Questions to Ask a Financial Advisor

We think the best chances of success for an individual investor are tied to their relationship with their advisor. Of course some may opt to do it themselves. In our experience, this takes tremendous discipline. Investors can save themselves money by taking this route, no doubt, but the majority of investors choose to work with someone. Do-it-yourselfers run some very simple but real risks, namely not identifying those biases we all share that can lead to costly mistakes. A good advisor educates investors about these biases to help them see decisions more clearly. A piece on said biases is forthcoming.

As with all professions, some advisors are better than others. How do you find the right one for you? Interestingly, many investors don’t offer up referrals of their advisor to their friends willingly. Of course there are exceptions, but many choose to keep this relationship to themselves so asking friends and family for a name is a start, but only a start. You must first decide what is important to you. Not all advisors work in the same way.

These five questions are a good place to start:

  1. What services do you offer?
  2. How do you charge for these services?
  3. Is there an overarching philosophy or approach you follow when investing?
  4. Are you a fiduciary at all times?
  5. The magic question.

We will discuss each of these questions in detail but in practice, your advisor should be able to answer them succinctly and clearly in plain English. Services – These will vary from advisor to advisor. Beware of those advisor web sites that have long lists of services they offer. It has been our experience that jack-of-all-trades, master-of-none applies here. You want to seek out an advisory firm that specializes in servicing clients that resemble families in your situation. For example, you are a small business owner, an executive, or a single parent family, etc. They are client-centric, working in teams to offer a well-rounded client experience. Bottom line: identify firms that are experts in areas relevant to you.

Fees – The industry has made a massive transformation toward fees and away from commissions over the past 20 years. This is a good thing. It minimizes (not removes) potential conflicts of interest from the advisory engagement. Fees are typically based on a percentage of assets under management (AUM) such as 1% of the money managed annually. There may be an additional fee for financial planning or it may be wrapped within the AUM fee. For higher net worth (HNW) families, additional services could include tax prep, bill paying, and other concierge services for additional fees. The HNW clients might pay an annual retainer based on net worth rather than a straight AUM fee. The advisory firm should have a written and easy to understand fee schedule. Bottom line: if your advisor’s answer to the fee question starts with, “It depends…”, run the other way.

Investment Philosophy – The most successful planning/investment firms typically follow a specific investment philosophy rather than try to be all things to all people. They believe strongly in what they practice by investing their own money alongside the client’s. They have a robust research effort so that they keep current with the latest thinking. Bottom line: find a firm that believes in a specific investment philosophy or approach that has worked for them for years if not decades.

Fiduciary – This has become a hot button topic as of late with the big brokerage and insurance companies fighting it tooth and nail. It seems obvious that your advisor should put your interests before their own. But the reality is that for most of retail financial advisors, the suitability standard reigns. Simply stated, suitability means that your advisor (really the wrong term; it should be broker) can recommend investments that they believe to be suitable but that there are likely better options available to you. Additionally, they acknowledge that their advice may be conflicted due to the specific products they are recommending. Several countries have adopted a fiduciary standard for financial advisors, the U.K. and Australia among them. Legislation has been introduced but lobbyists for the big brokerage firms and insurance companies have successfully kept it from becoming law…for now. This will likely change one day. Bottom line? Work with a fiduciary. Make sure that they do not wear two hats meaning they are a fiduciary some times, and a broker at other times depending on what they are selling you.

The magic question – “Why do you do this?” It’s a great question and a fair one to ask someone to whom you’re considering entrusting your life’s savings. Find out their “why”. Our favorite answer is something along the lines of, “We love helping people gain peace of mind over a very emotional and stressful part of their lives.”