Last night, on Twitter, I suggested a few questions that you should ask your Financial Advisor, let’s explore them a bit more closely here, along with a few more pearlers.
Note that this is an advanced series of questions, most other lists focus on just the fiduciary vs suitability standard, and encourage people towards a fee only advisor vs a used car salesman. As a fee only advisor myself I feel confident in saying that even within that field there are good and bad advisors, so here’s how to find the right one for you.
(real) Questions to ask your financial advisor: Q1 how are you compensated? At any time do you receive commission/bonus for client action?
— Saverocity (@Saverocity) October 25, 2016
First question focuses on compensation – a fee only advisor cannot earn commission, and is paid only by the client (you!). However, since the used car salesmen of the advisory world know this, they might well fudge the facts, and answer in a way to trick you into thinking they are the good guys. Here’s an example of a bad question and a sneaky answer:
- Client: I heard that I should work with a Fee Only advisor, who puts my interests first, how are you compensated?
- Bad Advisor: Absolutely, without my reputation I would have nothing, I always put my clients first, and we do work in a Fee Based manner as we find that is the best way to support our clients.
This advisor just tricked you, and takes a commission -neat huh? This is why you need to dive into commission more specifically, not only are you Fee Only, but is there any way you earn a commission or bonus for something that you advise me to do? Of course, bad advisors can still lie here.
Q2 What can you do, what can't you do, what qualifications support that, and how many years have you been doing these things?
— Saverocity (@Saverocity) October 25, 2016
I received pushback on this question (which is great!) let’s explore the rationale of the question: you want an advisor to know their limits. Many inexperienced advisors might think that their qualification or education is enough to make them an expert in areas where they shouldn’t be advising.
Example: the CFP® certification is considered the ‘gold standard’ in financial advice, but in truth holding one doesn’t, by itself, equip a person to be an investment manager. You can get a Fee Only CFP® who shouldn’t be touching model portfolios or attempting to rebalance. Likewise, many shouldn’t be giving tax advice, despite it being a core competence of the exam. Again, I would put them far above a used car salesman type advisor that you’d find at a bank or broker house, but it isn’t enough by itself. Experience, education, and certification need to work in harmony.
Beyond that, it is important to find a person who knows what they don’t know, because that level of prudence will help you navigate difficult situations together.
Q3 What is your own net worth? What is your asset allocation?
— Saverocity (@Saverocity) October 25, 2016
Question 3 looks into the advisor, and might be too personal a question for some. However, the advisor is going to be asking you these types of questions so why can’t it be a two way street? Why is this important? I’ve found many advisors who simply cite advice without truly understanding it. The amount of net worth implies success, failure, and a middle ground. An advisor with little to no net worth might simply be inefficient at saving (bad), or they might have plowed everything into starting their own firm (good). An advisor with too high a net worth might have been doing other things on the side, like earning fat commission checks from their clients.
I think it is an interesting line of questioning, albeit an unorthodox one.
Q4 What do you feel about investments outside of your core competence, how will you help me evaluate them?
— Saverocity (@Saverocity) October 25, 2016
Q4 addresses investment choices outside of their core competence. This is a two pronged question. Firstly, it circles back to Q2 and explores if they can articulate what they are good at and what they are bad at. Secondly it shows how they can remain impartial while supportive.
An example of this in action was at a recent conference where I saw advisors exploring Alts and Hedge Funds. Many of these advisors weren’t competent in these areas. That said, if the client does want to invest in them it might still be a good idea, so how can an incompetent advisor support a topic that is out of their sphere of influence. Some might shut down the concept entirely, others might leap too far into the fire and offer a ‘whatever you want’ approach.
There isn’t really a ‘right answer’ to this question, but it allows you insight into a more meaningful discussion with your advisor. It’s not so much what they say, but how they say it.
Q5 Are there any monetary or non monetary incentives to recommend a course of action which involves movement of assets?
— Saverocity (@Saverocity) October 25, 2016
Q5 is a catch all line of questioning – your Brokers will have to explain their commission (or try to fast talk you into believing there is none) your Fee Only advisor should also have address asset transfer with you. A great example of this is when a Fee Only advisor won’t work with held away assets (you need to transfer them). There’s no (legal) reason that they can’t manage these assets remotely, but it is much more cumbersome for them to do so.
At a certain point it might just not be able to help you if you aren’t migrated, but does the migration really help you, or could a different fee only advisor leave assets where they are and offer you better service? Another thing here that applies both to the Broker and the Advisor is that a third party might be pressuring them to move assets for the sake of moving them. This could be the Broker’s firm wanting more commission, or the advisors custodian demanding a minimum level of assets.
Some last minute tips
In addition to the above, some warning signs to look out for:
Does the advisor (or their firm) sell insurance?
If yes, you need to be more thorough in your interviewing. Insurance sales is disallowed for the Fee Only advisor, so the presence of this is a giant red flag.
How big is the firm?
There are few large Fee Only firms. If your advisor works for a large firm, especially one with many offices, there’s a good chance that commission is involved. That doesn’t mean that small firms can’t have commission too.
Are you getting any freebies?
