questions to ask financial advisor
James Sweeney No Comments

Are you trying to decide who to hire as your new financial advisor or wondering if the one you have is acting in your best interests? With so many opinions and convincing sales pitches out there, it can feel like an impossible task.

A couple of years ago Jason Zweig, a consumer advocate and writer for the Wall Street Journal, wrote an article to help consumers sift through the noise and focus on what is most important in selecting an advisor you can trust.

I’ve shared this article many times with clients, prospective clients, friends and family members since it’s publication. Today, I’d like to dive a little deeper into the article and tell you why each question is important, as well as provide you with my answer.

As Jason suggests in the original article, “I encourage you to clip or print out this column and bring it to your next meeting with your financial adviser.”

Each question is listed in Jason’s original wording, followed by his preferred answer in parenthesis. After that, I give my opinion on why it’s an important question to ask and conclude with how I personally would respond to the question.

1. “Are you always a fiduciary, and will you state that in writing? (Yes.)”

Why ask? The word fiduciary has grown in popularity since the Department of Labor’s hotly contested and ultimately delayed “Fiduciary Rule” in 2017. What you need to know is there are essential two standards of care that financial advisors may follow. The suitability standard is the lower standard of care. It simply says an advisor cannot sell you something that is “unsuitable” – but says nothing about conflicts of interest or excessive, hidden fees. The fiduciary standard is a higher standard of care that requires an advisor to put their client’s interests ahead of their own and disclose any potential conflicts.

Since the popularizing of the concept of “fiduciary”, more and more advisors are using the term. In reality, some advisors operate at times under the fiduciary standard and at others under the suitability standard. For example, they may offer investment advice for a fee as a fiduciary and then sell you an insurance product under a suitability standard.

What you want is something in writing that says your advisor acts as a fiduciary 100% of the time.

My Response. Yes, I am a fiduciary 100% of the time and am happy to state that in writing.

2. “Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)”

Why ask? This gets at the heart of conflicts of interest. Imagine you walk into a car dealership looking for a new vehicle. You know when the salesman approaches that he works on commission. So you take what he says with a grain of salt. His job is to get you in a car today, not give you objective advice about cars.

However, in the financial services industry, most advisors position themselves as the unbiased expert. And they do this even though they get paid the same way the car salesman does – on commission. Knowing how your advisor gets paid will help you understand why they may be recommending certain products over others.

My Response. No. The only compensation I receive is paid to me directly from my clients.

3. “Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)”

Why ask? This is similar to question #2. The bottom line is you want to understand what incentives your advisor has.

My Response. No. Again, I do not receive any compensation or incentives for recommending any products or services.

4. “Will you itemize all your fees and expenses in writing? (Yes.)”

Why ask? This question is less focused on the how your advisor is compensated and more concerned with how much. Even if your advisor’s compensation doesn’t favor specific products or services, the overall level of fees can also be detrimental to your long-term financial success.

I’ve written extensively about reasonableness of fees in the advisory industry. Of course, paying less is not always better than paying more, but you want to make sure you understand exactly what you are paying, what you are receiving for your money, and what alternatives are available to you.

My Response. Yes, I am happy to itemize all my fees in writing. My flat fee for ongoing wealth management is as simple and straightforward as it gets.

5. “Are your fees negotiable? (Yes.)”

Why ask? Assuming you’ve been through the first few questions on this list and are only considering fee-only advisors, you are likely looking at paying around 1% of your portfolio to your advisor every year. Whether that fee is reasonable or not depends on the size of your portfolio and the types of services offered. If your portfolio is $500,000 and you are receiving both investment management, as well as financial planning, then your $5,000 per year fee is probably reasonable. If your portfolio is $2,000,000 and you are receiving little more than quarterly performance reports and a couple of meetings each year, you can probably get similar services for much less than $20,000. Make sure your fee is fair for the services you are receiving.

My Response. Because my fee is based on services provided, not portfolio size, I don’t negotiate the rate for full-service clients. However, I do offer alternatives for those who don’t need my full-service offering.

6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)

Why ask? There are two primary reasons why an hourly or retainer fee could be beneficial.

First, if your portfolio is over $1,000,000 it is likely your advisor is making an unreasonably high profit margin for managing your account. I can tell you from experience that it doesn’t take twice as much time to manage $2,000,000 as it does to manage $1,000,000. So why should you pay twice as much? If your fee is over $15,000, you could likely benefit from a flat retainer or hourly arrangement.

Second, charging a % of your portfolio creates conflicts of interest if you are receiving holistic planning advice and not just investment advice. Because your advisor’s compensation is dependent on your account size, he may be conflicted when giving advice about:

  • Retirement spending decisions
  • Debt payoff using investment assets
  • Gifting to charities or children
  • Social security timing
  • Pension lump sum vs monthly payout decisions

In short, if you are looking for more broad financial planning advice, an hourly or retainer fee may reduce the conflicts of interest your advisor faces when answering these types of questions.

My Response. I only charge by flat annual fee or hourly.

7. Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)

Why ask? This question is related to several of the above questions, but is just another way to understand why your advisor is making certain recommendations. If they have a conflict of interest, you should know about it before implementing their recommendation.

My Response. While I have set up my business to reduce conflicts of interest to the extent possible, occasionally conflicts can arise, and I am happy to disclose them.

8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)

Why ask? Let me describe a sadly common situation. An advisor who charges you 1% of your portfolio, sits down and recommends you put a portion of that portfolio into a private investment fund. Unbeknownst to you, your advisor is also an advisor to that fund, and receives a kick-back for any money he funnels to them. Some call it “double-dipping”. Again, big conflict of interest that you should know about.

