Financial advisors have different approaches when it comes to how they work with clients. It’s important to understand what those differences are so you can make an informed decision when choosing who to hire. Here’s a few questions you should ask.
Are you a broker, insurance agent, or a financial advisor?
The most important difference is that some people giving financial advice and selling financial products operate as a fiduciary and others don’t. Being a fiduciary means “he or she is required to put your interests ahead of their own.”
Sounds reasonable, right?
Unfortunately, not enough of the financial gurus in the United States operate as a fiduciary. They are brokers or salespeople working for large companies who have an obligation to create profits for their shareholders. They might be well-intentioned advisors, but their legal requirements are different.
Financial planners who adhere to the Fiduciary Standard are bound to act in your best interest. On the other hand, advisors (a.k.a. brokers) who work for large brokerage firms you know by name are held to a “suitability standard.” They are not fiduciaries and are only required to take your risk tolerance and goals into consideration when making recommendations. The cost and quality of the products don’t necessarily need to be factored in.
How can you tell if a financial advisor is a fiduciary?
The easiest way is to simply ask. Learn their legal requirements as well as their intentions.
How do you get paid?
It’s critical to understand how your advisor gets paid. Too many people calling themselves financial advisors are simply salespeople at the core. Hiding behind mountains of disclosures, they are paid to sell you a product and receive a commission for doing so. In many of these cases, they are not ethically or legally restricted from recommending you a product with the highest commission rate.
Fiduciaries typically are paid a transparent advisory rate calculated as a percentage of assets managed OR charge a stated flat rate.
By understanding how an advisor is paid, you’ll also understand the possible motivations behind those recommendations.
What are my all-in costs?
Hidden costs are a deplorable part of the financial industry. It goes without saying hidden fees can impact your investment returns and retirement success.
Annuities are well known for layering cost upon cost. If your needs or desires change before the commitment period is exhausted, there is usually a significant cost associated when exiting.
Standard investment accounts (as well as annuities) may contain investments with their own separate cost. This is in addition to management costs or commissions paid to advisors. For example, just about every investment fund your financial advisor recommends has an expense ratio. The expense ratio can be as little as 0% or as high as 3%.
How will our relationship work?
Consider if you are seeking one time or ongoing advice. Many times, after a financial product is purchased and commission paid, salespeople don’t have a reason to provide ongoing support unless there is an opportunity for another sale. Know if this is a one-time product purchase or the beginning of a relationship.
If ongoing advice and support is your desire, don’t assume an advisor will communicate with you in the way you want. Perhaps you remember Oscar Wilde’s thoughts on what happens when you assume. There’s no doubt you want a financial advisor who is smart and experienced, but also one who communicates in a way that suits you.
Some clients prefer phone calls on a regular basis and frequent meetings, while others are ok with email-based communication and one or two formal meetings per year. Too frequent communication may be as bad as too infrequent. You may be looking for someone you trust so you can stay focused on other things.
Are you a fiduciary 100% of the time?
Most people see a financial advisor for best in class personalized advice. Nobody asks to be sold a high-priced product paying a juicy commission.
What’s your investment philosophy? How do you select investments?
Some advisors take a highly customized approach to investing, tailoring investment needs to your unique goals.
Some advisors sell products based on market fear. A chicken little, the sky is falling, approach means you must select certain products to avoid impending market doom.
Others find a way to fit your needs into the products they sell. One-off solutions are suggested without taking the full financial picture (or associated taxes) into account. You might have heard the saying, “To someone with only a hammer, everything looks like a nail.”
It’s important to find someone who can clearly articulate their philosophy and how it can help you with your unique situation.
Will help me manage taxes? Do you consider tax implications of your recommendations?
Not all advisors ask for a copy of your tax return, yet each recommendation has an impact on how much tax you pay (now or in the future). Minimizing taxes should be a key part of any financial advice. Let’s face it, taxes are not a trivial expense.
Too many advisors proudly tell you they aren’t tax experts and point you to a licensed tax expert for tax advice. Why don’t they consider all the implications of their recommendations? Why should you take the job of coordinating advisor recommendations?
Ask yourself one question: “Are taxes a financial topic?” If taxes are indeed a financial topic, why would any competent financial advisor stop short of a full education?
We believe it’s deplorable to make decisions and recommendations impacting a client’s tax situation without fully exploring the consequences.
Final Thoughts
In order to find the best advisor for you, be ready to articulate your short and long-term goals. Are you working toward the next big purchase or planning retirement in a few years? The more specific you can be the better.
You’re making a big life decision when you hire and advisor. Take your time, do your homework, and don’t be rushed into making the decision.
Additional Resources
Notice:
This generic information is not intended to be taken as tax, legal, benefits, financial, or HR advice.
Since rules and regulations change over time and can vary (by industry, entity type, and locale), consult
your accountant, lawyer, and/or HR expert for specific guidance.