Fee Free service is a huge red flag – if they aren’t charging you a fee they are probably earning a commission from you, dig deeper.
In closing, Fee Only advisors are generally far superior to the investor because they are working for your best interests. Brokers know this, so they often fudge the facts or confuse the investor into thinking they have a Fee Only relationship. Once you’ve narrowed it down to Fee Only, don’t forget that there are plenty of inexperienced, naive, and downright stupid people in every walk of life. Make sure you interview your advisor carefully. And seriously.. watch out for the big banks and brokerage firms.
If you get to the point where you are asking those questions. Shouldnt you be doing your own investment management. The only thing stopping 98% of people from managing their own money is a little education. When you get over $1-2m in investable assets it might make sense to get some advice (hourly rate) on a few more complicated strategies that you can put to work. No reason for someone w less than 1m to pay a fee on advisor. Especially to the clowns who turn around and put people in a generic index fund. Paying a fee only advisor to put you in Vanguard funds is silly.
I totally disagree with that. You’re thinking of Advisor as ‘Investment Advisor’. This is very common, and promoted by Investment Advisors and Robo Advisors.
Proper financial advice adds value to people with and without assets. For example, if you have a business, knowing how to elect tax treatment for that, and what retirement account to open with it, and how to customize the docs can save you huge amounts of money lost to tax.
Another tax one is being able to read a tax return and find out what you’ve been doing wrong. That can lead into conversations about expenses, deductions, and investment (cap gains/losses/distributions/etc).
Also, Vanguard funds are fantastic.
The questions here should encourage a sophisticated discussion, which teaches you about the character of the advisor (real advisor) and should be used.
I do agree that there are people out there who can’t afford an advisor, but everyone would benefit from a good one.
But you’re an advisor. Isn’t that a huge conflict of interest in shelling out advice on whether people should or should not hire a financial advisor?
Also, the majority of Americans don’t own a business. So those that don’t would not benefit (as you described) from a financial advisor.
The ability to read a tax return would fall under what MileageUpdate suggests is a lack of education. Something that most people should be able to overcome without hiring a financial advisor.
My finances are fairly simple right now, so it’s hard to come to the conclusion that I should pay someone to tell me what to do.
I don’t think it is a conflict of interest. I’m suggesting what questions to ask when assessing the advisor that they are already considering hiring. I’m not saying that they should go out and hire one.. that’s a different topic.
And I just used a simple example of the business taxes as a way of highlighting that comprehensive financial advice is more broad than just investing. Another example of this would be how to assess student loans for payment, deferral or prepaying in relation to cash flow allocated to other things, such as a 401(k) or a HSA.
I think education is by far the best thing anyone can do, and agree with both of you that learning more is great – it still doesn’t necessarily take away the need for an advisor, but it does certainly help improve matters.
The ability to read a tax return is a little different for an ‘end use’ than an advisor. It tells the advisor what else might be amiss in the clients financial situation. I think that it can offer to the client too, but it isn’t just ‘what is this figure of $x’ it is, how can that figure be changed?
Example of that might be a high figure for investment income or cap gains which could be controlled with different types of investment and different timing.
Don’t get me wrong, you can absolutely DIY this, but it is a big task.
In terms of simple finances, you’re probably right, but the other thing to consider is that weird question of how much you don’t see or know because it is new to you – so while you think it is simple, a tweak could make it a lot better.
Lastly, I’m generally against taking on clients who are starting out and don’t have huge assets unless they have complexity where I could offer value, I tend review their cases, come up with some ideas, and suggest to these clients that they can DIY without me.
Dont have you Financial Advisor do you tax stuff. Hire a CPA independent of the FA as well. Like I said for 98% of people there is no need to pay someone a % to “manage your money”
Maybe, maybe not. If the CPA is good it can be worth it, but also the FA can have the same or better tax experience than the CPA.
It ties into this post, where I say just being a CFP isn’t good enough, just being a CPA isn’t either.
As with many things, it depends.
Never have one and the same doing both. Easier to get ripped off. When your FA is crooked he can mask it by also fudging your taxes. A good protection is to have 2 distinct people doing those different jobs. Then again below 1m in Investable Assets I wouldnt even think of wasting money on a fee only advisor.
Custody and compliance takes care of a lot of that.
But I thought you were a heavy hitter? If you were pulling in $50k a month I think a fee only advisory might not have been a waste. What do I know?
I would never let someone else touch my money. Lack of knowledge and trust of someone else having my interest ahead of theirs
Well, if you ever reconsider that, these questions might be helpful 🙂
I think they are great questions. Just a small population of people who need a fee only planner.
I think everyone needs one, the right one for the individual would clearly add value to pretty much everyone wherever they are in life.
But, they cost money, so it is just a ROI decision, I bet you could find a reasonably priced one who could help you with your problems.
For some other folk, perhaps the cost is too large for the immediate return.. but then it is more of a long term investment.
We get paid for managing people.
Travel hacking hobbyists are NOT our target market!
Good post. To this day, I only had one prospect ask me what is my net worth.
Ho from Shiraz
Enjoy the wine!
Whatt a peculiar mix of financial and other adivce
The problem is i know enuf to know that what i don’t know is just about everything