12 Questions to Ask Your Financial Advisor (and Yourself) Before Investing Start with a hard look at your style, then find a reputable broker to match it. Before you let a stranger manage your money (even if it s someone who s been recommended), make sure you re doing your research. Here are some questions to ask your potential (or current) broker, and some to ask yourself. A Motley Fool Special Report Takeaway: 5. How is my advisor going to get paid? 6. Is this person acting professionally? 7. Am I receiving full and fair disclosure of all important facts? 8. What s involved in leaving this product? 1. What s my style of investing? 9. Am I working with the right type of advisor? 2. What kind of financial manager do I need? 10. Am I learning? 3. Is this person a reputable fiduciary? 11. Do I have an exit strategy? 4. What are his or her certifications? 12. Am I trusting my instincts? Key Terms Fiduciary: A professional or institution that takes on the duty to manage assets in the best interests of clients over the fiduciary s own interests, avoiding any conflict of interest. Investors should ask whether their advisor operates under the fiduciary standard or the less-stringent suitability standard. Financial advisor: A professional who helps clients plan and arrange their finances. Different financial advisors provide a wide range of services, with some focusing solely on investing while others look at broader financial planning issues including insurance, estate planning, taxes, and retirement planning. Financial advisors must understand their clients financial situation, need for financial stability, and tolerance for risk in order to make suitable recommendations. Financial advisors often hold various designations indicating some form of professional expertise; follow this link for a list from wiseradvisor.com of more than 100 advisor designations. Registered investment advisor: An investment advisor who is registered with the Securities and Exchange Commission (SEC) or a state s securities agency. RIAs are paid in any or all of these ways: (1) a percentage of the value of the assets they manage, (2) an hourly fee, (3) a fixed fee, and/or (4) a commission on the securities they sell (this applies if the advisor is also a broker-dealer). Stockbroker: An agent or firm that charges a fee or commission for executing buy and sell orders. Suitability standard: A requirement that an investment strategy be appropriate for an investor. How suitable a strategy is depends on the investor s situation. Investors should ask whether their advisor operates under the suitability standard or the more stringent fiduciary standard. Wirehouse:
1. What s my style of investing? If you trade frequently, or have a large portfolio, paying a percentage of assets under management might be the way to go for you. If you trade infrequently, paying per trade makes more sense. Know your own style. If you need more service and for your agent to be more proactive, then it s best to go with fee-based, says Lana Burkhardt, principal of Lana Burkhardt & Associates. David Lo of JD Power & Associates says it s a best practice for advisors to develop a solid financial plan for each customer. If your advisor doesn t offer one, ask to establish one together. 2. What kind of financial manager do I need? The kind of financial manager you ll need will depend on several factors: how much wealth you have, your stage of life, and your financial savvy. It s important to know whether you want an advisor who s going to offer personalized attention for more active trading and complex financial planning, or if you re someone for whom a more standard approach could work. For someone who s 35 [and] starting to build wealth, your needs are fairly similar to the needs of people who are going through similar life steps as you are, says Francisco Prat, who founded the financial education website http://www.lifewellth.com. A lot of advisors provide solutions appropriate to 80% of the population. A large portion of the population is better served by having an automated solution rather than personalized attention from an advisor. 3. Is this person a reputable fiduciary? Len Hayduchok of Dedicated Senior Advisors says, If a client does nothing else other than identify if their advisor has a fiduciary responsibility and whether the advisor has any complaints or black marks, the client will be ahead by about 95%. Determine if the advisor has any black marks by checking FINRA s BrokerCheck. 4. What are his or her certifications? Frank Masselli, president of the Masselli Group and an industry speaker and trainer, warns against assuming all financial advisors meet the same standards. You could be a registered investment advisor by paying $100 and filling out a form, he says. It s terrifying. The client won t know the difference, because we all kind of sound the same, and we ve all mastered the ability to look good on a quick interview. So how to avoid the broker who got his license on the Internet? Make sure the agent is Series 7 or Series 65. If you re not Series 7, then there s a high probability you ve got an insurance agent, and he s going to pitch you an annuity, says Masselli. If you re not Series 7 or Series 65, you re not going to get managed money or stocks and bonds capability. The Certified Financial Planner Board of Standards issues a certification for financial planners who have met set standards of competence, professionalism, communications, advocacy, and sustainability. They maintain a free, publicly accessible database of all CFP-certified professionals. 5. How is my advisor going to get paid? I tell my clients pointedly: Ask what the advisors are making. Some advisors will tell you 100% of your money goes to work right away, Masselli says. That s a red flag. That s like shooting up a flare. Advisors are in this business to make money, and that s OK. But you have to know how they re making it. 6. Is this person acting professionally? Think this is a no-brainer? Yes, your broker or advisor will be winsome and charming, he or she may say they ve put their own parents in a particular fund, or own shares of something themselves. But at the end of the day, they may be working as more of a salesperson than an advisor. You wouldn t expect a Dodge dealer to tell you you re best in a GMC truck, and if your advisor deals in annuities, you ll often find the answer to your questions is to buy an annuity.
