1. Are you a fiduciary?
Most people have the misconception that all financial advisors should always act in the best interest of their clients. Unfortunately, this is not the case at all. In fact, only a small percentage of advisers actually act strictly as fiduciaries. Why is this so important? By law, a fiduciary must always act in the best interest of the client (his or hers).
The easiest way to determine this is to ask the advisor how they get paid. As a fiduciary, I receive a flat fee as a percentage of the assets I manage or based on the financial plan I complete. I do not receive commissions based on the investments I recommend.
Please note that some advisers act as “hybrid” Registered Investment Advisers (RIAs). This means that sometimes it will act as a fiduciary and other times under a lower standard (fitness). While this is a convenient record, as it allows them to sell insurance and other commission-based products to their clients and/or charge a flat fee, it can also blur the lines of what interest (yours or theirs) has. priority and when.
If your adviser is a “hybrid” RIA and recommends investments that charge a commission, you have the right to ask him how much he receives in commission based on his investment in the product. To go one step further, ask them why this product is better than others along with a table that includes a breakdown of their analysis of similar products.
2. What is your area of expertise?
The world of financial advice is unnecessarily complicated. The professional who recommends auto insurance may call himself a financial planner, while a hedge fund manager may call himself the same. Unfortunately there is no law against this. However, what is the difference?
One is an expert in property and casualty protection and the nuances of protecting your assets using different insurance carriers and policy riders. The other is a wizard at implementing strategies and buying securities to mitigate investment risk. Two different specialties, but both can use the same title.
When hiring a professional to help you achieve your financial goals, understand their area of focus. This is especially helpful in understanding your capabilities and limits. It will also help you better understand if you should keep all of your assets with this person or company.
When I was working as an insurance advisor, I often tried to upsell clients to open an IRA or investment account with me. By doing so, you could help them diversify their investments between insurance and securities while making money from the mutual funds or ETFs they’ve invested in. In some cases this made sense, but for more complicated cases I found myself out of my league.
Be honest with your counselor to find out what approach they can help you with. While it may be convenient for you to keep all of your assets with one professional, it may not be your most cost-effective option or the fastest path to achieving your goals.
3. How does your advice fit into my financial plan?
Every person needs a financial plan. It doesn’t matter if his goals are to pay off student loan debt, buy a house, or make his wallet last a lifetime.
The easiest way to achieve your goals is to measure your activity and track your progress. Why do you think professional boxers weigh themselves every day? They want to know each day if they are overweight so they can take specific steps to reach their goal. Your financial goals should be approached using the same technique: precise measurements.
During your first few meetings, an advisor may emphasize how their product or strategy can help you get on the fast track to your financial goals, but the easiest way to clearly see if this is true is to review their advice within a financial plan.
Doing so will allow you to see how your advice affects other areas of your life, such as income, taxes, legacy, etc. More importantly, it will give you a point of reference to review with any other financial professionals who may be able to help you and to revisit at your next meeting with that advisor recommending your solution.
4. Where will my money be kept?
Remember that Bernie Madoff guy? He was the one who was able to run a ponzi scheme (pay old investors with money from new investors) for at least two decades while he stole several billion dollars. How could he do it for so long?
The most important reason is that his company served as an investment adviser and custodian. This means that he not only kept the securities in which his clients invested, but he also kept possession of the money within his company.
The easiest way to protect yourself from becoming a victim of a ponzi scheme is to ensure that your advisor places your funds with a third-party custodian. Most RIAs will use one of the major custodians, such as Charles Schwab, Vanguard, TD Ameritrade, or Fidelity.
Placing your money with these firms puts a firewall between your advisor and your account. That means they will be able to make adjustments to the type of securities you invest in and the amount of each, but they will not be able to withdraw funds without your permission. Even better, the custodian will provide you with a statement, usually monthly, that will allow you to track activity and balance (if you choose to open it).
Another quick way to protect your money is to NEVER write a check to the advisor. This is a huge red flag that should always be avoided.
There are several other areas to focus on when selecting your advisor, but these are the main concerns that anyone should be familiar with. Remember, it’s your money and your future. The biggest complaint I hear from clients when we start working together is that they are reluctant to make changes that are in their best interest because other advisors have burned them in the past. Don’t let your dreams fall victim to an unscrupulous advisor, get informed and protect yourself.