Whenever you use financial, tax, or legal advisors, you must be careful about whom you are consulting and how your investments, taxes, and legal affairs are handled. These nine basic points may help in your decision-making process.
1. Clarify specific needs and goals. Think concretely about what you are "hiring" advisors to do for you. For example, do you want just tax advice on a specific situation or broader ongoing tax and financial planning? Do you want the advisor to merely invest the proceeds from your stock options or restricted stock, or also to manage all of your investments? Carefully consider your specific intentions. This will help you find an advisor with the expertise you need.
2. Educate yourself. When you use an advisor for his or her expertise, you will want to clearly explain your situation, present the issues, ask smart questions, and understand the advisor's recommendations. Use the content on myStockOptions.com to help you, whether the glossary or specific articles and FAQs, such as those in the Tax Center and the section Financial Planning. If your advisor respects your knowledge, he or she may even raise the level of the advice.
Understandably, the Madoff scandal may have made you suspicious of anyone managing your money or giving you financial advice. Education, knowledge, and due diligence are the best defense, as ultimately any actions are up to you. This is similar in some ways to performing your own research on a medical treatment or condition before or after you see a doctor.
3. Think like a boss; undertake due diligence. Your advisor is supposed to be working for you and your family, so do research on advisors as you would for a prospective employee. There are independent sources where you can check the background of advisors and their firms, along with any regulatory filings and violations. The SEC offers a primer about background checks on financial advisors. Use other sources for checking the backgrounds of lawyers and CPAs. You can find some resources on the Background Checks page of AdvisorFind from myStockOptions.com.
4. Look at the advisor's typical client profile. Be aware that there are many different approaches to financial planning, and these depend on such factors as age, income, assets, children, and goals. You probably want to choose an advisor working primarily with clients whose financial positions and aims resemble yours. An advisor whose clients are very different from you may not have the expertise or experience needed to make the most of your particular situation and resources. When seeking a lawyer or an accountant, ask about his or her experience in handling situations similar to yours, and learn the outcome.
A financial advisor should be able to provide references from current or past clients whose situation and goals are similar to yours (however, client confidentiality may not allow lawyers and CPAs to do this). Speak with these other clients directly. If they know other clients of this advisor, obtain references to those clients too. These additional references may be especially revealing, as they will not be among the references whom the advisor hand-picked.
5. Find out how the advisor is paid. Legal and tax advisors usually charge an hourly rate for services, but financial advisors may use various approaches, whether singly or in combination. Learn whether the financial advisor receives a commission on sold securities, charges a flat fee or a percentage of assets, offers an hourly rate, or a combination of these. If the advisor works for a firm, find out whether the advisor receives a higher commission for selling particular financial products. If the advisor takes a percentage of assets, any figure higher than 2% should raise a red flag. Be sure you understand the sales charges on mutual funds, as these can significantly eat away profits.
6. Ask the advisor to explain methods, preferably in writing. Lawyers will probably have a written agreement and perhaps a retainer requirement. Ask the advisor to disclose details of his or her working methods; be suspicious if the answer is less than 100% clear. Obtain a formal written outline of services and methods in writing, along with regulatory filings. Find out who else (e.g. broker-dealers or insurance agencies) may gain from your investment dealings, if that is the service you want. Ask the advisor whether he or she will formally assume fiduciary duty, legally binding the advisor to act in your best interest. If the answer is no, be wary.
7. Identify trustworthy third parties, including auditors. Checks providing funds for buying securities should always be made out to a third-party financial institution involved in the transaction (e.g. Fidelity or Schwab), not to the advisor or the advisory firm. This lets the advisor make investment decisions according to your instructions without giving the advisor the ability to take direct control of the funds. Contact the financial institution to verify its dealings with the advisor. Get the advisor to explain the due diligence performed on money-managers he or she suggests. Identify the auditor your advisor or the advisory firm uses. Every state has a database where you can see whether the auditor is licensed. Be suspicious if the advisor or advisory firm has recently changed its auditing or accounting company.
8. Seek transparency. Be wary of vagueness or a lack of transparency in any aspect of your advisor's business. The more your advisor can verifiably show about fees, methods, track record, auditors, and business affiliates, the better.
9. Understand the potential consequences. When a financial advisor manages your stock compensation proceeds, your investments can lose money or not appreciate as much as you expected. With tax and legal advice, the risks and consequences can include IRS audits, tax penalties, lawsuits, or even criminal prosecutions. When considering an advisor, ask whether he or she will always explain all of the risks involved in any suggested action before you commit to it. Ask about any indemnity provided for faulty advice, and ask about the advisor's insurance.
It is your responsibility to find an advisor suitable for you. myStockPlan.com Inc. has not independently verified the experience, credentials, or professional licensing of the advisors listed in AdvisorFind and can provide no assurances that a listed advisor is capable of providing the guidance and services you seek. We do require advisors to warrant the accuracy of their information, and to use AdvisorFind they must agree to certain terms.