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The "Financial Planning Blueprint" Blog

  • Writer's pictureJason Flurry, CFP

10 Questions you MUST ask your financial advisor

How to make sure your advisor is acting in your best interest

In my last article, I shared with you how 90% of all financial advisors, regardless of their fancy title, are basically brokers who are motivated to sell products based on their commission payout and their firm’s position in a particular investment. It’s only natural for someone to expect their financial advisor to act in their best interest, but unfortunately brokers don’t have to recommend the best investment options for you. They only have to make sure that whatever they suggest for you is suitable, which is a very low standard to uphold. Brokers may be very ethical and honest people, but because of the business model they're in and the intense pressure they face to generate high levels of commissions, which are typically at least $500,000 a year or more, brokers can have a host of potential conflicts of interest that can interfere with their judgment as they manage your money.

Another category of financial advisor is someone called a Registered Investment Advisor or an RIA. By law they have to look out for your best interest because they have a fiduciary responsibility to take care of your needs ahead of their own. Being a fiduciary is a much higher standard to maintain than simply trying to make sure investment recommendations are suitable for person’s situation. Registered Investment Advisors do that though and they usually charge a flat fee or small percentage of the assets they manage for their clients as a way to get compensated. RIA’s also offer a wider array of services for that fee then brokers do and that provides you with a much more comprehensive level of financial experience and expertise.

The third category I talked about last time was a duly registered advisor. This type of advisor can be both a broker and an RIA. Most Registered Investment Advisors fall into this category and that can be problematic when they switch from being a fiduciary to being a broker without telling you. It’s a perfectly legal practice within the industry, but you never know if they’re looking out for your best interest as fiduciary or representing themselves and the firm as a broker - because they don’t have to tell you which one they’re being at any given time. The only way to know for sure that your interests are truly being protected is to work with an independent Registered Investment Advisor, so let me show you how you can tell if your advisor fits that description or not.

I’m going to share with you 10 questions you have to get answers to in order to make sure you know your financial advisor is not taking advantage of you like so many do. Let me say again here like I said last time that some very honest and ethical people work as brokers and many of the brokerage firms, mutual fund companies, and insurance companies do great work. In most cases, those individuals and their companies aren’t necessarily trying to take advantage of people. The problem is they’re part of a broken system that’s been set up and maintained for a very long time. In fact, I believe that some of these financial advisors aren’t even aware that what they’re doing hurts their clients, but that doesn’t change the fact that you can still be hurt if you’re working with that type of financial advisor.

They just don’t know any better and neither do their clients.

So that you don’t fall into that same trap, let me share with you several key questions that will help you make sure you’re working with the right advisor and uncover any potential conflicts or concerns that you might miss otherwise.

If you have an advisor already, even if you worked with him or her for a long time, it’s really important that you get answers to these questions. Alternatively, maybe you don’t have an advisor but your considering working with one. These are the questions you need to ask up front, as well.

So here you go. Start with a simple one.

#1 “Are you Registered Investment Advisor?” If the answer is no, this advisor is a broker. Smile sweetly, thank them for their time, and say goodbye. If the answer is yes, he or she is required by law to be a fiduciary, which is exactly what you want. But, you still need to figure out if this fiduciary is wearing one hat or two, as I described earlier. Requesting a copy of their investment management agreement will tell you which roles they do and don’t play, and that’s really important for you to know up front.

#2 “Are you or is your firm affiliated with the broker dealer?” If the answer to this question is yes, you’re dealing with someone who can act as a broker and usually that person has an incentive to steer you toward a specific investment because they’ll get a higher return from the firm they’re in or a higher commission for themselves if they do it that way. It could also be that a particular type of product is the only thing they offer, which is what you find it firms like Fidelity, for example.

One easy way to figure this out if the advisor or the advisor’s firm is affiliated with a broker dealer is to look for a phrase at the bottom of the advisor’s website or on their business card that says this: “Securities offered through (the advisor with the company’s name) – member of FINRA or SIPC.” This refers to the financial industry regulation authority and the Securities Investors Protection Corporation respectively. If those regulation authorities are on there, that person is a broker.

#3 “Does your firm offer proprietary mutual funds were separately managed accounts?” You want the answer to be an emphatic no. If the advisor says yes, then you have to be very careful. Having an in-house brand can create a conflict of interest for the advisor, since they usually make more money by promoting their own offering or promoting some preferred fund family within the firm. This extra payout for them doesn’t usually translate to extra investment performance for you.

