There are loads of articles out there about “questions to ask your financial advisor,” and those are really helpful. However, sometimes the tough questions are the ones that are the most important to get answered before you hire someone. Unfortunately, not everyone knows the right questions to ask. This can lead to some big mistakes.
Several years ago I ran into someone who had hired a financial advisor at a big bank. They had asked lots of questions about qualifications, the safety of the custodian, types of investments etc.
Unfortunately, the client didn’t ask was what brand of products the bank would invest their money in. The bank put all of their money into proprietary products owned and managed by the bank. A couple years later, the client wondered why his performance was lacking and realized that the bank hadn’t picked what they thought was best or even investments with the best track record, but rather what would make the bank the most profit.
This person’s theory was that you can’t go wrong with a brand name. While this might be true with tires, I would argue that bigger names in the financial advice industry actually have more conflicts of interest than smaller firms which can be bad for the client.
To help you out, here is a list of tough questions you need to ask. I call them tough questions because many financial advisors will squirm when you ask them.
Check out our video as well. In it, we go over some basic and some tough questions you need to ask.
The financial industry is REALLY good at hiding compensation. To me the first question you should ask is,
“How do you get paid?”
Don’t accept a vague answer to this one like, “I’m like a travel agent, If you buy this investment from me or straight from the company, there’s no difference, they just pay me a finder’s fee.”
You need to know whether the advisor gets paid on commission, by fee, or what?
“Do different products pay you differently or more?”
If some of the products pay the advisor more than others, how do you know you’re getting unbiased advice?
“Do you have proprietary products?”
I see this all the time. Someone has a portfolio with “insert big name investment company here” and every one of their holdings is in a company owned fund. There is no one company who is the best at everything in the investment world. That would be like saying Chevy makes the best pickup, sports car, hybrid, electric vehicle, midsize sedan, semi truck, etc. They may be great in one or two areas, but other companies are better in other areas.
“Are there any complaints about you or your firm?”
Just having a complaint against them should not disqualify an advisor. Even the best restaurants have negative reviews. However, you should be aware of the circumstances and the resolution of the complaint.
“What are your qualifications?”
The test I took that allows me legally to charge for financial advice took me less than a day of study to pass.
Just because someone is a financial advisor does not mean they know more than you. How do you know they’re qualified? In another article in our series, we go over some designations in the financial industry that show a commitment to further education in the field.
“How do you pick your investment recommendations”
If the guys back at corporate just make the recommendations and the advisor blindly follows them, what value really is the advisor? Why add a middleman?
“What is your investment strategy?”
This one makes me chuckle. A lot. More than half the people who come into my office with an existing advisor or doing it on their own cannot answer this question. And no, “To make money!” is not a strategy, it’s a goal. It’s like saying, “I’m going to Tahiti.” And not figuring out how to get there.
“Do you have sales goals/competitions/quotas?”
If your advisor will win an all-expense paid trip to an exotic island if they sell enough of product “X,” or if they don’t keep their job unless they make enough commission in a particular product every month, I would be very worried about how unbiased they will be.
“Are you acting as a fiduciary?”
This is a big one and in my opinion, it is the most important. A fiduciary has to put your interests ahead of his own and minimize conflicts of interest. It doesn’t mean they’re educated, or good at picking investments, but at least it means they’re on your team.
Even if you get satisfactory answers to these questions, it’s not unheard of for people to lie. Check out our other articles and videos for ways to double check these answers and make sure you can be confident of your choice of financial advisor.
In the next installment in “Choosing the Right Financial Advisor for You,” we cover some top questions you can ask potential advisors that will help you understand their business model and philosophy in detail.
See you there.