Answers to Your Burning Advisor Questions, Part 2: Know Their Limits

In Part 1 of this series, we looked at the kinds of answers you might look for when interviewing an advisor about her qualifications and experience. In this column, we’ll look at services provided, a really important factor for more reasons than you may think.

The following are the questions we outlined that you may have for your advisor regarding services:

• What categories of financial planning do you offer?

• Do they include retirement planning or estate planning? Investments? Life insurance and long-term care insurance?

• Do you have experience with education funding plans?

• Are you held to a suitability standard or a fiduciary standard?

Why are the services provided so important?

Generally, investors are not aware of the differences between financial professionals. Terminology is part of the confusion. Broker-dealer, advisor, adviser, Certified Financial Planner, life insurance agent—there may be subtle differences between professionals with these titles, but those differences may not always be clear to you. It’s this confusion that is, in part, driving President Obama’s desire to have the Department of Labor pass a new rule addressing conflicts of interest.

As an investor, you may not want a life insurance agent being your overall financial advisor, because that type of agent may specialize in selling variable annuities, and may push annuities because it’s the vehicle he is most comfortable with. The way to sort through all this is to find out exactly what licenses your advisor has and what those licenses enable the advisor to recommend to you. Find out if there are potential conflicts of interest between the vehicles you’re most interested in and the vehicles the advisor is most familiar with. Make sure the financial services you need line up with those offered. If you’re single, just starting your career, and don’t have a need for life insurance, you’ll want to steer clear of a professional that sells mostly life insurance policies.

Another reason you’ll want to know the full range of products and services your advisor has experience with is that for physicians and many others, trusting someone else with your personal information and your financial future can be a bit of a leap. If you’ve established a level of comfort and trust with your advisor, chances are you’re going to be much more comfortable working with her on a regular basis. But if your advisor “doesn’t do” college savings plans, and college savings plans are a big priority for you, that may give you pause. The same is true for life insurance, annuities, mutual funds, lifecycle funds, options, and many more investment vehicles.

You don’t have to know what all those vehicles are and what licenses correspond to having some expertise in them. Ask. Ask again until you understand. Make sure your prospective advisor uses simple, straightforward language in her answers.

Jack of all Trades?

Very few advisors have every license you could ever need, or deep experience in all financial areas. If yours claims to, that should, in itself, be a red flag. The important thing is that the expertise of the advisor matches up nicely with your financial needs. When you ask for references, make sure those people have similar needs and goals, and that they’re happy with the advisor’s ability to deliver on them.