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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?

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.

Slide03

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.

Slide04

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

Slide05

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.

Slide06

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?

Slide07

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.

Slide08

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.

Slide09

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.

Slide10

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!

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40 Comments

  1. Advisor

    Rob brings up some valid points & Matt is trying to come across as the most noble guy on the planet.

    If you did your due diligence you would conclude that with hard work and an ethical approach a successful practice can be built.

    Regardless, most people cannot afford (time or low income in the first 3 years) or do not have the discipline to to build a successful practice.

    Dr.’s and Attorney’s are not salesman. They get PAID and do they follow up to make sure you take your Rx… Probably not.

    A Financial Planner (regardless of designations) with the right business model can bill $100 – $300 an hour or a Flat Fee for Advice (sounds like a professional to me).

    A Great Planner has the necessary skills to Motivate the client to implement the reccomendations to get them from point A to point B. This of course includes some sales skills.

    The hourly or flat fee approach encourages the Planner to stay on top of the client to execute whether the recommendations are implemented with the Planner or elsewhere.

    Why… Because the hourly rate/flat fee is their Salary & if they want to earn the same amount next year they need to work on the clients behalf to produce results.

    The other side of the spectrum is the wolf in sheep clothing (a commission junky)who is just trying to earn a buck telling a client whatever they want to hear vs. what they NEED to hear.

    The bummer is – they are all called advisors.

    Reply
    • Rob Drury

      Great points! As you and I both suggested, a fee-only advisors is a good way to (hopefully) alleviate some bias and self-interest, but is far from a guaranty of it; and I consider it a waste of money, as one will still have to purchase products. By far the better way is to work with an independent advisor who can offer most any options from a multitude of providers. He gets compensated similarly no matter what he recommends, so he has no bias toward one provider or product over another, and he realizes that the long term relationship is far more important than the quick buck. This is why I do not allow captive advisors in my network.

      Reply
  2. Matt Parker

    Nice try Rob but the structure of financial planning is a SALES structure and is why I did not go into the profession. If an advisor is commissioned by a fund you cannot tell me that the incentive does not exist to be pushed to that find. That incentive structure should not exist and it is totally appropriate for a potential customer to ask. Although I agree with Sandip in that you should expect a scripted answer back if the advisor is compensated.

    Reply
    • Rob Drury

      Matt, my remarks were spot on. Because my current post as executive director of the nation’s largest nonprofit financial planning network allows me little time for it, I am no longer in private financial practice. However, I spent many years in the commission-based environment you describe. Keep in mind that consumers have the option of fee-only advisors who are barred from selling anything to their fee-based clients. Of course, I realize the reality that the most impartial and cost-effective advisors are those who don’t charge a fee and don’t get compensated unless they actually implement a program, but are authorized to offer virtually any products from any company and are compensated essentially the same regardless of what specific recommendations they make. The “salesmen” about whom you should be wary are captive agents and advisors who must push specific products or lines. For this reason, I do not allow captive advisors in the ACFA network and I don’t recommend them to consumers.

      I stated that the true financial planner or advisor was no more a salesman than a physician or attorney. I meant absolutely that and the converse. There are “sales” aspects to practicing medicine or law. This makes none of these specialties any less of a profession; a term I define extremely narrowly.

      Matt, your response to my comments suggests that you are a victim of the common misnomer that financial planning and investment planning are synonymous. Of course, nothing could be further from the truth. Investments and retirment planning are a miniscule part of a comprehensive financial plan. Anyone whose primary emphasis is investment sales is not a financial advisor.

      Reply
  3. Sandip Lahiri

    I am not sure if asking hard questions is sufficient to evaluate a Financial Planner.

    I bet these folks have scripted answers to these questions already. Plus they can and will lie.

    I do not think it’s an easy task as merely asking X number of questions. It can lull one into a false sense of confidence.

    Reply
    • Rob Drury

      What disgustingly cynical comments. Granted, what many call “financial advisors” are merely salesmen; particularly those whose primary focus is investment planning, with little emphasis on other far more important aspects of financial planning. However, a true financial planner or advisor is a practitioner; no different than a physician or attorney, except for the area of expertise.

