What Questions Should You Ask Your Financial Advisor?
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In the past two decades, deciding where to obtain financial advice has become increasingly difficult, as banks, insurance companies, CPAs, and other independent firms have marketed themselves with traditional brokers as “Financial Consultants”. With more choices, being informed can have a large financial impact on your investment success. Whether searching for a new investment advisor or simply evaluating your current one, investors should ask some basic questions to help determine which is best for them. The following sample questions will help determine the right choice:
1. What are your qualifications and experience that make you capable of providing investment advice?
Like most professions, the more experience, the better. Advisors with five or more years of experience will be more likely to have experience with different market cycles and better positioned to help you set realistic long-term goals. Advisors will often have certifications behind their name to indicate they have achieved certain standards set by various professional organizations. CFA, CFP, CIMA, and CPA/PFS are some of the more difficult to obtain. Many of these often have continuing education requirements to maintain the certification.
2. How are you compensated?
Advisors are usually compensated in three ways: commission, fee-only or a combination of both. Commissioned advisors will often be limited to products that their brokerage firm can offer and earn a commission; therefore, they may not always be able to offer the best solution. Always ask how a commission is
calculated so that you can estimate how much the advisor’s advice is costing you.
Fee-only advisors will normally charge an hourly rate or a percentage of assets, usually around 1%. This method is simple and straightforward and has increased in popularity in recent years since there is no incentive to sell a product in order to earn a commission. The advisor has more of an incentive to help you grow or preserve your assets since his compensation is directly correlated to the success of your portfolio. If an advisor uses a combination of both, they will typically charge a flat rate for a plan and then earn a commission on the products used to execute the plan.
3. What are the annual charges I should expect? What is the cost to terminate or “exit” if I am not satisfied with your services?
Annual expenses and termination fees can be costly and affect the return of an investment; therefore, it is always important to evaluate what an investment is costing you on an annual basis. If you are sold a mutual fund, variable annuity, variable life insurance, or a “managed” account, there are annual expenses associated with each. Your advisor should be able to provide a detailed accounting of what expenses are charged on an annual basis. While these fees are sometimes necessary, they shouldn’t be excessive. Excessive fees will detract from the overall return on your investment and should be avoided.
Exit fees or “surrender” charges are common on annuities, variable life policies, and some mutual funds. These are usually charged to compensate the firm since the advisor is normally paid a commission at the time of sale. The amount of the charge will depend on the product; however, it is not uncommon for the exit fee to represent a large portion of your original investment. In addition, the fee will usually depend on holding the investment for a specified period of time, usually five years or more. If sold an investment with an exit fee, make sure that the product is appropriate for your needs as selling or surrendering it may be expensive.
4. Are you acting in the capacity of a Registered Investment Advisor or a Registered Representative of a Broker / Dealer?
While this question may seem like splitting hairs, it is an important one. Registered Investment Advisors (RIA), which are normally fee-only, are recognized as “fiduciaries” that should act in the best interest of their clients. If they manage more than $25 million, they must register with the SEC and are held to higher standards. A Registered Representative will hold a Series 7 license and be required to make recommendations to clients that are “suitable”. They are typically commissioned sales representatives that offer investment or insurance products of firms they represent. Some advisors may be registered as both an RIA and a broker. In this case, their compensation can be from fees and commissions.
While asking these questions will help you make a more informed decision on the advisor you hire, it is by no means complete. For additional questions to ask please give us a call at 504-835-1135 or e-mail me at mnobile@crescentsterling.com