Choosing a financial advisor could be one of the most important decisions you make. After all, when you are handing all of your hard-earned money over to someone and asking them to make decisions in your best financial interests, it is absolutely vital that you pick the right person to do that.
But how can you find out what kind of person you’re dealing with?
Many investors – especially new investors, or those seeking out professional financial guidance for the first time – aren’t sure how to begin the process. They know they ought to ask some questions, but which ones? And which answers should be considered “correct” for their specific case?
In other words, many new investors don’t even know what it is they don’t know.
To help you pinpoint the right professionals to work with, here is a list of important questions to ask any financial advisor you are considering. Listen carefully to their answers. If anything doesn’t sit right with you, ask for clarification. If it still doesn’t sit right after further explanation, walk away and start over.
Are You a Fiduciary?
Many novice investors are absolutely shocked to discover that there is only one class of investment professional that is legally required to work in their best interest: fiduciaries.
This means that anyone who answers “no” to this question merely has to make “suitable” investments on your behalf, not the best investments. Now if you’re wondering why on earth a financial advisor would want to make risky investments on behalf of their clients, that brings us to the next question…
How Do You Get Paid?
It is not uncommon for financial advisor compensation to happen on a commission based payment scale. This means that there is a direct financial incentive for your advisor to invest or move your money around in such a way that generates the most commission for him or her. Typically, a customer working with a commission-based financial advisor will see growth in their investments, but not as much as they might see otherwise.
A fiduciary on the other hand, works on a fee-based payment plan. Not only are they legally required to invest your money with your best interests in mind, but they also have no monetary incentive to invest your money any other way.
If You Receive Commissions, How Are They Determined?
There are a few ways investors can wind up getting burned by commission based professionals. For example, many financial advisers will charge a commission each time stocks are sold or traded. This is a fairly typical arrangement, but what not every investor realizes is just how frequently stocks are being moved around in your portfolio.
You are paying twice each time stocks are sold or traded, if you are working with a commission-based financial advisor. Not only are you losing part of your profits to a sales commission, but you are also responsible for any capital gains tax that result from these sales. Money that is moved around too frequently can wind up costing investors tremendously. Some commission-based professionals choose to do this anyway, because it increases their pay.
Are You Compensated in Other Ways outside of Fees or Commissions, Such As Revenue Sharing Arrangements, Bonuses or Other Incentives?
Financial advisers who work for large firms or banks may receive other forms of compensation. It is always important to ask for a full and open discussion of how these incentives work. You may find out that your financial advisor is incentivized to sell you additional products on behalf of the firm or bank where they work, regardless of whether or not it would be the best choice for you. Clearly, this creates bias where there ought to be none. Listen to their answers, and decide if there is any situation wherein a move made by your financial advisor could benefit them more than it would benefit you.
Do I Have Any Choice in How I Pay You?
Be on the lookout for situations where you feel you have absolutely no room to negotiate. If you are looking to invest a large sum of money, you may ask for lower fees or personalized payment schedules. Any financial advisor who seems reluctant to work with you may be attempting to make more money off of you than they should.
Can You Provide a Fee Schedule Listing All of the Fees That Will Be Charged for Investments and Maintenance of My Account?
Again, what you are looking for here is complete transparency. Some investors are dismayed to discover that they have been paying additional and unnecessary service fees, transaction fees, commissions, etc. on their investments for years without realizing they were doing so. This is usually because these fees were never spelled out to them in their paperwork. Your investment professional should be able to provide you with a concrete fee schedule which you can easily check against monthly or quarterly statements.
Can I Pay Lower Fees If I Open a Different Type of Account?
When a financial advisor seems overly eager to force a new customer into an annuity, or some other type of overly complex investment account without good reason, that should immediately send up a red flag. Ask your financial advisor up front if there are other accounts available which would cost you less in terms of fees.
Do I Need to Keep a Minimum Account Balance to Avoid Certain Fees?
This is information that is readily available on every basic checking or savings account. It should not be a secret on investment accounts.
What Fees Will I Pay to Purchase, Hold, and Sell This Investment?
You should be given a clear picture of what this investment will cost you in fees over the entire life of the product. Many investors do not realize that they may incur fees when they seek to get out of an investment, and may wind up losing even more money when they try to walk away from an investment they’re unsatisfied with.
The Takeaway: Transparency is Key
The absolute best advice I can offer to any investor, whether they are a novice, or have 30 years of experience is this: work with someone willing to offer you complete transparency into your own investments. So few investors fully understand the fees they are paying, and therefore wind up paying too much unnecessarily. To see a more complete breakdown of how investments can cost more than they should, download the free white paper The True Cost of Investing.