Look for someone who is independent and who can provide you with a wide variety of investment offerings to help improve your investment returns, while lowering your risks and saving you a ton of money on fees and commissions. You won’t usually find that to be the case with someone who is a broker.

Another situation you need to be aware of with proprietary investment offerings is this. Sometimes a financial advisor will try to generate additional revenue by not only charging you a fee for designing your investment plan, or what they think is a financial plan, but by also steering you into products that are highly profitable for them through the implementation of that plan. It’s probably the case that some of their proprietary recommendation are good, but it’s not likely that all of them are as good for you as they are for the advisor who’s selling them.

#4 What are your credentials? Financial professionals can have a confusing list of initials behind their names and not all of them are accredited. For most financial professionals, who I showed you last time are actually nothing more than brokers regardless of their title, there are very few requirements involved in becoming a financial advisor.

The largest one is that you have to pass a licensing exam and register with the Securities & Exchange Commission or your state as an investment advisor. At most that takes about 6 weeks for most people. Yes, only 6 weeks. Think about that for a minute.

It takes years to become a trusted expert in many other professions, like medicine and law for example, but you could be turning your life savings over to someone who wasn’t even in the business a month and a half ago. You put a lot of trust in that person, but like I said before, that person usually works for the house, who has trained him on what to think and on what to sell. And, because they get paid on each transaction regardless of whether or not you make any money, the house and the financial advisor always win.

Because of this arrangement, some financial advisors differentiate themselves with credentials that go well beyond the basic registration to help improve their credibility with clients. One of the most common and widely recognized distinction is the CERTIFIED FINANCIAL PLANNER™ (or CFP®) designation.

It requires its people to complete 18 months of rigorous coursework first. They then have to pass a 2-day, super rigorous certification exam that only about 60-70% of people pass. And then, after all of that, they have to also have several years of relevant experience that demonstrates a sufficient level of expertise before they can begin using the title.

Being a CFP® professional also requires practitioners to adhere to a set of ethical standards, including the fiduciary standard that requires them to put your interests ahead of theirs. But this doesn’t mean that they can’t still be brokers.

Because of this, understand that when you find a CFP® Professional working for a brokerage firm, a mutual fund company, or a bank, you can be sure that no matter how qualified and how ethical that individual is, they are still captive inside a business model that limits their ability to serve your best interests.

What you really want is a CFP® Professional working exclusively as a Registered Investment Advisor. That’s the best way to get the results you’re really looking for with your hard earned savings and know they aren’t switching hats between being a broker and a fiduciary, like dually registered agents do, or earning money as a commission based on the advice they’re giving.

#5 “Do you or your firm receive any third-party compensation for recommending particular investments?” This is kind of like the ultimate question you want answered because if they’re not getting commissions, they may say no - but they may have a consulting agreement, which gives them kickbacks or trips, or other goodies you never see. You need to know that the advisor has no incentive to recommend products that they get some other benefit from outside of what you’re paying them to be your advisor.

Unless the advisor is an independent Registered Investment Advisor, it's likely that the advisor fee he charges for his services doesn’t include everything you’ll need. Based on their investment management agreement, Advisors may charge additional fees for services that are more complex or that they consider to be extra, like implementing the plan they created after you’ve already paid them to design it. That’s perfectly legal and normal within the industry, but you need to know that up front if you’re looking for a full service advisor who can handle everything you want.

Regardless of what kind of advisor you use, you’ll almost always be responsible for trading and brokerage costs, as well as fund fees. With our firm, we keep these fees very low with transaction costs usually averaging less than $10 each, if there’s a transaction cost at all. At other firms though, these additional costs can really add up, so you’ll want to know what they are. Fees can decimate your savings over time costing you up to half of your growth over a lifetime of investing.

Let me give you a quick example of something I saw just the other day.

A guy I’ve known for a while rolled his 401(k) over to an investment company about 15 years ago. He was in his 40’s back then and felt like he had plenty of time to make it grow. The advisor at the firm, who had a fancy title but was really just a broker, recommended an aggressive allocation for him. So, he put 100% of his money in that allocation and hoped for the best.

As we looked at everything, he was puzzled why his accounts hadn’t grown any more than they did, especially after having a strong stock market environment in play 13 of the 15 years he had been invested. After all, when the markets are going up like they have been almost consistently for the last decade, being aggressive should have really paid off for him.

As I looked a little deeper, I discovered that he was paying almost 3% a year in fees to the company who managed his account. 3%! And that was annually for over 15 years! There were times when the market had done pretty well, but he didn’t get paid until they took their 3% off the top. When the market was flat, they also got paid, which hurt his performance and even put his net returns in the red for a few years. And then there was the market crash back in 2008 that cost him severely in market losses. Even then they still took their 3% out in those years too.

