Whenever I meet with prospective clients, they bring a list of questions to ask me. Few people, though, lob as many queries as they truly should. The problem is that many people don’t quite know what to look for in an adviser.
Choosing the right financial adviser for your needs is crucial. It’s not just your money that’s at stake. Your ideal future is, too. The best way to learn how your money will be managed and if you can trust your adviser is to ask questions.
So, let me do a little role play. I’ll play the role of a person shopping around for financial help. Based on my experience as a financial adviser, here are 10 questions I would ask and the reasons why.
1. What are all the costs and fees associated with investing?
When it comes to investing, there are always costs. There are costs associated with owning investments, such as mutual funds and ETFs, as well as transaction fees for trading. If an adviser tells you there are none, proceed no further — except for the exit.
The financial industry is creative when it comes to fees though, so this is a question you may need to ask several ways. Ask if you will be charged front-end or back-end commissions. Also, find out if any of the investments charge 12b-1 fees, which are fees charged by mutual funds to shareholders for marketing and distribution purposes. Essentially, these fees don’t directly benefit you, but instead lower your return. Remember, the more you pay in fees, the less you get in return.
Some advisers also sell annuities. Be careful. Annuities are often wrapped in layers of fees. If you’re considering an annuity, ask for a complete summary of the fees, including any optional riders and benefits, mortality and expense charges, administration fees and investment fees. Further, make sure you understand the annuity’s surrender fee schedule.
2. How will you and your firm be compensated?
The fact is, we advisers don’t work for free. Sorry. We charge for our services just like everyone else. The tricky part is that advisers can be compensated for their services in different ways. Some charge a flat dollar amount or a percentage of assets under management. Others are compensated by the investments they sell in the form of commissions and 12b-1 fees.
This is an important difference. It’s better to have an adviser who is compensated for the work done for you and not for the investments sold. Advisers should not be compensated extra for making changes to your account or selling you more products.
3. Are you a fiduciary?
Fiduciary is the highest legal standard to reach. It means those providing financial services are legally obligated to act in the best interests of their clients. Registered investment advisers (RIAs) are regulated under the Investment Advisers Act of 1940, which binds them to the fiduciary standard. This is a higher standard than the “suitability” standard that is followed by registered representatives, such as stockbrokers.
Therefore, you should be aware that the advice you receive from one adviser to the next can differ depending on how they are registered.
However, one thing to keep in mind is that advisers are technically not fiduciaries on the investments they don’t manage. For example, an adviser helping a client with an active 401(k) or providing advice on purchasing a car is not in those instances held to the fiduciary standard. When interviewing an adviser, ask what standard would apply to the investments he or she manages and any others you need help with.
4. Who’s your custodian?
You should never be required to give the money you’re investing directly to a financial adviser. Think Bernie Madoff. Instead, there should be a third party, the custodian, who holds your account and the assets in it. This should be a reputable company that sends you regular statements and provides online access.
5. Are you credentialed?
The financial industry is home to an alphabet soup of letters. Arguably, the three most respected sets of letters are CFP (Certified Financial Planner), CPA (Certified Public Accountant) and CFA (Chartered Financial Analyst). Advisers are required to undergo rigorous testing and continuing education to earn and maintain these designations. For personal finance help, look for a CFP.
6. How long have you been a financial adviser?
Along those same lines, if applicable, you might also ask how long have you been employed with your company? Further, what’s your future look like? It’s good to know that your adviser has a history with a reputable firm and has every intention of sticking around. It takes time to build a trusted relationship, which is an investment on your part that you don’t want to go to waste if your adviser leaves in 12 months.
7. Do you have any disclosures?
If your adviser has any rulings against him or her, it’s important to know what they are. You can also find this information on your own. Search through government websites such as the Securities and Exchange Commission’s Central Registration Depository (opens in new tab) and the Financial Industry Regulatory Authority’s BrokerCheck (opens in new tab).
Simply type the adviser’s name in the search field and you’ll find any past disciplinary action, registrations or licenses and educational and career histories.
8. How will you invest my money, and what’s your investment philosophy?
You don’t necessarily need to know how the sausage is made, but you should be comfortable with what’s served to you on the plate. You and your adviser should come to an agreement on the appropriate asset allocation in your portfolio based on the level of risk you’re comfortable with and your long-term financial goals.
You should also understand what types of investments your adviser recommends. Will your adviser use mutual funds and ETFs, individual securities, insurance products, etc.?
And, how often might changes be made? Few investments perform well indefinitely, so it’s inevitable you will need adjustments in your portfolio from time to time. However, frequent investment changes can hurt more than help. Learning how often an adviser buys and sells investments will provide some indication of what you could experience. It’ll tell you whether he or she is trying to help your money grow over the long term or constantly trading in hopes of hitting a home run.
9. How often will we communicate?
Perhaps you’ll need a lot of hand holding or want continued comprehensive planning. Or, maybe you just want someone to manage your money while you concentrate on living life to the fullest. Either way, make sure your new adviser will provide the level of attention you desire via written correspondence, phone, email and in-person meetings.
10. How will I fit in among your clients?
The last thing you want from an adviser is to be treated as just another number. Nor do you want to have financial needs your adviser isn’t able to help you with.
One way to get an idea of where you stand with your adviser is to ask how many clients he or she services. After all, there’s only so much of one adviser to go around. Further, ask how your account size and financial goals relate to other clients. Lastly, what other aspects of your financial life — beyond investing your money, planning for retirement, etc. — can you get help with?
If you feel like a small fish in a big pond with important financial needs unmet, then it’s a sign you need to find another adviser.
Sean McDonnell, CFP®, is a financial adviser at Advance Capital Management (opens in new tab), an independent registered investment adviser based in Southfield, Mich. He works closely with clients to create and implement customized financial plans, as well as provides a wide range of services, including: investment and 401(k) management, retirement planning and tax strategies.
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