Finding Financial Help
10+ Questions for Those Desperately Seeking a Great Advisor
There are two kinds of investors: Do-it-yourselfers and those who work with an advice provider of some type. Both types of investors could probably do better with the right investment adviser.
The vast majority (over 99%) of those who provide financial advice in America are not always required to do what’s best for their clients (1), meaning they are free to create expensive, chaotic portfolios that are a hodgepodge of the latest, "greatest" investment concepts. Most of these investors neither know what they own or what they are paying for this haphazard guidance.
Most do-it-yourselfers are doing themselves a disservice. Numerous studies have shown that the average investor fails to even match the performance of the markets in which they invest. Rather than saving money through wholesale avoidance of advisers, DIY investors may be costing themselves more than they are saving.
Two different research reports from both Vanguard and Morningstar have unequivocally stated that a good fee-only investment advisor can make you more than you pay them in fees (as long as the total costs don’t exceed about 1.5% per year – more on that later). The trick lies in finding the right investment advisor. Here are the ten questions (plus a critical bonus question) you need to ask to do just that:
1. Are you always required to act as a fiduciary and only provide advice, investments, and strategies that are in my best interests?
There are well over 1.1 million providers of financial advice in America, and more than 1 million of them are NOT always required to act in your best interests (as a fiduciary). Every licensed physician, attorney, and CPA has a fiduciary responsibility to his or her clients. Thanks to influential lobbyists, the financial services industry is one of the few licensed professions not always required to act in your best interests.
Hiring a fiduciary does not guarantee the best service, but it’s a good place to start. Be sure to ask the question, just as it’s written (because the word ‘always’ is critical – some advisors can be a fiduciary one minute and only be required to provide suitable advice the next) at the beginning of any meeting with an advisor.
Be aware that some might prevaricate or even outright lie in response to this question. That’s okay because we’ll discover the truth soon enough.
2. How are you paid and how much do you charge?
Here we start to winnow out those advisors who care more about themselves and their business than they do about you. A fancy office, custom suits, luxury cars, and palatial estates do nothing to enhance your wealth. While everyone deserves to make a decent living, in the end, it is your money.
Here is where you might experience one of the ‘big lies’ that will prove they are not always fiduciaries. If your potential advisor tells you that either they receive commissions from the purchase and sale of securities or that “the company pays me,” they are commissioned salespeople and therefore probably NOT always required to act in your best interests.
If they are true fiduciaries, they will disclose their fee structure, which will either be an hourly charge or a percentage of the assets managed for you
After studying hundreds of advisor’s disclosure documents, it appears that a fair asset-based fee starts at about 1% per year for managing amounts under $1 million. That should gradually fall to less than 0.5% at somewhere between $1 million and $5 million.
3. Do you offer or suggest any investment products that charge clients a commission, ongoing fees, or surrender charges?
Again, this question is partially designed to ferret out the truth as to an advisor’s fiduciary role. Anyone who is selling stocks, mutual funds, partnerships, or insurance products with a built-in commission – whether up-front, through an annual 12b-1 fee, or a surrender charge – is not considered to be acting in a fiduciary capacity.
The true fiduciary will explain the internal operating or management fees of any product suggested. These can run well over 1% or more per year, but should be in the range of 0.75% or less. Plus, there may be a transaction charge to buy or sell any securities from the third party custodian. These can run between $10 and $50 per trade and should not be shared with the advisor.
4. If I place money with you, to whom do I write the check?
If the answer is, ”…just make it out to me,” run! You should never write a check to the advisor (they could be another Madoff). Reputable advisors always place your funds with a well-known, third-party custodian like Schwab, TD Ameritrade, or Pershing. Check out the custodial firms credentials and insurance.
5. How do you determine what kind of investment portfolio is right for me?
Bad answers: We pick those investments we expect will do well and sell when they fall from favor. Also, any answer that includes the words: individual stocks, options, partnerships, market timing, short-selling, hedging, alternatives, or any variety of words you don’t understand.
Good answer: We don’t until we know you better, understand your future needs, and grasp your level of risk tolerance. Then they should readily admit that they don’t know what the future will bring and suggest a well-balanced massively-diversified portfolio based on your needs and risk profile that will be monitored and regularly rebalanced.
Best answer: All of the good answer (above) plus, “If you are looking for someone who will pick the best investments for the time and then get you out before the market falls and back in before it rises again, we are not the right firm for you." (Not that such a firm exists - they just claim to)
6. Do you practice market timing of any kind or are the funds you offer actively managed?
If they say yes to either part of the question, just say “NO” to them.
7. Is your advice part of an integrated financial, estate and tax plan?
Tax management is an important part of a real advisors responsibility to you. Your advisor should understand your tax situation and, should your situation warrant (bear in mind, some who think they need tax-advantaged investments don’t) have a plan for reducing your tax liability. This plan might include tax-managed mutual funds, the use of very high-quality tax-free bonds, and/or a tax-loss selling strategy.
8. Do you provide comprehensive financial planning services? If so, at what cost?
In many cases, a detailed financial plan is not a necessity. As your portfolio grows larger and situations change, you might be wise to invest in a full-blown financial plan. Working with an investment advisor who offers this service in-house allows you to maintain a lifelong relationship.
Typically, comprehensive plans run between $1,000 and $2,000, as they take many hours to create. Some firms offer free or reduced price plans to their larger clients.
9. Will you coordinate with my other financial professionals (accountants, attorneys) or are you able to suggest qualified professionals to assist me with my legal and tax needs?
Any advisor worth his or her salt will gladly work with your lawyer or CPA. Those with longevity and experience in you local market should have a number of qualified experts to suggest.
10. How often will you contact me?
A true fiduciary adviser should always meet with you at least once a year for a thorough review of your financial situation and to discuss any changes in your current life or future needs. In addition, great advisors should provide regular reports in addition to your custodian's quarterly statement and unscheduled notes or calls throughout the year to help you maintain your investing discipline.
Critical Bonus Question:
11. Will you put it all in writing and sign it?
This final bonus question is the key to separating the wheat from the chaff. A totally honest investment advisor must be willing to commit every claim made to paper and validate their statements with a signature. It may not carry the weight of a properly written contract, but is an adequate indication of a person’s sincerity and intentions.