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Go Ahead, Grill Your Financial Advisor: Getting the Low-Down

June 5, 2013
Go Ahead, Grill Your Financial Advisor

Before you hand over your future, put your financial advisors in the hot seat. They can take it.

It’s one of the most important relationships in your life. So don’t shy away from asking the tough questions when you sit down for the first time with a financial advisor. This relationship, like all relationships, demands a healthy discussion up front about goals and expectations. And sometimes, it may require a break up—after a few months, even, or a few years. (Think “I love you, I’m just not in love with you.”)

Here’s a short list to kick it off right.

It’s an obvious starting point, but feel entitled to ask about an advisor’s educational background, years of experience, number of clients, and the size of a practice including average account size. After all, you’re turning over hard-earned assets. And like with marriage, you want to say “I do” to someone who you trust.

Some advisors will hand off your account to assistants or junior advisors, some won’t. You are investing in the intellect and superior financial instincts of the person before you. Likewise, lots of advisors have huge practices, and can’t service clients personally or often. This may be fine with you. Or not. Find your comfort level. Are you investing for the first time? Have you been at this for years already? Is your portfolio mature? Do you need daily calls? Weekly calls? Monthly check-ins? You also have the right to know if the advisor is running other businesses in the capacity of owner, partner, or trustee. Will they also have the bandwidth and energy to keep your financial interests in mind?

Finally, ask to speak to other clients who can provide valuable testimonials. You can also get opinions and references from an advisor’s colleagues. In the end, it may take one conversation or several to make a decision. And you need to be informed at every level.

You have every right to ask your advisor how they’re paid. In fact, you may want to know if the fee structure is fee-only or fee-plus-commission well before your initial interview, as it could help you prepare your list of questions.

“Fee-only” is a straightforward payment structure. Yet, it’s sometimes confused with the similar sounding ”fee-based.” With fee-only, your advisor is compensated solely by the fees you pay for their services. You are not responsible for any commissions based on product recommendations, or for any revenue-sharing agreements with an advisor’s investment providers. Likewise, “fiduciary” is the legal standard that fee-only advisors accept in their client engagements. In the simplest of terms, being a fiduciary means an advisor has a duty to always act in your best interest first (or disclose it otherwise), before acting in their own interest or in the interest of other parties. It’s also important to get a full understanding of the depth of services you’ll get for your fee as you comparison shop among fee-only firms.

A fee-based relationship, on the other hand, is a fee-plus-commission arrangement, where advisors receive compensation from investment providers. There is some suggestion, or at least the perception, that this kind of payment structure might influence which investment products an advisor recommends.

Also consider “flat fees” vs. hourly rates. In the end, make sure the details of your agreement are clear and in writing. Ask for a comprehensive written agreement describing compensation and services for the life of the engagement.

Eventually, you’ll want to know a little more about what to expect for your portfolio. How are financial goals set and met? What does cash management and budgeting look like, especially for older investors? Can your advisor help you with tax planning, or will those services be outsourced? How often is investment planning reviewed? Does your advisor recommend estate planning, and is there expertise in this specialized area? What about your related financial needs like insurance, education funding, long-term retirement planning, medical funding, and more?

Beyond your individual needs, does your advisor make recommendations for specific investments and products? How many investment types is the firm familiar with? Can the firm implement your financial plan and trade your portfolio? If not, who will?

It may sound pretty technical, but ignore these issues at your own risk. In the end, the more knowledgeable you are, the more you can participate in conversations about your financial future and track your advisor’s work. Will the firm take custody of, or have access to your assets? Does the firm require “discretionary” trading authority over my investment accounts? If you don’t understand these phrases and others, always ask.

Most importantly, ask about government fines, jail terms, disciplinary actions, or regulatory inquiries into the individual or the firm. This can be a good measure of honesty from the start.

Ask if the firm will cover fraudulent or unethical actions by its staff. Chances are you’ll never have to play this card. But surely it’s better to know up front how an individual advisor or firm prepares for a worst-case scenario.

You have no obligation to stay with an advisor that doesn’t get you. It’s a competitive industry for a reason. If you and your advisor have lost your chemistry (or never had it), be open about your feelings. From the start, you’ll avoid a lot of bumps in the road if you’re clear about communication needs, as well as the more complex stuff like risk tolerance and portfolio diversity. In the end, if you can’t resolve differences, there may be a better fit with someone else in the organization, allowing you to keep your accounts and records in place. But if you want a change of scenery, there’s nothing stopping you.

Not sure where to start? It’s understandable. That’s why some prep work and research will go a long way toward starting this important dialogue. And that leads us to the most important question. What’s the one thing that financial advisors fear the most? Silence. Because they can only give you a realistic idea of how best to serve you when you present not just your assets and financial goals, but also your fears, worries, and concerns. Advisor relationships today are true partnerships. Speak your mind and sleep a whole lot better.

Holding Hands

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