10 tough questions you need to ask your financial advisor
Americans spend more time shopping for a car than they do looking for a financial advisor.
Finding a great car is important—you know what you want, what you’re willing to pay, and you ask important questions before making an investment in a new vehicle. But when it comes to finding an advisor, it’s just as important—if not more—to take your time and do your due diligence to ensure you’re getting the value you deserve from your advisor.
Oftentimes, investors may not know the questions to ask. Or they may get runaround answers from their advisors. To guide you, I’ve included some very important questions that every investor should ask their advisor, along with the direct response that you should receive.
If your advisor can’t answer these questions or gives you an indirect response, you may want to consider getting a second opinion on your portfolio.
1. Fee transparency. How do you get paid for investments you recommend? Do some pay more than others? Are you paid commissions on investments or other products you sell? Do you receive payments from mutual funds or investment companies you recommend? Aside from what I pay you, what other costs will I incur?
Advisors should be 100 percent transparent when it comes to explaining their fee structure so clients fully understand how they are paid. They should define which portion of the fee is paid out to the firm and which portion is paid out to the advisor.
Does your advisor charge on a tiered rate system or does he or she receive commissions on the assets you invest? It’s important to understand the commissions that your advisors receive and whether or not they receive payments from mutual fund companies or investment companies that they recommend.
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2. Regulatory controls. Are you fiduciary? What safeguards does your firm have in place to ensure that my assets are protected from fraud? Have you ever received disciplinary infractions for unlawful or unethical actions? How do you ensure that your firm remains in compliance with legal and regulatory statutes?
Your advisor should always answer, “Yes, I am a fiduciary.” In order to safeguard your assets, they should be held with reputable third-party custodians. Your advisor should address whether or not he or she has received disciplinary infractions both individually and as a firm.
Advisors who strictly adhere to a code of ethics and client bill of rights have defined standards in place that they can share with clients. Your advisor should be compliant with the Financial Industry Regulatory Authority (Finra), the Securities and Exchange Commission and state and regulatory agencies.
3. Experience. What licenses, certifications and/or credentials do you have?
Many of the top advisors in the industry have designations such as certified public accountant (CPA), certified financial planner (CFP), certified fund specialist (CFS), chartered financial consultant (ChFC), chartered financial analyst (CFA), chartered life underwriter (CLU) and/or juris doctor (JD), and carry their Series 7, 24, 51, 63, 65, 66 and insurance licenses.
4. Proactive communications. How frequently do you communicate with your clients? Do you proactively send out rationale for buy/sell decisions?
Your advisor should focus on delivering proactive and transparent communications to clients. For example, our firm sends out trade notifications that explain every buy and sell decision. In addition, we send out a weekly market commentary, a monthly investment outlook and a quarterly market outlook video, along with several education videos, strategy fact sheets, industry updates, insightful statistics, informational whitepapers and more.
Making these types of resources available to clients will help educate investors and give them the information needed to know that we are actively monitoring their accounts.
5. Access to Information. Call your advisor out and ask them to explain the top holdings of the strategies you’re investing in and earnings reports. Your advisor should know or have direct access to this information.
Your advisor should not only answer your question when you call, he or she should also proactively educate you on each strategy’s objective and holdings prior to investing your assets. Through the educational process, you should know and understand why your assets are invested in a strategy, how it ties to your family index number and both the time horizon and volatility expected from the strategy.
Once you understand the reason you’re invested in a strategy, you should then receive trade notifications for the actively managed strategies so that you know the rationale for all buy and sell decisions. If you have a question after reading the rationale, you should be able to call your advisor and expect a direct and thorough explanation.
At Carson Wealth, we even welcome clients to attend our morning conference calls with their advisor so clients can hear strategy updates firsthand from our investment committee.
6. Personalized service. What services do you offer? Will you be the only person working with me?
Your advisor should be actively involved in all decisions that pertain to your financial future and serve as your main point of contact for any questions you have regarding your account(s). You should always know who your direct contact will be, should you have any questions, and receive prompt and timely responses.
Your advisor should hold annual review meetings to review your financial plan and ensure it is up to date.
If your advisor’s firm has an in-house team of experts—such as wealth planners, insurance advisors, research analysts, an investment committee or an operations team—make sure they explain whom you contact with specific questions and how the team provides enhanced value in their area of expertise.
In addition to portfolio management, does your advisor also offer services such as wealth planning, insurance services, tax planning, estate planning and risk management? There are many benefits to offering investors a one-stop shop for all of their financial planning needs.
7. Investment philosophy. Ask your advisor to describe, in simple terms, his or her investment approach.
Disciplined investment strategies are the foundation of a solid investment management process. By building a portfolio that ties back to your Family Index Number—the average annual return needed to make sure you reach your financial goals—your advisor is able to create a customized yet repeatable process.
The investment philosophy should be explained in simple terms that make sense to you. It should be a process-driven and time-tested approach managed by an in-house team of experienced professionals.
8. Client profile. Who is your ideal client? How many new clients do you take on each year?
By limiting the number of new clients accepted each year, your advisor demonstrates the ability to provide each client with personalized service. By identifying an ideal client profile, both you and your advisor can determine if there is a mutual fit before working together.
9. Client experience. Can you explain your client service philosophy and how you ensure each client receives personal and professional service?
Your advisor should be able to explain how he or she provides you with quality service, trusted advisors, recommendations based upon your needs and transparent and timely communications.
10. Succession planning. What happens to my money if something happens to you? Do you trust your firm to manage your own family’s money should something happen to you?
Your advisor should have a detailed succession solution in place in the event that something should unexpectedly happen. The high level of service you’ve come to expect should not change, and the same group of experts should continue to serve you for all of your wealth management and financial planning needs.
Your advisor should also be able to confidently state that, should something happen to him or her, the firm would continue to manage his or her own family’s wealth.
It’s extremely important for investors to do their homework when choosing an advisor. Advisors should be able to directly answer your questions and have detailed, documented proof of fees; fiduciary standards; a client bill of rights and code of ethics; and a succession solution.
It’s not easy to challenge your advisor with these questions, but in the long run, you will be glad you did your research. You don’t want a lemon for a car—or an advisor. You yourself hold the power; after all, we live in a meritocracy.
Gone are the days of paying 1 percent to have someone guess for you. If your advisor cannot demonstrate value beyond a doubt, then you deserve to find an advisor who can.
—By Ron Carson, special to CNBC.com. Carson is founder and CEO of Carson Wealth Management Group.