I was recently in a meeting with a new client where we went over the scope of my services, and what I charge for advising my wealth management clients. It’s always been my practice to provide a transparent and detailed description of my fee structure so clients know exactly what they are paying me to advise them and manage their assets. With that said, here are the first 5 questions you should be asking a financial advisor before signing any legal documents:
1. What are ALL the ways that you and your firm are compensated for your services, and are they fully disclosed?
How much you’re paying for the management of your assets shouldn’t be a mystery, but usually this is anything but an easy answer for most providers. I can’t tell you how many times I’ve asked prospective clients, “what do you pay your current advisor” and draw a blank stare. Would you ever purchase a product without first knowing its price?
If you’re speaking with an Independent Advisor ask for their Form ADV Part 2. You can access this directly on the SEC website: https://www.adviserinfo.sec.gov/.
Remember, if you don’t know exactly how much you’re paying, you’re almost certainly paying too much!
2. Does your compensation depend on the investment strategies that you recommend?
The fees paid for different investment products can vary significantly, ranging from very little (indexed ETFs), to modest (active mutual funds), to exorbitant and very often unnecessary (derivatives, structured notes, annuities, hedge funds). This can bias recommendations towards more expensive investment products.
Your advisor should have no economic interests in the investment strategies they recommend!
3. What conflicts of interest do you face in advising me?
The answer should be none. Most financial advisors are not fiduciaries. Instead, they are outside sales agents for banking institutions with sales quotas in an antiquated business model.
Consider hiring a Fee-Only Registered Investment Advisor. An advisor working in this model is required by law to act in a fiduciary capacity and put their clients’ financial best interests first. The Fee-Only advisory model aims to remove many of the conflicts of interest found within traditional brokerage firms, i.e. UBS, Merrill Lynch, Morgan Stanley, etc.
4. How will you evaluate the success or failure of my portfolio over time?
This shouldn’t be just a performance number relative to the stock market, but rather whether the portfolio has met your stated goals, income and liquidity needs, tax considerations, liabilities, risk tolerance and other factors or preferences specifically addressed in your Investment Policy Statement.
This is only possible if these matters have been formalized in an Investment Policy Statement that defines the purpose of the portfolio and how it will be organized, formalized, implemented and monitored. As a part of the Investment Policy Statement, specific indices and benchmarks (S&P 500, Barclays Aggregate Bond, etc.) should be defined for the evaluation of performance so that no ambiguity will exist. Risk management is both the most crucial part of portfolio construction and the only real aspect that can be controlled — get the downside risks covered appropriately and the upside will take care of itself.
As one of my mentors used to say, “Don’t confuse a good advisor with a bull market!”
5. What services does your firm provide besides investment advisory?
Wealth Management/Investment Advisory is a full-time job. Be highly skeptical of firms that offer a number of unrelated or tangentially related services such as insurance, estate planning, tax preparation, banking, credit, etc. It is difficult for any firm to have more than a single core competency, and efforts to do otherwise typically lead to sub-standard offerings. The consolidation of the financial services industry has profited service providers more than their customers as its goal is to create cross-selling opportunities rather than a quality and customized service offering.
Financial advisory services should be more than just the core competency of the firm you work with, it should be the ONLY competency.