My Response. No, I don’t receive any compensation whatsoever from anyone accept directly from my clients.

9. Do you pay referral fees to generate new clients? (No.)

Why ask? If you were referred to your advisor by another professional, like an accountant or attorney, you certainly should understand if that referral was based on merit alone, or if it was financially motivated. Of course, paying a referral fee doesn’t mean the advisor doesn’t know what he’s doing. But it does call into question the validity of the referral.

My Response. No, I don’t pay referral fees.

10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)

Why ask? As I mentioned before, you want to know what you are paying for. It’s not uncommon to find two advisors who both charge 1%, and one offers holistic planning, while the other only provides investment management.

My Response. I personally believe that to give good investment advice, its necessary to understand an investor’s retirement plan, debts, tax situation, etc. I offer holistic financial planning and investment management, while coordinating certain aspects of clients’ financial lives with other qualified professionals, like estate planning attorneys and accountants.

11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)

Why ask? For the same reason you may not want your advisor to pay fees for referrals, you wouldn’t want them to receive fees. Your advisor should refer you to whoever they believe can best meet your needs, not whoever offers the largest kick-back.

My Response. No, I don’t earn referral fees.

12. What is your investment philosophy?

Why ask? Turning over your nest-egg to someone in a nice suit, without understanding what they plan to do with it, is a recipe for disaster. Of course, the point of hiring a professional is so that you don’t have to be the expert. However, one of the biggest mistakes investors can make is running for the hills during a downturn in the market. Gaining some understanding of your advisor’s investment philosophy will give you confidence to stay the course.

My Response. I believe the primary goal in investing should to harness the power of financial markets – not try to outguess them. While most of the industry sells stock-picking and market-timing prowess, the research shows that investors almost never benefit from this approach.

I utilize an evidence-based approach to investing that focuses on diversification and discipline, and minimizes expenses and taxes. This approach minimizes risk and allows my clients to capture their share of the returns the market generates. Most importantly, it gives them the best chance at reaching their financial goals. Learn more here.

13. Do you believe in technical analysis or market timing? (No.)

Why ask? Trying to time the market is a losing game. If your advisor is promoting such a strategy it is likely that he either doesn’t understand the research, or he cares more about what sells than he does about what works.

My Response. No, I don’t utilize technical analysis or market timing in my client’s accounts. I believe in a disciplined, buy-and-hold approach.

14. Do you believe you can beat the market? (No.)

Why ask? This is similar to the question above, but perhaps includes stock picking or other strategies for trying to “beat” the market. Again, the evidence is just overwhelming that your odds of success pursuing such a strategy are slim.

My Response. No, I don’t believe I can “beat the market” utilizing market timing or stock picking. The only way to earn higher returns is to take more risk.

15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)

Why ask? Trading typically results in transactions fees charged by the custodian of your account and may also result in tax consequences. Trading infrequently is a sign that your advisor believes in the power of markets and is determined to help you capture the gains the market generates, while minimizing expenses and taxes.

My Response.  I review accounts at least quarterly, but only trade if necessary (i.e. there has been a large move in the market and we need to rebalance, or your situation has changed)

16. How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)

Why ask? Performance can be manipulated very easily. You want to make sure your performance is compared to a relevant benchmark, not a benchmark chosen to make your performance look outstanding.

My Response. When reviewing performance, I show returns net of all fees.

17. Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall.)

Why ask? I think Jason did a good job of explaining the why on this one. The only thing I’ll add is to consider what services you are looking for to help you decide which credentials matter. The CFA and CPA curriculum are more in-depth and specific, with the CFA designation focusing on investments and the CPA on accounting. Meanwhile, the CFP curriculum touches a broader range of financial planning topics.

My Response. I hold both the CFA® and CFP® designations. I find these to be the most relevant to my clients as they are looking for both investment management and holistic financial planning. Many already have an accountant/CPA who I work closely with on tax issues.

18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)

Why ask? Over-inflated expectations of the return your portfolio will generate can lead to disaster in retirement.

Jason’s 3-4% estimate may seem depressingly low. But bear in mind, his point here is that you need to be looking at returns NET of inflation, taxes and fees.

Most advisors (and people in general) talk about returns before all of these things. But Jason is correct, that the net number is what really matters.

If we assume a typical 60% stock, 40% bond portfolio would return around 6-7% gross, it’s easy to see how we get to Jason’s 3-4% net after subtracting:

  • 2% for inflation
  • 0.5% to 1% for taxes
  • 1% to 2% for fees

My Response. Jason’s response is probably reasonable for the average retiree, but it really depends on how much risk you are taking, what your level of fees are, and the tax treatment of your accounts.

19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)

Why ask? As they say, you want to work with someone who “eats their own cooking.” It can be a strong indication of the strength of their conviction.

My Response. I do –  and yes, I invest in the same funds and use the same philosophies to manage my own money.

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What I love about these questions is that they get at the core of who your advisor is and how they operate rather than what they are recommending or promising. The latter is easy to dress up and make appealing. But the former is what really matters. In the end, you want to find someone who you can trust. If you follow the questions outlined here, you will find an advisor who:

  1. Acts in your best interests
  2. Minimizes conflicts of interest, and discloses any that exist
  3. Has relevant credentials/expertise
  4. Focuses on implementing strategies supported by research, rather than selling products or solutions that have little chance of performing as advertised.

If you liked what you heard in my responses and would like to learn more, I’d love to chat.

You can schedule a complimentary, no-obligation introduction here.