3 Questions to Ask Your Financial Adviser

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We’ve all been there. When out car shopping, you walk into a dealership and see the sales staff anxiously watching from their cubicles — waiting to pounce. You begin trying to figure out the difference between the sticker price and the invoice price — and what you’ll really wind up paying — when you feel a hand on your shoulder.

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“Friend,” he says, “I’m here to help.”

But is he really? While you’re asking about leather seats and four-wheel drive, still trying to decide between a sedan and an SUV, your “friend” keeps coming back to financing and monthly payments.

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“What did you want to spend?” he asks. “Are you going to finance or pay cash?”

He doesn’t seem much interested in your wants or needs, your desire for leg room and trunk space or your (finally!) getting the car of your dreams.

For him, it’s all about the sale.

In the financial industry, this type of selling happens every day. Some financial professionals use seminars to sell new clients annuities or mutual funds instead of working with them personally on goal-setting and providing information. And in many instances, the products they push aren’t part of a comprehensive financial strategy.

Enough about you, they say with a smile; let me tell you about this product’s bells and whistles.

Is this what anybody really wants in a financial professional — to be seen as a dollar sign or commission check and not as an individual with specific needs and goals?

No doubt this is why the Department of Labor is so keen on pushing through the new fiduciary rule.

I disagree with the government’s plan to regulate how financial professionals treat their clients. I don’t think true professionals should have to be told to put their clients’ needs before their own. But there are plenty of examples of schemers who make us all look bad. It happens.

So, I want to give you some questions to ask your financial adviser (or another financial professional you're thinking of working with) the next time you feel as though you’re being pitched instead of helped.

1. Are you going to review my tax return?

Would you trust your doctor if she never looked at your bloodwork or ran any kind of tests? How about a contractor who wanted to build your house without any blueprints?

Your tax return could be thought of as the blueprint to your financial investments. Wages, IRA distributions and capital gains are just a few of the items your professional should be reviewing with you every year. Schedules such as loss carryforward, dividend income, itemized deductions and taxable Social Security will help your financial professional help you plan for the future.

2. Can you explain the ABCs of my mutual funds?

Did you know that one mutual fund can have four different charges based on the way it is purchased or sold? For example, an A-class share of a mutual fund can charge between 2.25% and 5.75%; so, if you spend $100,000, that’s $2,250 to $5,750 up front in commission. On the other hand, a C-class share of the same mutual fund does not charge a commission to purchase the fund, but charges a yearly fee that can range anywhere from 1% to 2%. With a C share that charges an average 1.25% over 10 years, a $100,000 investment would incur at a minimum $12,500 in fees. Wow!

Alternatively, you could purchase the exact same mutual fund with the exact same $100,000, but as a no-load fund without a commission or high fee — and just pay a fee to the financial professional who manages your account. Doesn’t that seem more in line with your best interest?

Next time you get your investment statement, take a look at your mutual funds. If you don’t understand how the fees or commissions work, ask your financial professional. A simple question could save you thousands.

3. Do you charge a fee or work on commission?

The big debate today in the financial world is the difference between fee-based and commission-based financial professionals. One charges a fee for planning and managing a portfolio, and the other gets commissions based on the funds or products he offers. Some financial professionals use both strategies, charging fees for stock-market investments and commissions for insurance-based products.

I believe the fee-based approach is better suited for clients in today’s financial world. If you work with a financial professional who charges a fee instead of a commission, theoretically, you shouldn’t have to question the professional’s motives or if an investment is in your best interest. But the most important point is that you, as the consumer, understand what you are being charged and have a clear understanding of the financial professional’s interests.

Take charge of your money and investments. Make sure you’re getting a comprehensive financial strategy with a written income strategy or exit strategy. And if you feel your financial professional is just pushing products, push for a new professional.

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Drew Blackston is a Registered Financial Consultant, Certified Retirement Counselor and investment adviser representative with the Blackston Financial Advisory Group. He lives in Florida.

Kim Franke-Folstad contributed to this article.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Drew Blackston is a Registered Financial Consultant, Certified Retirement Counselor and investment adviser representative with the Blackston Financial Advisory Group. He lives in Florida. He and his father, David, are co-authors of the book Have You Ever Been Bitten by an Elephant: The Definitive Guide for Retiring Well.