      The primary cause of financial advisors acting like peddlers is that they are treated as such. If one wants a respectable financial advisor, respect one’s advisor. The scrutiny detailed in the above article is ironically the very cause that such scrutiny appears to be needed. Doctors are trusted to always act in their patients’ best interest. As a result, they have no need or temptation to compromise integrity. They make a good living as a direct result of, not in spite of, operating completely ethically. While there are apparently plenty of shady lawyers, they virtually never operate against the interest of their clients. While the public has tremendous distrust of lawyers, one rarely distrusts one’s own lawyer.

      Most financial planners and truly comprehensive advisors enter the profession for precisely the right reasons. Most will not compromise ethical standards under any circumstances; most of the rest will not do so until squeezed into a desperate situation. Treat advisors as the professionals they are, and they will operate as such.

      Rob Drury

      Reply
      • Anonymous

        Rob,

        Having worked in several different types of firms in the financial planning industry I would say that these questions are not enough. You need far more research into the firm than the advisor answering these questions can provide, just to determine if the firm you are getting is a “true” financial planner as you say.

        Reply
      • Mike

        I wish comment on Rob Drury’s comment. I wish I lived in the world you described, but my Dr. has made very unethical decisions in my behalf and then laughed in my face when I confronted him. Needless to say, he isn’t my Dr. any more, and after a very long history of watching other Doctors do the same and even worse for those near me that I love, I’ve come to the conclusion that I’m better off without them, so I try to live a proactive health lifestyle that is working, and when/if the time comes that I need a Dr. I will hopefully have done enough research to find one of the rare ones that I might trust. As for lawyers; even ones in my own family can’t be trusted. I’ve been scammed in every possible way by them, and like the Dr. scenario above, I keep researching to try and find just one that can be trusted, and so far none! I have trusted my financial adviser so far, but after reading this, I think perhaps I shouldn’t. He knows that I check my investments weekly and if they aren’t doing well, I let him know. But so far he hasn’t done anything about complaints, and I’m looking for someone new. In his defense, he has chosen good investments that have performed well for over a year. I’ll tell you this much, just asking those questions isn’t good enough. I need to hear or read reviews from people who are long term clients and not part of the scam before I’m convinced to trust anyone! IMHO, your comments seem naive or you are in the profession and trying to cover for your colleagues. If the later, shame on you; if the prior then I think you don’t’ live in my world. Ethics and trust are rare and one must be very careful and research for a long time to find either! If you think I’m cynical as you suggest, just google the stats on fraud and scamming in the financial world in this country! Wake up Rob!

        Reply
    • Steven K

      It’s unfortunate that so many believe that Financial Advisors are scripted liars. At minimum an advisor should have Financial Industry Regulatory Agency (FINRA) series 6 & 63 licenses… Which legally requires the advisor to act in the best interest of the clients needs and recommend only what’s suitable. These exams are very tough, thorough and impossible to cheat on (metal detectors, fingerprint checks and other scary federal legal requirements). There are substantial fines and jail time involved with negligence and fraudulent practices. Investors should look for advisors that are appointed with several differnt financial firms rather than being limited to one company. As stated by many here on this site, ask those questions a morally sound advisor will be happy to brag about their training and licensing.

      Reply
  4. socrates

    An adviser, a good one, will understand you and your needs, in addition to being transparent and always full disclosure on all of his services and fees. Investors who don’t ask the tough questions and have a full understanding are doing themselves harm long term. A good investor always remembers that its their money and not the advisers, and the investor is in the driver seat, with the adviser as a guide/teacher/knowledgeable resource in helping and aiding in the decision making processes. A good adviser has the heart of a teacher and a backbone of steal to help steer the investor away from actions that will cause harm to the investor’s portfolio.

    Adviser and investor have to work together to avoid the common pitfalls of following one’s emotions, and not listening to the wisdom of great investors that are a proven track record.

    Investor behavior has a negative effect on return, according dalbar its like -4%. Advisers, a good one will hopefully aid in keeping that investor from not loosing that return.

    Reply
  5. Financial Samurai

    A lot of folks, myself included are too shy to ask the hard questions once we get to meet someone because we like their personality or are afraid to offend them. But given our future is highly dependent on our wealth, we MUST be diligent in asking tougher questions. We might not need to ask all eight of these questions, but we should demand clarity.

    Sam

    Reply