviser
2. Does your firm hold sales contests or provide sales incentives? Ideal answer: No
3. What is your main method of compensation? Ideal answer: flat or hourly fee, although this is not a deal breaker by any means
4. Do you provide full disclosure of all fees and commissions paid by clients? Ideal answer: Yes, for each recommendation
5. Do you mainly use products from your own company? Ideal answer: No
Qualifications and Competence
1. What investment management qualifications do you have? Ideal answer: CFA is the gold standard, but others show expertise as well
2. Are you licensed to trade options? Ideal answer: Yes
3. Will you show clients your own personal portfolio so they can see if you practise what you preach? Ideal answer: Of course.
4. What financial planning designation do you hold? Ideal answer: The RFP, CLU and CFP are among several that show expertise.
5. Are you licensed to sell insurance products? Ideal answer: Yes
Client Services Offered
1. Do you provide an investor policy statement (explains how a client's portfolio was created and what will happen in various situations)? Ideal answer: Yes
2. What kind of financial plan do you provide clients? Ideal answer: A comprehensive plan involving investments, estate planning, budgeting and tax.
3. Do you provide a written summary of all meetings to recap recommendations, etc.? Ideal answer: Yes
4. How many people are on your team? Ideal answer: A few, to provide several points of contact.
5. What kind of contact will we have? Ideal answer: Annual face-to-face meetings, plus periodic phone calls and comment in falling markets.
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