Questions to Ask When Choosing a Financial Advisor | Personal Capital
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Questions to Ask When Choosing a Financial Advisor

Did you know that that 61% of Americans don’t know how much they pay in investment fees, according to a recent survey Harris Poll conducted on our behalf? What’s more, only 26% of those polled agreed with the statement “My financial advisor only makes recommendations that are in my best interest.”

Those numbers are alarming considering they’re related to consumers’ financial futures and those to whom they’re entrusting them.

If you’re entrusting your golden years to someone, you should be able to trust him or her, right? The confusing thing is, this trust isn’t necessarily well-earned. Many financial advisors operate as broker-dealers, who are transaction-oriented and make money by charging commissions for selling securities or products such as mutual funds. Because their traditional role has been the sale of securities, and not objective advice, broker-dealers are not held to the fiduciary standard, which means they are not legally required to act in their clients’ best interests.

On the other hand, registered investment advisors (RIAs), such as Personal Capital, are legally bound by the fiduciary standard, and typically charge a flat fee through their sole business of dispensing advice, not generating product commissions. Well, why wouldn’t you play it safe by just going with an RIA? The answer isn’t so simple. Some firms become dual-registered, which means they can continue to charge as broker-dealers, but also offer theoretically objective advice like an RIA.

So what can you do to ensure you’re getting objective advice that isn’t based on earning commissions and other transactional charges? If you’re currently evaluating managers, or rethinking your current relationship, here are some important questions to ask to ensure you are receiving financial advice in your best interest.

Are you a fiduciary?

A fiduciary has a legal obligation to act in your best interest, including disclosing fees and any potential conflicts of interest. Brokers do not always have this legal obligation, but registered investment advisors (RIAs) do. Avoid an advisor who earns higher fees by pushing certain products.

Why did you recommend that investment

Ask your financial advisor if he or she is willing to invest in the same products that they recommend to you, or if they receive an incentive for recommending that product. Alternatively, you can also ask why they picked a product recommended over another similar offering. Do they have a fee-sharing arrangement with another company?

How are you compensated?

If the answer is vague or takes more than a minute to answer, walk away. You should also know what your all-in costs are and 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 management fee he or she makes from working with you.

What service can I expect from you?

Ask your advisor what kind of on-going service you can expect. How often can you contact them and what can you expect in response times? Do they have online tools that allow you to review your account data in real time and perform what-if analyses? What materials do they provide so you can track how your investments are doing? Equally important, how do they keep your financial plan up to date?

What is your investment strategy, and how will it achieve my goals?

Does your advisor understand your specific needs and goals? 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 specific needs, risk tolerance, age, and other financial priorities.

To learn more about what questions you should be asking your advisor, as well as how the investment fees you’re paying could be eating away at your nest egg, download our free report, Hidden Beneath the Surface: What Americans Are Paying in Advisory Fees.

Download the Free Advisor Fee Report

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.

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Building my emergency fund
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Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

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