The job titles vary: financial planner, investment manager, wealth advisor … We could go on. Often, these names are arbitrary, so the savvy investor digs deeper to find out more.
As you interview financial professionals, what questions can you ask to see past a sales pitch and discover a worthy advisor who is right for you? Some of the most important qualities include education, experience and ethics and – perhaps most important – whether the advisor is a fiduciary, advising you according to your highest financial interests above all else. With that in mind, let’s begin!
Question #1: Are you a fiduciary advisor in all our engagements (and will you agree to this in writing)?
There are two types of investment advice you can receive: suitable or fiduciary. When the advice is considered secondary to a broker’s or agent’s primary, transactional based duties, the advice must be suitable for you, but it’s allowable if it is influenced by underlying interests in promoting one product over another – even if the recommended product is not in your best interests.
A fiduciary advisor, on the other hand, is in the business of offering you advice. As such, pursuant to the Investment Advisors Act of 1940, a fiduciary advisor is bound by the highest legal duty of care for your financial welfare. Their advice must always be in your best interests. Ask your advisor to show you their Form ADV, a regulatory document required if they are acting as a fiduciary.
It’s also possible for an advisor to be “dual registered,” which means sometimes the advice will be fiduciary and sometimes it won’t. How will you know when the advisor is acting in which capacity? The answer is, you may not, making it very difficult to determine when they are and when they are not acting in your best interests.
Question #2: What licenses do you hold?
By identifying how a practitioner is licensed (typically, as a broker, insurance agent or investment advisor), you’ll usually be able to tell two things: First, whether you can expect to receive fiduciary advice from the individual, and second, how they earn their living (which suggests whether their incentives may run counter to your own). Brokers or insurance agents may tell you that they’ll serve as your advisor, but because they earn some or all of their living from commissions based on product recommendations, their advice need only be suitable, not fiduciary.
Instead, you want to seek a licensed investment advisor (without a dual registration as a broker, as touched on above). The technical lingo is, an Investment Advisor Representative (IAR) for a Registered Investment Advisor firm. In addition to being a fiduciary by default, your IAR should be fee-only, meaning, they earn their living through the fees you pay – and only through the fees you pay.
Question #3: How are you paid?
To continue on the theme from above, fee-only investment management (with fees based on a percentage of your assets being managed) best aligns an advisor’s interests with your own, especially when they also commit to a fiduciary obligation to you. In contrast, those compensated by commissions have two “clients” to serve: you, and the firms whose products earn them compensation. As Vanguard founder John Bogle observed, “No man can serve two masters.”
In addition to learning whether you’ll pay fees, commissions or both, ask if the practitioner earns any compensation from third parties. Many do. Sometimes money managers, insurance companies, wrap account sponsors, mutual fund companies and others pay brokers and agents extra commissions for promoting their products over other, potentially better ones available. In some cases, brokers and agents who sell enough of a certain product are rewarded with exotic trips, expensive trinkets, fancy dinners or other perks. Not only do these sorts of incentives generate conflicts of interest, the costs they incur ultimately come out of your pocket, should you invest in their wares.
Question #4: Where will my assets be held?
This is an important question to defend against the sorts of disasters that befell Bernie Madoff’s clients. By serving as advisor and account custodian, Madoff eliminated the usual check-and-balance system that helps investors detect falsified reports. We prefer arrangements in which your advisor is strictly in the business of offering you advice and assisting with your transactional paperwork, while your assets are held and traded by an independent custodian who reports directly to you about your transactions and account balances. This is a best practice for keeping everyone accountable.
Question #5: What costs will I pay in addition to your advisor fee?
If an advisor’s fee is fair and fully disclosed, that’s preferred to opaque arrangements that can pose conflicts between your best interests and an advisor’s reasonable compensation for their work. That said, there may be other charges to be aware of, whether incurred by the advisor or by the aforementioned independent custodian. Each should be able to share a transparent schedule of potential add-ons, such as trading costs, account set-up fees, ongoing account maintenance charges, and account-closing and/or transfer fees if you ever wish to move your money elsewhere or among your existing accounts. Forewarned is forearmed!
Question #6: What can I expect from your client experience?
As BAM ALLIANCE’s Tim Maurer says, “personal finance is actually more personal than it is finance.” In that context, seek an advisor who weaves personalized service directly into your client experience. From the beginning, before any financial planning takes place, an advisor should want to get to know you, your situation, your values, who relies on you, and what is most important to you – in your life, for your career and with your money.
Also, does the advisor have a clear process for developing these personalized insights about you? Does their process include specific milestone meetings and accountability procedures for both of you? Is the advisor’s team adept at creating individualized financial plans based on a deep knowledge of you and how you create your stellar earnings? All these and more are hallmarks of a quality client experience.
Question #7: How will you deliver your wealth management experience?
Even well-meaning advice will only take you so far if it’s delivered in a vacuum. Does your financial planner know what your investment advisor is up to? Are they in synch with what your CPA, estate planning attorney, insurance agent and business consultant are doing on your behalf … and vice-versa?