When you added it all up, his investment selection had to earn a lot more in the good years to make up for the market losses from years ago and to compensate for the significant drag those fees were placing on his portfolio’s growth. It was almost impossible for him to earn a competitive rate of return, but I’m sure the advisor who recommended it to him did well, as did the company who was taking money from his retirement each year with that 3% fee.

And here’s the sad part. That’s not really an unusual situation for me to find. I see it all the time with client’s accounts before they decide to work with us and find it a lot in people’s 401(k)’s where they didn’t think they were paying any fees. I’ll cover that on a future article, but for now just realize that fees on top of fees can severely limit your ability to build wealth. You need to know who’s getting paid, how much they’re getting paid, and how much you get to keep before choosing to work with a financial advisor.

#6 “What’s your philosophy when it comes to investing?” Knowing this will help you understand whether or not the advisor believes that he or she can time or beat the market by picking individual stocks or by using actively managed mutual funds. Trying to outsmart the market over time has proven to be a losing game unless the person is some kind of superstar unicorn, which most people obviously are not.

Plus, the more trading a person does, the less likely they are to do well because of the way wins and losses offset each other. I talked about that in a previous article where I told you the story of Lester Moore. Go back and check that out if you’ve never heard it. I think it can help you. Trading frequently can be very beneficial for brokers and their brokerage firms at a number of levels, but need to understand how the investment philosophy benefits you before making any changes.

#7 “What financial planning services do you offer beyond investment strategy and portfolio management?” Investment help may be all you need depending on your stage of life, but as your life grows and expands, or as you become more wealthy over time, your financial needs and the skills, tools, and expertise it takes to manage them properly become more complex.

Most financial advisors, especially those who are brokers, are really more investment managers than financial planners. The job of an investment manager is to make sure that your investments are diversified and suitable for your age, income level, and net worth. That type of advisor doesn’t get paid to build a plan that helps you meet your goals. They’re only trying to keep up with a performance benchmark or maintain a certain balance between different types of investments based on their firm’s guidelines.

Have an investment manager can be helpful, but I feel like it’s difficult for an investment manager to really provide value to you outside of the context of your goals. An independent financial planner leads you to a process that doesn’t require you to use any particular products to implement that process. It’s going to be more conceptual based on your goals and your timelines.

A comprehensive plan like this should include college, retirement, weddings for your children, dream vacations, and other large purchases that come up from time to time, like purchasing a vehicle or paying for life expenses, like replacing the roof or the air-conditioning unit for your home. You may have stock options to consider and you may inherit money at some point, which could drastically change everything for you. You may have a need to review your life insurance, do some business planning, or plan for your estate so that Uncle Sam doesn’t become your biggest beneficiary at your death.

Ideally you also want advisor who brings tools for tax efficiency to your plan. After all, the only returns that really matter in your investment account are those that you realize after taxes and fees. That’s why we design investments strategies that give our clients the maximum tax benefit that’s legally available whenever possible. Having that as a part of your approach can make a big difference in where you end up financially. And this, plus everything else I’ve mentioned here, is something an RIA can typically do, especially if they’re an independent firm. On the brokerage side though, most financial advisors there have limited capabilities once they venture beyond investing your money. And, when they do offer additional services, they often charge you more than other RIA firms that can include all of it in one transparent, easy to understand, comprehensive advisor fee.

#8 “Where will my money be held?” This question is critical. A fiduciary advisor should always use an independent third-party custodian. In other words, when you work with a Registered Investment Advisor, you don’t give your money to the fiduciary directly. It’s held by a qualified third party, like Charles Schwab or TD Ameritrade. They have everything you’ll need there to help keep your money safe and secure. To work with the RIA firm, you simply authorize a limited power of attorney that gives the advisor the right to manage the money but never to make a withdrawal of your money.

The best part about an arrangement like this is that if you ever want to fire your advisor, you don’t have transfer your accounts somewhere else. You can simply hire a new advisor and they can likely take over managing the accounts that you already have in place at the custodian. That way you don’t miss a beat and you avoid transaction fees, taxes, penalties, and account closing fees firms impose when you take your business elsewhere.

