A few weeks ago a new, potential client came in to meet with me. He was armed with a list of questions.
After discussing his situation for a few minutes, he began his line of questioning. I dutifully answered each one to the best of my ability. When we were through he thanked me for my time, apparently satisfied with the answers, and we parted ways. But when he left, I stood there shaking my head for a moment, wondering if – despite my best efforts to steer the conversation – he had any idea how our firm works or what we do for our clients. To my mind, he had asked all the wrong questions.
As I sat down and started to explain this to my wife that night, I noticed a disapproving look on her face. I instantly knew what she was thinking: “Okay smarty-pants, what questions should he have asked?” It made me think about how I would interview a potential financial advisor. I came up with the top six questions I would ask and that you should be sure to ask any advisor you consider working with:
1. Are you a fiduciary?
There are two primary parties who are able to offer investment advice to clients, investment advisors and investment brokers. Under federal law, in particular the Investment Advisers Act of 1940, investment advisers are regulated by the Securities and Exchange Commission (SEC) or appropriate state authorities and are required to provide services to their customers under the fiduciary standard. As a fiduciary, an advisor must put the client’s interests before his or her own at all times. In addition, as a fiduciary, an advisor must disclose how he or she is compensated, as well as any conflicts of interest that might arise in the working relationship. Brokers, on the other hand, must adhere to what is called the suitability standard. Instead of having to place his or her interests below that of the client, the suitability standard only details that the broker has a reasonable belief that any recommendations made are suitable for clients, in terms of their financial needs, objectives and unique circumstances. A key distinction in terms of loyalty, the broker’s duty is to the broker-dealer he or she works for, not necessarily the client served.
The Department of Labor and the Securities and Exchange Commission have been working to simplify and streamline the fiduciary standard rules in both the retirement and broader investment advice industries, but, as of the writing of this article, have not yet finalized any changes. Making sure you are working with a fiduciary is a crucial first step.
2. With whom will I actually be working?
When you go to interview a new advisor, often you will meet with one of the principals of the firm. You may find that you really like him or her. However, many firms are structured as teams or groups, and it may be that you will usually work with someone other than the principal advisor. Before you sign up for a long-term relationship with an advisor or firm, find out how the team is structured and who your main contact will be, so you can get to know that person as well. A good advisory relationship will be one that is built on trust, so you’ll need to be comfortable with everyone you will be interacting with.
3. What services do you offer?
All financial advisors offer slightly (and sometimes significantly) different services to their clients. It is important to know exactly what services an advisor will provide and to make sure those services are aligned with what you are looking for. Be sure to gain a good understanding of the advisor’s basic service model. You may also want to drill down for more detail in some of the following areas with these questions:
- Financial planning – Do you provide comprehensive financial planning, just investment planning, or no planning at all? If you provide comprehensive planning, what areas does the plan cover (cash-flow analysis, cash reserves, insurance, investing, education retirement, taxes, estate planning, etc.)? Do you provide ongoing planning after the initial plan is complete? What is the process?
- Investment management – Do you require that I move all of my assets under your management? Do you manage the investments in-house or hire outside managers? Will you help manage investments not held with your firm?
- Tax, accounting and estate-planning services – Do you provide tax and accounting or estate-planning services? If not, do you have qualified referrals in these areas?
- Coordination – Do you coordinate with the other financial professionals I work with to make sure all of the areas of my financial profile are in sync?
4. How are you compensated?
Fees can be very transparent or extremely opaque, depending on the investment platform and specific investments you ultimately use. Each advisor sets up the compensation arrangement that suits him or her best, and while none are inherently better or worse than the rest, it is extremely important that you understand precisely how, and for what, your advisor will be compensated. Before you start, you should ask:
- Is there an initial financial planning charge? Is this charge waived in any circumstances?
- Are there any ongoing planning or advice charges? Do the charges change each year?
- How do you charge for investment management? The most common fee structures charge either as a percentage of assets under management, by commission for each trade or some combination of each.
- Do you utilize outside asset managers? If so, do they add an additional layer of fees?
- What are the average internal expenses charged by the investment companies or mangers that you use?
- Do you receive any more or less compensation based on the type of investments you recommend? If so, how do you determine which investments to recommend?
5. What type of clients do you most commonly work with?
Finding out if the advisor has experience with clients in situations similar to yours is very important. Does he or she really understand the specifics of your industry? Does your advisor commonly work with clients who are in a similar financial position and share the same concerns you do? You want to be sure that your advisor has experience addressing the types of issues that are most important to you and relevant to your situation.
6. What is your investment approach?
There are many different investment philosophies and methodologies out there and each advisor will have good reasons for believing in his or hers. The truth is that most can be effective, as long as the methods are disciplined, deliberate and articulated in advance so that the client (or advisor) is not making emotional decisions during times of heightened market volatility. Even so, it is crucial that you fully understand your advisor’s investment approach and are in agreement with how he or she will execute it.
This list is clearly not an exhaustive one, but it’s a good starting point. These questions, along with any additional queries more specifically tailored to your situation, should result in gaining a good understanding of what the advisor does, how he or she is compensated and what you could expect from the relationship. Getting solid answers to these questions will help provide you with the relevant information you need to make an informed decision when hiring a financial advisor.