A wealth manager helps ensure you’re not only receiving good advice, but that the advice is organized and aligned with your greater goals. For this highest level of care, seek an advisor with a “buck stops here” sense of ownership over your total financial well-being. This calls for specialized in-house team members and strategic alliances to offer or consult on a range of advanced planning needs.
Question #8: What sort of investment experience can I expect?
Your investing should be guided by a customized, integrated investment plan based on your unique goals; personal situation; and willingness, ability and need to accept market risk. The plan should be formalized within a written Investment Policy Statement that you and the advisor both sign. Look for an advisor who understands that successful professionals and their families can offset their career risks with an investment portfolio that is carefully tailored to safeguard as well as build personal wealth according to their distinct goals.
Question #9: How would you describe your investment strategy?
Many financial providers don’t have a formal approach to investment management; instead they merely sell a variety of investment or insurance products without any established methodology or underlying approach. If there is a formal approach in place, find out what it is and how it was developed. Did the advisor create it alone, or is there an Investment Committee operating under specific policies and protocols? Find out how long the current approach has been in place.
Decades of objective, peer-reviewed financial research should guide your advisor’s recommendations. We refer to this as evidence-based investing. Grounded in the science of how capital markets have compensated investors for taking on market risk, evidence-based investing has demonstrated that much of investing is beyond our control, especially when it comes to forecasting an essentially unknowable future. An advisor should help you ignore the uncontrollable elements and maximize those that can be managed, such as reducing costs, diversifying globally, and removing reactionary emotions that otherwise lead you into hyperactive trading. This helps you invest more efficiently, according to your personal situation, so you can expect to capture appropriate after-tax rates of return to meet your goals.
Question #10: How do you invest your own money?
Does the advisor “walk the walk,” by adhering to the same investment philosophy they are recommending to you? We would expect to see variations in the individual asset allocations they hold, given their own personal goals and risk tolerances. But are they turning to the same investment solutions from the same product providers they would have you invest in? If not – or if they’re reluctant to talk about the broad strokes of their personal investments – it’s worth finding out why or maybe stopping the conversation right there.
Question #11: Does everyone at your firm embrace the same investment philosophy?
If not, why not? First, if the advice is supposed to be in your best interests, shouldn’t the firm have conducted the due diligence and formed an investment philosophy structured to endure the tests of time? If that’s not the case, how do you know if the advice offered today by “Advisor A” will remain dependable tomorrow? Moreover, if “Advisor A” is unavailable, how will you know if one of their colleagues, “Advisor B,” can offer continuity and a team approach to your ongoing money management?
Question #12: What kind of clients do you usually work with?
Ask the advisor to describe their typical clients. If what you hear sounds a lot like you, great. If they describe someone entirely different, you could be out of place. Ideally, you want an advisor who has positioned their business and honed their experience to mesh well with your needs, values and specialized circumstances.
Question #13: What security measures do you have in place?
Of course your advisor will have a great deal of sensitive information about you on file – from Social Security and account numbers, to critical details about your life. It’s worth asking them what best practices they follow to safeguard your privacy. For example, before hiring new employees, do they routinely check on applicants’ criminal records and credit reports? What are their written privacy policies? Do they have written disaster recovery and contingency plans in place? What electronic security measures have they implemented? Are they and their staff engaged in ongoing training to thwart the latest variations of identity theft?
Question #14: Do you have a clean regulatory record?
Don’t be afraid to ask this question and, better yet, check for yourself by reviewing their online regulatory records. Every legitimate practitioner holds at least one FINRA or insurance license, so it’s relatively easy to find out if there have been past complaints. To check with the SEC directly, go to www.adviserinfo.sec.gov and click on “Investment Advisor Search.” To check with FINRA, go to www.finra.org/brokercheck.
By the way, most Registered Investment Advisor firms require you to sign an Investment Advisory Agreement, to ensure you share similar expectations about your relationship. As with any legal document, take the time to review it prior to signing it, to ensure you understand important details such as any requirements and limits it may place on you, abilities it grants the advisor, and how your fees will be collected. The advisor should be able to explain any language that is unclear. Ensure that the agreement states unambiguously that they will serve as a fiduciary throughout the relationship.
Question #15: Why should I choose you?
This is a fair question, and a good one with which to conclude your conversation with a would-be advisor. It gives them the opportunity to point out information you may not have asked about, but is worth knowing. (You then know to ask your next potential advisor about it too!)
This question also can reveal the advisor’s depth of character. In our opinion, the best responses are the one that clearly articulate how the advisor is going to add value to YOUR life and YOUR personalized needs. Be wary if you instead receive a laundry list of the advisor’s many skills and talents, even if they don’t have much to do with you. Worse yet, beware of an advisor who uses the question to disparage your current advisor or others you may be considering. In our opinion, true professionals do not need to diminish others to make themselves shine.
We hope you found these questions useful for your due diligence as you explore current or potential advisory relationships. While this isn’t an exhaustive list, it should at the very least help you create a short-list, from which you can then pick the best choice for you among the professional (and fiduciary) advisors available!
Like what you read here? Sign up for our newsletters to keep learning more.