You value your money and your time, and you don’t want to spend too much of either on a relationship you’re not comfortable with. A financial advisor is a position of trust—not only the trust not to make off with your funds in the night, but also the confidence that you can tell them both your worries and your goals, and your advisor will work towards realizing your best financial future. Through the course of this relationship, your life will change. You may start a family or a business. You may decide you need a year to explore. You may have large medical expenses. You may need to take care of your parents as they age. Although you may not be able to map exactly how your life goes, you can develop a plan that anticipates these events. Therefore, it makes sense to put in the time necessary to find the advisor who is the right fit for you.
While you should ask questions about how the advisor would handle specific concerns of yours or issues unique to your situation, here are some general questions that you must have answered:
1. HOW DOES THE ADVISOR GET PAID?
This may be the most important question. No matter how good someone is at managing your money or providing advice, if someone other than you is paying them, your advice will be conflicted. Payment for services can either come as commissions, fees or both. An advisor working on commission gets paid based on a product they sell you. This motivates them to sell you more of the product and to sell you more of a product that has a higher commission. Advisors who accept commissions from third parties may have a conflict of interest that needs to be disclosed. A fee-only advisor is paid only through fees for service to clients. The fees can take many shapes—hourly work, fees for specific actions or fees for assets under management—but they are paid by the client. Ask how the advisor’s fee structure incentivizes them to work for you. In the middle, there are “fee-based” advisors who may earn some combination of a fee and a commission. If you are the only one paying your advisor, you are more likely to be receiving their best efforts. Everyone works for money – make sure they are working for your money!
2. WHO MAKES PORTFOLIO DECISIONS AND HOW?
If you ever have any deeper questions about why your recommendations are what they are, you want to speak to the person who actually makes these decisions. Your advisor may outsource management or even advice to another company or to a computer program. None of this is inherently bad, but it is good to know where the decisions are being made and what their limitations are.
3. WHAT IS THE ADVISOR'S WORK HISTORY AND EDUCATION?
Hopefully you have checked out your prospective advisor on www.FINRA.org BrokerCheck and have maybe conducted a Google or LinkedIn search, but hear it from the advisor too. Ask about education, experience and credentials. While these don’t mean everything, it is important that your advisor have a broad base of knowledge to deal with any questions that you may have. Many industry certifications require continuing education so that their members stay up to date with changes in that world.
4. HOW AM I PROTECTED FROM THE ADVISOR?
Don’t be afraid to ask: “What happens if you try to scam me?” Third party custodians, watchful regulators and open communication go a long way in preventing fraud. An advisor should understand the deep fear of losing everything to fraud and be able to demonstrate how you are protected. The ability to withdraw your money without penalty or to transfer your accounts to another advisor are powerful tools for keeping your advisor in check. Make sure that you retain full ownership of your assets at all times.
The flip side of this question is to see if your advisor is a Fiduciary. A fiduciary is someone who has an obligation to put your interests first. When making decisions, a fiduciary does not consider any personal benefit they may receive from the outcome. This is generally the highest standard of advisors.
5. WHAT DOES THIS RELATIONSHIP LOOK LIKE TO THE ADVISOR?
Make sure you are on the same page here. You approach an advisor because you have specific current needs and unknown future needs. Make sure that they are aware of what you will need from them, as well as how often and proactively you would like them to communicate with you.
Selecting a financial advisor is selecting someone for your personal Board of Directors. You need to trust this person’s ability, integrity and dedication to the task. You have a right to know how your advisor works, gets paid and makes decisions. Hopefully this will be a long and fruitful relationship, and it will take effort on both sides to maintain it.