As Don Canale, an entrepreneur who calls his advisor of 12 years a peach, puts it, He knows that despite the fact that we re friends of 12 years, it s a business relationship. And if it s not good for me, I have to find someone else. There s a role for friendship in your relationship with your advisor, but don t let it be an excuse for your advisor not to meet your needs. Burkhardt says that finding the advisor with the right communication style is imperative. For her, it was working with a female advisor. In general, when you find a very good female investor, the time, the energy they put into the relationship is generally higher than what I ve experienced with male advisors. Particularly for women who tend to be more concerned about asking a lot of questions and admitting they don t understand. 7. Am I receiving full and fair disclosure of all important facts? One of the problems we heard repeatedly is that clients don t always know how they re being charged, or are suspicious of what kickbacks their advisors are getting. Ask the advisor, Please explain all imbedded fees and upfront fees that this product will cost over the long term. Make them spell it out and put it in writing. If they hand over a prospectus and say it s on page 32, make them take a sheet of paper and write down the fee structure, Burkhardt suggests. She also recommends bringing a friend who understands fee structures to a meeting with you, if it s not your strength. 8. What s involved in leaving this product? If you re in a fee-based product and you decide to move your assets, there s a level of paperwork and selling out and buying into, but it s not that difficult, says Burkhardt. When you have bought into a commission-based product, every time you leave and buy back in, there s a cost penalty if you re not in a fee-based arrangement. 9. Am I working with the right type of advisor? If you re like investor Maggie Welch, whose primary concern is a portfolio that lets you sleep at night, and you re in stocks and bonds you don t understand, your best interests are not being put first. I hope that I can find a good financial advisor so I won t be a bag lady when I retire, Welch says. 10. Am I learning? An advisor who is helping his or her clients grow, not only in their portfolios but in their knowledge base, is something Motley Fool cofounder David Gardner recommends. It s not something I d require, but it s definitely something I d seek out. Education, engagement, that the advisor is helping the investor learn and grow. The best financial advisors should enlighten. 11. Do I have an exit strategy? It s wise to have an exit strategy for stock purchases. This can take the form of an event (such as change in management), price (if it goes lower than my purchase price or if it reaches your estimate of fair value), or windfall (a split, for example) that indicates your pre-determined time to sell. The same can be true for your broker or advisor. Before entering into an arrangement, tell yourself, I ll stay until... Your touch point could be a noticeable drop in service, an increase in fees, or a change in normal trading activity (either significantly more or less). Whatever you decide, write it down and stash it away. It s a note to your future self, warning you, and it should be heeded. 12. Am I trusting my instincts? Finally, never overlook the importance of your instincts. In Blink, Malcolm Gladwell makes the case that we sometimes pick up on things subconsciously that we don t process consciously. If something feels off in dealing with your broker or advisor, trust your instincts and walk away.
There are plenty of brokers to choose from, regardless of the size of your portfolio or investing experience. You can also always do it on your own. At the end of the day, it s your money, and how you manage it -- whether you hire someone to do it for you, or give it a go on your own -- is entirely up to you. And even if the advisor you ve chosen passes your test, keep in mind the relationship is a continuously evolving one. What might work for you at one stage of your life (or one stage of your advisor s career) may change as you and they evolve. Like your portfolio and your financial needs, don t be afraid to reevaluate your relationship with your broker or advisor on a regular basis. Molly McCluskey doesn t own shares in any of the companies mentioned. Follow her on Twitter @MollyEMcCluskey. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. Series Glossary By Kris Eddy and Nicole Seghetti 12b-1 fee: An annual fee that mutual funds charge for marketing and distribution expenses. 12b-1 fees are typically 0.25% and included in the fund s expense ratio. Annuity: A tax-deferred investment vehicle that s issued as a contract between an individual and an insurance company. An annuity provides many types of income options. Annuities come in several categories, including fixed versus variable and immediate versus deferred. Assets under management: The market value of the assets that a firm manages for its clients. AUM is how firms measure growth and how they compete with other firms. AUM can increase due to capital appreciation of the investments the firm manages and/or new money coming into the firm. Conversely, AUM can decrease due to investment losses and/or money flowing out of the firm. The larger the AUM, the more money the firm makes. Back-end load: A fee charged by mutual funds when shares are sold; amount depends on how long the shareholder owns the fund shares. Funds that charge back-end loads are often referred to as B-share mutual funds. These funds assess a contingent deferred sales charge, or CDSC. Typically, if the fund is sold within five to 10 years, the mutual fund shareholder pays a fee based on a percentage of the value of the shares sold. The fee is highest in the first year and decreases each year until the period ends, at which time it drops to zero. One example commonly seen is a 5% backend load if you sell within the first year, 4% in the second year, 3% in the third year or fourth years, 2% in the fifth year, 1% in the sixth year, and nothing in the seventh year and after. (Compare to front-end load.)
