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How Do You Know If You Can Trust Your Financial Advisor?

The financial services landscape is increasingly complex, and it’s tough to know whether you are getting your money’s worth from your financial advisor. In fact, according to our 2019 Financial Trust Survey, one in five people don’t even know how their financial advisor is compensated! Americans surveyed are also almost evenly split as to whether they believe financial advisors have an obligation to act in their best interest.

So how do we figure out who to hire for investment advice? How do we cut through the noise and understand if we are working with the right advisor and institution to best serve our financial needs?

Want a clear view of your retirement?

Here are 8 critical questions to ask your financial advisor to get to the bottom of this. Whether you are looking to hire an investment professional for the first time, or if you are looking at alternatives to your current advisor, these questions are a good way to get some of the information you need to make an informed decision about managing your wealth.

Our 2019 Financial Trust Survey revealed that many Americans are still in the dark about their financial advice. Read the full report here.

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How is Your Advisor Compensated?

Do you know exactly how your financial advisor is compensated? If the answer you get is vague or takes more than a minute to answer, walk away. You should also know what the all-in costs are.

Make sure you understand how much you are paying per transaction, per product, or per service. Ask how much your financial advisor makes when he sells mutual funds, annuities, and individual stock or bond trades. Be sure to ask if those costs to you are in addition to the annual, or ongoing advisory fee he or she makes from working with you. Also, know what services you are entitled to.

Tax optimization?

Rebalancing?

Retirement planning?

Estate planning?

You should be able to get all of this support from one advisor.

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Are You a Fiduciary?

Is your financial advisor a fiduciary? This question is critical. A fiduciary has a legal obligation to act in your best interest. This includes disclosing fees and any potential conflicts of interest. Brokers, for instance, do not have this legal obligation, but Registered Investment Advisors (RIAs) do. RIAs can provide you with holistic investment advice, and they must legally do what is in your best interest. That’s the relationship you want.

Read More: The Fiduciary Standard at Personal Capital

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Why Did You Recommend That Investment?

Some firms have fee-sharing arrangements with mutual fund companies or insurance companies i.e. kickbacks. This might mean your financial advisor is heavily motivated to sell a certain company’s investment products over another. You’d better ask your financial advisor if he or she is willing to invest in the same products that they recommend to you. For example, if your financial advisor has recommended you invest in mutual funds, be sure to ask:

“Why did you put me in this particular mutual fund?”

“How did you select it?”

“Do you get compensated if I agree to invest?”

According to the Economic Times, 77% of mutual funds underperform their benchmarks, but selling them to clients is often a big source of revenue to the advisor and their firm. A mutual fund-only strategy may benefit your advisor – but it may not be in the best interest for you.

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Do You Have a Sales Quota?

Did you know that some financial advisors have monthly sales quotas? It means your Advisor has sales goals to reach and will be compensated if they reach those goals. So, who’s buying? The quota might come in the form of accumulating a certain level of assets with the firm or garnering a certain number of new clients. It could be a quota for selling insurance or other products.

Quotas can also be targeted at how much in fees the advisor generates for their firm. Think about how sales quotas can impact your financial advisors behavior as they reach the end of the month. Is your Advisor selling you a product in order to reach their goals or because it is in your best interest?

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What Percentage of Your Time Do You Spend on Portfolio Management?

Most people picture their advisor at a desk researching the next great investment for them. Actually, most advisors wear multiple hats. They have to divide their attention between research, portfolio management, servicing existing clients, and prospecting for new clients. Find out how your advisor monitors your portfolio and how often. You don’t want someone managing your money who consistently has his or her attention elsewhere. This is your nest egg and you want to make sure you trust your financial advisor to watch it carefully.

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What is Your Investment Strategy?

Does your advisor understand what your specific needs and goals are? Did you work together to build your long-term investment strategy? Ask your financial advisor what his or her investment strategy is and most importantly, how it is customized for your needs. Investment strategies also change over time as risk tolerance and life changes. Make sure your investment strategy is dynamic and you have an ongoing dialogue with your financial advisor.

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What Are Your Credentials?

Certifications and credentials are often good indicators of expertise and understanding. Investment professionals can go by many terms (financial advisor, financial consultant, financial planner) so it’s helpful to understand what designations and credentials they have. Common credentials are Certified Financial Planner (CFP®), Chartered Financial Analyst (CFA). Licensing exams are needed to give different types of advice. Make sure to ask, if they’re certified or chartered, or which exams they have passed. Ask them why they are qualified to help you with your investments.

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What Service Can I Expect From You?

Knowing that some financial advisors may be distracted by sales quotas and time prospecting for new clients, you want to make sure that your financial advisor won’t sign you up and then ignore you. Find out what kind of on-going service you can expect. How often can you contact them and what can you expect in response times. Can you chat with them online or do you have to schedule meetings with them? Another important consideration is performance reporting. What materials do they provide so you can track how you are doing? Remember, this is your long-term financial well-being. If you’re not getting everything you ask for…demand it!

Get a Free Portfolio Review with Personal Capital

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Kyle Ryan
Kyle Ryan is a member of the Personal Capital Advisors Investment Committee. He also serves as Executive Vice President responsible for Personal Capital Advisors sales, client service, and investment operations. Previously, Kyle held senior management positions within Merrill Lynch and Fisher Investments. While at Fisher, he was responsible for managing nearly every aspect of the organization, including all global trading operations, investment research, portfolio implementation, and high net worth sales. Kyle graduated with honors from the University of California – Los Angeles.
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