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Questions To Ask When Interviewing Financial Advisors

As promised in my most recent blog, New Year, New Tax Code, New Financial Review, I am providing a list of questions to pose when interviewing potential financial advisors. Whether you are trying to determine if your current advisor has your best interests at heart or you are looking to hire your first advisor, you could also refer to the list published by the Department of Labor. However, the following five questions should guide you to a genuine fiduciary advisor. A word of caution: Beware the individual claiming to be a “money manager” touting “assets under management”. These tend to be merely middlemen between you, the client, and another investment advisor who is actually doing the investment research and management.

Have this list with you and refer to it when interviewing potential financial advisors.

1. What is your track record? In order to determine the validity of the advisor’s track record, request two things: A) a copy of the Form ADV, which discloses possible conflicts arising from securities trades and answers a lot of other questions. And, B) ask for a risk-adjusted performance record going back at least five years. Get it in writing along with a list of client references—and call them.

2. What is your background? Many registered investment advisors have advanced degrees in business and finance and years of experience as investment analysts or traders at major financial firms. Be wary of an advisor with little or no previous experience outside of his or her years in brokerage and/or insurance sales.

3. Who pays you? Virtually all the compensation an investment advisor receives should come directly from his or her clients. Any other sources of income should be insignificant and fully disclosed. Brokers, on the other hand, can earn commissions on trades, trailer fees for mutual funds and annuities, and bonuses tied to their firm’s proprietary investment products or trading. These ‘other sources of income’ create lots of conflicts.

4. Can I pay you by the hour? The going rate for a financial advisor has historically hovered around 1 percent of assets under management. But one benefit of the Internet has been a dramatic reduction in transaction costs. If you and your advisor agree that most or all of your money should be put in a mix of index funds, mutual funds and exchange-traded funds that’s practically on autopilot, ask him or her to charge less. Have the cost of the fund expenses subtracted from his or her percentage. Or better yet, get them to agree to let you pay by the hour.

5. Are you always legally bound to act in my best interest? The answer has to be yes, all of the time. If it is, get it in writing. This is fiduciary duty. It’s a well-established legal principle, backed by decades of precedent. An advisor who acts as your fiduciary knows you can haul him or her into court or, if you agree, arbitration.

Finally, beware of any “advisor” who swears you’ll always be the boss. From a legal standpoint, brokers are free to carry out your orders, even ones they think are unwise. Mindful of fiduciary duty, a true advisor will tell a client he or she would decline to make an investment they believe could threaten your financial health. At the very least, a fiduciary advisor should try hard to talk you out of it. If unable to convince you, the advisor should give you your money back and let you go it alone.

The fiduciary advisors at Retirement Resources operate on the following four core values: Always do the right thing; Make a difference; Truly care about people; and, Surround ourselves with successful people. If you would like to schedule a review with one of our advisors, call our office today.

This content is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources is believed to be reliable but not guaranteed. Past performance is not indicative of future results.

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