5 Question You Need To Ask Your Financial Advisor
5 Questions to Ask a Potential Financial Advisor
I like to tell people that having a quality financial advisor is a lot like an athlete having a good coach. Just like how players use the expertise of the coaches and trainers around them to help them expand their individual knowledge to advance and succeed in their careers on the field. A financial advisor who is truly working FOR YOU and has your best interests at heart will be able to help guide and coach you through major investment decisions to keep you on a path to financial independence and success.
However, choosing a financial advisor can be an intimidating task. Athletes are notorious targets for bad actors in the industry. This was showcased recently after yet another incident where a financial advisor was accused of stealing money from an athlete client. In this case, Aroldis Chapman is now suing his former financial advisor for stealing over $3 million from him. Situations like this can be avoided with information, which is gathered by asking the right questions.
Using this list of five simple questions will give you a solid foundation and understanding about what to expect, as well as what to information to look out for when meeting with a potential advisor.
1.Does your firm act as a Fiduciary for its clients?
Fiduciary is the most important “F” word in finance. There are two standards in which advisory firms can operate under: the fiduciary standard or the suitability standard. The fiduciary standard means that the firm/advisor must put the client’s needs ahead of their own at all times and act solely in the best interests of the client, and also consists of a duty of loyalty and care. The suitability standard is defined as making recommendations consistent with the best interest of the customer and making sure transaction costs are not excessive. While this may sound the same it's important to note that there are some big differences between the two (for a more detailed explanation, click here) particularly when it comes to disclosing conflicts of interest and how the advisor is being paid for the advice that you are receiving.
2.How do you get paid?
Clearly understanding how your advisor is compensated for the work that they are doing Is critically important when selecting a financial advisor. There are essentially three different forms of compensation models for financial advisors; commission based, assets under management (AUM) based, and the fee-for-service model.
For most of the history of the financial industry there were two ways that brokers could get paid. One was through commissions on actual transactions like buying or selling a stock or bond, which would result in a ticket charge. The other is through sales loads on the brokerage firm’s proprietary products such as mutual funds or annuities. Here, the advisor would be paid a commission for putting investors into products owned or promoted by the company in which he or she worked for. For example, Edward Jones received revenue sharing payments of approximately $228.8 million from mutual fund and 529 product partners in 2019. This model can be problematic due to the clear conflicts of interests and how the advisor is paid in comparison to the actual investment results for the client. Today, commissions for trading activity have been driven down to zero, or near-zero across the industry. Which has greatly reduced the incentive for client activity. This has created a shift away from the commissions-based model; to a fee structure based on total AUM which has become the industry standard.
In this model you are charged a flat % of your total Assets under management. Most advisors charge fees on average somewhere around 1% and that fee typically goes down over time as your account balance grows larger. So, for example, if you had a $100,000 portfolio and your advisor is charging a 1% fee, then you would pay $1,000 in annual fees. This business model helps to eliminate a lot of the conflicts of interest that is seen in the old-school brokerage world.
The fee-for-service model is becoming increasingly popular in the financial advisory industry in recent years. There are a couple different ways that this model can work. A flat fee, where and advisor charges the same flat fee for all clients for their advisory services. A tiered fee, which is based on tiered services where clients are charged fees at varying tiers depending on the depth and complexity of the services being provided. The final fee-based model is an hourly or time-based fee. This works similarly to how lawyers charge their clients in the terms of billable hours.
3. What types of services can I expect to receive for my money?
There are a wide variety of investment approaches that vary from advisor to advisor. The key is to make sure that you understand what you will be investing in, and at least have a fundamental understanding of what the investment plan will be.
A meeting with a modern-era financial advisor will typically include having you sit down and review your income statements, financial goals, and financial statements to come up with some sort of written financial plan or investment policy statement to guide investment decisions within your portfolio. This shift towards planning-based investing is great for individual investors, by giving them more clarity to the purpose of each holding in their portfolio. A second major shift in the financial advisory industry has been the increase in add-on services firms are offering in addition to traditional portfolio management and financial advice. Offerings such as estate planning and tax planning services have become common add-on services for many advisory firms. It is important to ask if they will be providing these services for you in-house. If they do not, be sure to ask if they will be able to assist you by referring you to someone that they trust who is qualified in that area of expertise.
4. How often can I expect to be in contact with you?
Each client has their own set of expectations regarding how often they want to be in contact with their financial advisor. There are some clients who are very hands-off and are not concerned with paying to much attention to their investments. They are selecting an advisor to run their investment portfolio for them and only need to check in once or twice a year for updates to their financial plan. There are also clients who expect a much more hands-on level of service and expect more frequent communication about their investments from their advisors. It is important to understand what type of client you are, and what level of communication from your financial advisor you would be comfortable with. One of the most common complaints about financial advisors is that people feel like their account was “set and forget” for their advisor. Setting clear communication expectations up front will help avoid conflicts later in the process.
5.Do you or people in your firm have any industry specific designations that show your expertise?
There is an alphabet soup of different designations that one can earn in the financial industry That represent different areas and levels of expertise. Looking for advisory firms with employees who have earned the following designations will help you find credible people to work with who have who have demonstrated expertise in their designated field of finance. These designations alone are not the end all be all to finding a competent and trustworthy advisor, but they will help you find people who have taken the time to advance their knowledge and industry expertise.
Certified Financial Planner (CFP®) - Advanced designation showing expertise in holistic financial planning and providing financial advice to clients.
Chartered Financial Analyst (CFA®) - This designation is recognized the definitive standard for measuring competence and integrity in the fields of portfolio management and investment analysis.
Certified Public Accountant (CPA) - The CPA designation distinguishes licensed accounting professionals committed to protecting the public interest. Anyone filing your tax returns should have the CPA designation.
Searching for a financial advisor can feel like a daunting task and going into a meeting with a potential advisor can be downright intimidating. However, when you are meeting with a potential financial advisor, remember that they are the one that is going to be WORKING FOR YOU. Meaning they are the one that is on the hot seat during the conversation, because they are the one trying to earn your business. If you are in a meeting with an advisor and they are unable or unwilling to answer any of these five questions, then you will know that you should go in a different direction.
Jonathan Perrin is a former professional baseball player turned financial advisor. Jonathan was selected in the 2015 Major League Baseball Draft by the Milwaukee Brewers after graduating from Oklahoma State University. His professional career spanned five seasons, including stops in both Mexico and the Dominican Republic. Jonathan became a licensed investment advisor while still an active professional baseball player, with his first clients being his teammates. Post-playing career; Jonathan earned a Masters in Personal Financial Planning from the University of Missouri, and has continued to work as a financial advisor at helping professional athletes and other young professionals manage and invest their money to create long-term wealth.
Disclaimer: This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading or distribution strategy. Past performance does not guarantee future results. The accuracy and completeness of this information is not guaranteed and is subject to change. Waterfront Wealth Inc. is currently registered as an investment adviser with the Securities and Exchange Commission.