BrokerCheck: An online FINRA resource for investors to research financial advisors. It provides information such as educational background, previous employers, tenure in the industry, securities licenses held, and disclosure of any past or pending customer disputes, disciplinary actions, and regulatory events. Click here to go to FINRA s BrokerCheck. Discretionary account: Accounts that allow the broker to buy and sell securities on behalf of the client without first obtaining specific approval of a transaction. Clients must sign a disclosure agreement acknowledging this before any trading occurs. Discretionary trading is common in managed accounts, which are personalized investment portfolios that are professionally managed. Broker-Dealer: A company or individual that buys and sells securities for its own account or on behalf of its customers. Certified Financial Planner Professional: A financial advisor who has obtained a certification from the Certified Financial Planner Board of Standards. The designation shows that the advisor has demonstrated proficiency in several areas, including financial planning, taxes, insurance, estate planning, and retirement planning. A CFP also requires ongoing education to maintain certification. A financial advisor does not have to be a CFP. For more information, follow this link to the Certified Financial Planner Board of Standards. Commission: A sales charge collected by an advisor for buying or selling a security. Because commission-compensated brokers will not get paid very much if their clients don t conduct many transactions, unethical brokers may encourage clients to conduct more trades than necessary. Contingent Deferred Sales Charge: Commission charged by back-end load mutual funds on the sale of some mutual funds. If an investor sells such a fund before holding it for a certain time period, the CDSC will be deducted from the value of the mutual fund shares sold. See also back-end load. Fee-based: Advisor compensation that is based on a set percentage of a client s assets under management, rather than (or in addition to) commissions based on transactions performed. Fee-only: Advisor compensation that is based solely on fees for financial planning or asset management and excludes commissions. Fiduciary: A professional or institution that takes on the duty to manage assets in the best interests of clients over the fiduciary s own interests, avoiding any conflict of interest. Investors should ask whether their advisor operates under the fiduciary standard or the less-stringent suitability standard. Financial advisor: A professional who helps clients plan and arrange their finances. Different financial advisors provide a wide range of services, with some focusing solely on investing while others look at broader financial planning issues including insurance, estate planning, taxes, and retirement planning. Financial advisors must understand their clients financial situations, need for financial stability, and tolerance for risk in order to make suitable recommendations. Financial advisors often hold various designations indicating some form of professional expertise; follow this link for a list from wiseradvisor.com of more than 100 advisor designations.
FINRA: The Financial Industry Regulatory Authority is the largest nongovernmental regulator for all securities firms doing business with the U.S. public. Its goal is to protect American investors. It oversees all securities firms and the advisors they employ. Visit FINRA s website for more information, including access to its BrokerCheck database. Registered investment advisor: An investment advisor who is registered with the Securities and Exchange Commission or a state s securities agency. RIAs are paid in any or all of these ways: (1) A percentage of the value of the assets they manage, (2) an hourly fee, (3) a fixed fee, and/or (4) a commission on the securities they sell (this applies if the advisor is also a broker-dealer). Form ADV: Documentation that a firm submits annually to the SEC. It specifies the services provided, fees charged, investment style, assets under management, and key officers of the firm. The form is a public record and is typically required for companies managing more than $25 million. You can find a firm s filing by going to the SEC s Investment Advisor Public Disclosure database. Front-end load: An upfront commission charged by a mutual fund and taken from a person s initial investment. Funds charging a front-end load are typically referred to as A-share mutual funds. For example, a 5% front-end-load fund will charge $500 for a $10,000 mutual fund purchase; therefore $9,500 is actually invested in the fund. (Compare to back-end load.) High net worth: Industry term used for individuals with substantial liquid or investable assets. What is considered high net worth differs from firm to firm, but typically an individual with $1 million or more is considered high net worth. Firms often offer different investment products and services to these individuals. No-load funds: Mutual funds offered directly to the public with no sales charge. No-load funds are not without fees, though; they charge annual expenses (as do all mutual funds). Revenue sharing: An annual fee paid by a mutual fund company to a brokerage firm that sells its funds to investors. The investor does not pay the fee directly, but the mutual fund recoups its expenses from the income that the fund generates. The dollar amount that the brokerage firm receives depends on the dollars invested in the company s mutual funds. Series 7: Securities license needed for an advisor to sell securities, including stocks, bonds, and other investments. Series 65: Securities license required for an advisor to function as a registered investment advisor. Stockbroker: An agent or firm that charges a fee or commission for executing buy and sell orders. Suitability standard: A requirement that an investment strategy be appropriate for an investor. How suitable a strategy is depends on the investor s situation. Investors should ask whether their advisor operates under the suitability standard or the more stringent fiduciary standard. www.fool.com 1995-2012 The Motley Fool. All rights reserved.