This custodial system also protects you from the danger of getting robbed by a con man like Bernie Madoff. He had all of his clients’ money in his own accounts. So, when people gave him their money to invest, he gained full access to it as their account manager. And that was the problem. Not only did he have access to trade the money or invest it, he also had access to take that money out of the accounts. You don’t ever want that happening to you and any legitimate RIA will have your money held by a third-party custodian. They can only send or move money through the custodian to the account holder or to someone the account holder has designated in writing. Plus, you have an important safety check in place because you can always log into the custodian’s website and see your money at any time. No one can take money out of your accounts but you.

#9 “How do you get paid?” Some people are uncomfortable asking advisors how they get paid, but it’s well within your right to do so and it should be one of your top questions because paying an advisor for their services affects your bottom line. It’s important that you have a thorough understanding of exactly how your advisor gets paid, how much they get paid, and how much you get to keep. An independent Registered Investment Advisor will have a fee schedule you can review prior to working with them. Financial advisors who are really brokers work off of transactions or they sometimes try to bury their fees behind the scenes through their investment products.

As I mentioned earlier, when you work with a financial planner, you’re not just paying someone to manage your funds. You’re paying for a full-service professional who can help you set realistic goals, monitor your progress toward reaching those goals, calm your nerves when you’re anxious or nervous about the financial markets or about your plan, and answer any question you have about the strategies and tactics being used to meet your goals. In my experience, the value of that relationship is worth every penny, but it’s helpful to know upfront how many pennies it’s going to take to get that level of value.

A great Registered Investment Advisor can clearly articulate not only how they’re paid, but also why it’s worth it to have them on your team. That’s the person you’re looking for and if you’re doing your homework, you’ll know them when you find them. On the other hand, if an advisor dodges a question about fees or can’t clearly explain how they get paid and who does the paying, take that as a sign to go elsewhere. Don’t work with someone who won’t give you a straightforward answer about how they’re paid. They know and you have a right to know too.

#10 “How will you consider my assets that you don't directly manage?” A financial advisor who’s a broker is usually very limited in their ability to advise you on money that is not directly under their control. Most independent financial planners recognize that your entire net worth won’t be tied up in money under his or her direct control and you may have things like a 401(k) at your work or a rental property or some other form of investment that either doesn’t make sense to consolidate with your advisor or can’t be turned over to your advisor due to some other restriction. You still want to have those assets included in your plan, but since a broker can’t really make transactions or earn any money on those outside assets, they usually get excluded.

Financial advisors who are only looking out for their own best interest instead of yours will sometimes pressure you liquidate those assets so they can be moved over and added to your accounts with them. Naturally, that allows them to make more money for themselves regardless of whether or not you make more money too.

What you really want is a financial planner who will partner with you and develop a comprehensive plan that incorporates your full financial picture, including the money that you still control outside of the accounts they manage for you directly. The fee for those types of accounts, if there’s any fee at all, should be much less than their normal advisory fee on accounts they manage through their custodian. You want those assets included in your plan and you should expect to keep your planner updated of the state of those other assets from time to time too. That way, your advisor can help make sure you’re on track to reach your goals and make adjustments as needed to help keep you moving forward.

Conclusion I’ve covered a lot of information with you here during these last couple of articles and I hope it’s opened your eyes to see how flawed the financial advisor system truly is. It’s sad, but is not surprising once you understand how things really work, that so many hard-working people come up short financially and have to settle for less than they deserve because they didn’t know any better or they placed their trust in the wrong kind of advisor.

There’s a lot that’s wrong with the financial services industry, but I hope you also see here that there is a better way to getting the results you really want in a way that puts your best interest first. Working with an independent RIA can provide a great deal of confidence and certainty as you approach life’s most important milestones. That' why it’s essential that you understand the roles and responsibilities your financial advisor has and make sure you’re getting the value you deserve for the fees you’re paying.

If you like to have someone review your current financial plan or even build one for you, you can check out how we do things by requesting a free financial review. Click here and complete the request form that will put you in touch with us. There’s also a detailed case study on our site that will show you the kind of positive difference an experienced, independent, fee-only Registered Investment Advisor can make. Check it out when you have a minute and give some thought to how your finances are being handled now.

I’ve dedicated my professional life to helping people live their best life possible. And, over the past 25 years. I’ve seen over and over again that in order to give you the chance to live the best life possible, we have to make sure that your best interest to being taken care of first.

As you’ve seen here, choosing the right financial advisor can have a lot to do with your success over time, so don’t be fooled by someone with a big office and a fancy title. Your dreams and goals are more important than that and you need more than just a transaction oriented, investment strategy to make them a reality. Like I’ve shown you, there is help available if you want. So use these questions to find the right person to help you and start taking back your financial future today.


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