Are you working with the right financial advisor? Here’s an easy way to find out.
Ask your advisor the following nine questions and compare the answers you receive with the responses outlined below. These questions are listed in order of importance.
Please note there is a difference between an investment adviser and advisor — it’s not that I can’t figure out which spelling to use.
1. Are you a fiduciary for the recommendations you make?
The answer you receive should be yes. This is the most important question — by far.
What your advisor says will provide you with an indication of the quality of the advice you will receive. The difference between getting investment advice from an adviser who is a fiduciary compared with one that isn’t is huge.
Investment advisers who work for Registered Investment Advisory (RIA) firms are required to act as fiduciaries for the advice they share. Investment advisors who work for banks, brokerage firms and insurance companies are only required to provide advice that is in compliance with the new best interest regulations, which fall considerably short of requiring fiduciary conduct.
Always work with an investment adviser who is required to act as a fiduciary. These advisers are legally required to put your interests above theirs and eliminate all conflicts of interest.
2. How are you paid?
Investment advisers acting as fiduciaries typically only accept fees paid by clients. Investment advisors working for banks, brokerage firms and insurance companies can receive payments from mutual fund companies, fees from clients and commissions. It can be hard to determine how much these advisors are paid. And remember, you are paying them regardless of where their compensation comes from.
In addition, advisors paid on commission or who receive payments from mutual fund families have an agenda to push and, as a result, are conflicted. They are salespeople rather than advisers. They would much rather see you invest in something that pays them a high commission than offer you a low-cost (low commission) option that might be more appropriate. They have families to feed and can’t make money working with you unless you buy something that pays them.
Work with investment advisers who receive 100% of their compensation from invoices they send to their clients. It is much easier to determine what you are paying for their services and it eliminates all conflicts of interest.
3. What is your investment philosophy?
The investment adviser you work with should have an investment plan for your money that you understand and believe. Don’t work with an advisor who seems very sharp but shares an investment approach you just can’t seem to understand. If you do, when the markets crash, you may worry even more about what is happening to your money.
Understand how often you can expect to hear from your adviser and how you will communicate. Don’t work with an adviser who prefers to communicate via email if you will need to talk to someone when the markets crash and your balance declines.
Expect to meet in person with your adviser at least once a year to review performance, strategy and goals.
4. What professional credentials do you have?
You should work with an adviser who has some sort of financial planning or investment-related credentials. Two of the most popular are the Certified Financial Planner (CFP) designation and the Chartered Financial Analyst (CFA) designation.
Nearly all credentialing programs I am aware of have a work experience requirement, so you can be assured that if you hire a credentialed adviser, you won’t be their first client.
5. What is your educational background?
There are a lot of individuals without an appropriate educational background working as investment advisors. Why? Because their advisor jobs at banks, brokerage firms and insurance companies are primarily sales positions. You want to work with an investment adviser, not a salesperson. Make sure your adviser has a degree in finance, economics or investments.
Yes, there are a number of individuals with other types of degrees who changed careers and are good advisors and really fun to talk with. However, for your investments, it might be better to hire the individual with the economics undergrad and MBA who really understands this stuff.
6. How many years have you been an investment adviser?
We are at the end of a 10-year bull market in U.S. stocks. That means a lot of advisors have entered this business over the past 10 years and have never experienced sustained down markets. As someone who has worked with retirement plan investments for more than 30 years, I can tell you that bear markets aren’t much fun — for anyone.
Many advisors will step away from this business during the next bear market (coming soon, unfortunately). Make sure you work with an adviser who has weathered more than one storm, because tough markets are when you need an investment adviser the most.
7. What does your ideal client look like?
Just like you, right? That’s the answer you are likely to get. You should find out what your adviser’s book of business looks like. How many clients does your adviser have with your amount of money out of their total book of business?
If you aren’t the dominant client size, you will likely be inadequately served. And by that I mean you won’t get exactly what you need. With the large number of investment advisers out there, you don’t need to settle for someone who doesn’t specialize in you. Generally, it is not hard to find the right adviser.
8. What happens to my business if you are gone?
Advisers change firms every now and then. Some exit the business permanently. Understand what would happen if your point of contact leaves. Find out whether your adviser is part of a team — he or she should be.
9. Does the company you work for sell investment funds/products?
There is nothing wrong with investing in a proprietary investment fund/product your advisor is selling if it is the best option available. However, most advisors who work for banks, brokerage firms and insurance companies are required to attempt to sell you their firm’s funds/products first, whether they are a good choice or not.
Generally, investment advisers working for RIAs do not have firm-branded investment funds/products to push. As a result, you have a better chance of getting a lower-cost, higher-quality recommendation from them.
And finally, be sure to check out your adviser using BrokerCheck.
BrokerCheck is a free service provided by FINRA, the Financial Industry Regulatory Agency, under the direction of the Securities and Exchange Commission (SEC). BrokerCheck will tell you whether your adviser has committed any infractions or broke any regulations.
Don’t worry, advisers can not tell when you use BrokerCheck to review their backgrounds.
Anything you find should lead you to look for another adviser. Studies have shown that advisers who offend tend to re-offend.
All of these questions are easy for your adviser to answer and something he or she does every day. If you don’t receive prompt, complete responses, think about finding another adviser.
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