How a Small-Business Owner Should Interview a Financial Adviser

Many small-business owners are hesitant to engage a personal financial advisor. But here's why—and how—you should.
July 10, 2012

Many small-business owners have achieved success by taking a “hands-on” approach to running their companies. Having full control over your business’ operations gives peace of mind because after all, no one is going to care about your business like you do. But that attitude can actually lead to serious problems when it comes to managing your personal finances, as many small business owners hesitate to let someone else—like a financial adviser—get involved with their money.

This hesitation can be financially perilous for small-business owners. A recent study by The American College, a nonprofit financial services educational institution, shows that:

  • Six out of ten small-business owners have not consulted with a financial adviser
  • Three out of ten small business owners have not estimated how much capital they will need to have a comfortable retirement
  • Fewer than one-third of small business owners have a formal financial plan for managing income and expenses during retirement
  • Fewer than a quarter have a formal plan for transitioning their business to new management and ownership when they are ready to retire

A financial adviser can provide the skills, information and discipline required to ensure that you and your family can enjoy the fruits of your labor after you are no longer able to work at your company. Where a business owner needs to focus their efforts is on selecting the right adviser. The best way to do that is to interview multiple people and ask the following questions:

1. How do you charge for your services? There are two compensation models for financial advisers: commission-based and fee-based. The former won’t charge you for the advice they provide; instead they make commissions on the financial products they sell you. The latter will charge you a fee for their time and advice. Typically the fee is structured as a fixed amount, like an hourly rate or a percentage of your assets under management every quarter. Personally, I believe the latter is a better deal; there is full transparency on how the adviser makes money and doesn’t leave as much doubt as to the purpose of their advice which can be the case with commission-based advisers.

2. What experience do you have working with people like me? There are financial advisers who specialize in working with small-business owners. You should place high value on this experience when evaluating potential candidates. Other factors like typical client net worth, typical client goals and client age range are important to ensure that the adviser isn’t going to practice on you.

3. How big is your business and how happy are your clients? Financial advisers who have few assets under management could signal that they are new in the business or have not achieved much success. $100 million under management could be considered a good minimum threshold to ensure that the adviser has achieved enough success to have a sustainable business. Dollar amount isn’t the only thing that matters, but an adviser managing only $5 million will have a difficult time paying the bills.

4. What are your credentials? Having the proper credentials is no guarantee that an adviser is competent or is the appropriate adviser for you. But not having them should be a warning sign. The Certified Financial Planner (“CFP”) designation indicates that the person has taken formal exams, has a minimum level of experience and has sworn to uphold certain ethical standards when conducting business. There are many financial designations depending on the specific area of expertise of the adviser.

5. Are you formally held to a fiduciary standard? The fiduciary standard means that the adviser will act with your best interest in mind when making any decisions or recommendations. A promise is not enough. Confirm if they have sworn an oath as part of a formal designation to act as their clients’ fiduciary. Also check to see if acting as a fiduciary is a condition of their employment.

Trust But Verify

If you are a successful small business owner, then you are likely a good judge of character. Use this skill when evaluating financial advisers but make sure to take the extra step and independently verify everything they say. The Financial Industry Regulatory Authority (“FINRA”), the largest independent regulator of securities firms in the country offers the Broker Check online tool, which provides a detailed profile of registered brokers and brokerage firms. If the adviser is a CFP, check the Board's public notices to see if the person has been subject to any disciplinary actions.

Your financial adviser is someone who will have an intimate knowledge of your finances, your goals, your concerns and your plans for your assets after you pass away. Don’t rush into a relationship this important, but don’t put it off entirely either.

Mike is the founder of Proximo International, LLC a leading provider of corporate, consumer and small business training services including financial and business educational content for television, radio, print and online distribution in both English and Spanish.

Photo credit: Thinkstock