Investors looking to evaluate potential financial advisors can avail themselves of many lists of sample questions, such as those suggested by the Financial Industry Regulatory Authority, for interviewing practitioners. But just how to interview references, as is frequently suggested, is less clear. What kinds of questions should a reference expect?
"Getting a reference from a friend or peer is a great place to start," said Scott A. Bishop, certified financial planner and partner with STA Wealth Management. "But many [references] have a great 'feel' about the person, but not the qualifications or references."
Bishop said the first thing you should check is their credentials. "Find out whether [the advisor is] in sales, via a broker dealer/insurance company, or will they act like a fiduciary, such as many affiliated with RIAs will be," he said. (RIA is an acronym for registered investment advisor.)
He also suggested asking references about the services they have received in the past, such as investment management, retirement planning, estate planning, tax planning, etc.
For his part, Bruce Colin, CFP and owner of Bruce Colin & Co., offers these questions for references:
It's important to be provided with references whose circumstances and needs are similar to the prospective client, said Neil R. Waxman, CFP and managing director with Capital Advisors. In addition, the references must feel very well served and should delineate why they are satisfied.
Some of Waxman's suggested questions for references include:
Sallie Mullins Thompson, CPA, offered some additional questions, such as asking whether a complete data-gathering process was conducted; whether a holistic, goal-oriented plan has been implemented to meet client objectives; if there's a monitoring mechanism in place; whether the tax impact of the plan has been evaluated and explained; and whether there is regular follow-up to meetings and reports.
"Giving referrals is the heart-blood of the adviser business, and it is often the referral from a person you did not expect who becomes a top client," said Mark S. Germain, CFP, founder and CEO of Beacon Wealth Management.
To proactively increase the effectiveness of potential references, he periodically sends current clients a series of questions and answers reminding them of what his advisors do and how they get paid. Examples include:
"By providing guidance to clients, you save them from saying they don't know how they're charged," Germain said. "Or, when contacted, they have a clear answer."
Not all advisors see great value in providing references, however. "That is a dumb thing to do," said Jon Ten Haagen, CFP, founder and principal of Ten Haagen Financial Group. "As a broker-advisor, who am I going to suggest they call? A client who loves me or someone who may barely know my name? "Of course, I'm going to stack the deck."
Ten Haagen added that "it would be better to Google me and review my website, especially because by law — SEC, Finra, etc. — it needs to be truthful."
He suggests potential clients look at Facebook, Twitter and LinkedIn to see what he's posting and what others post about him.
"This is a truer test, because it is everyday people who know me or have come across me, speaking their minds," Ten Haagen said. "However, be wary of the people who 'like' me, as some people will 'like' people they don't even know."
— By Deborah Nason, special to CNBC.com