By: Carli Smith, CFP®, Wealth Management Advisor
The time has come to think about hiring a Financial Advisor. Perhaps you just retired, sold a business or are about to, are getting divorced, inherited money, or just need some clarity around the financial direction of your life. Where do you begin when looking for the right person to help you through any transition or time frame in your life? First, it’s important to realize that there is a very broad spectrum of what a Financial Advisor is and the services they can provide. The term “Financial Advisor” can be thrown around loosely and really doesn’t give a clear sense of what that person can actually do for you when push comes to shove. The most important thing is that working with a Financial Advisor should be about more than just the investments. A good Financial Advisor should serve as your financial quarterback in all aspects of your financial life with your interests placed above theirs. Below are a few questions you should ask any Financial Advisor you are thinking about working with prior to signing on the dotted line.
1. Are you a Fiduciary?
Some might be surprised to learn that not all “financial advisors” are required to place the interests of their clients ahead of their own. A lot of the broker-dealers (i.e., a lot of the big named Financial Advisor firms) are only required to make recommendations that are suitable for the client whereas a fiduciary is legally obligated to make recommendations that are in the best interest of their client. In fact, a distinguishing difference is that a broker-dealer’s primary duty is to their employer, not their clients.
An example of this can be made by looking at investment recommendations to a client. A broker-dealer, or “Financial Advisor” at a broker-dealer firm has just recommended a mutual fund to a client that has high fees, pays some sort of revenue sharing back to the Advisor or has other incentives tied to it. Basically, the more the mutual fund is recommended and traded, the more the Advisor is paid. Essentially, the broker-dealer has found a way to recommend a mutual fund that is suitable in terms of the client’s overall risk exposure but he or she recommends it because it is in their best interest and not the client’s. With a Financial Advisor that is a Fiduciary, they are legally bound to make recommendations that are in your best interest. They are prohibited from making trades or buying securities for the purpose of higher commissions or fees.
The best way to start your search for a Fiduciary is to only work with RIAs (Registered Investment Advisors). They are required to register with the SEC and have a fiduciary duty to their clients.
2. How are you paid?
Financial Advisors can be paid through commissions or be considered fee-only. To make things more complex, some broker-dealers will say they are fee-based. It is basically a hybrid of being fee-only and earning commissions from the products they sell. It is a sneaky way for them to appear like they are fee-only when in reality they are still taking commissions in some way. When you work with a Fiduciary, you are working with an advisor that is a fee-only advisor and doesn’t accept any form of commissions.
Commission only: These advisors are paid based on the type of investment product they are selling you. They may get a percentage of a particular investment (hence the incentives of some broker-dealers) or even get ongoing commissions depending on the type of product they sell you. The key word here is that they are “selling” you an investment vs. recommending an investment strategy and investing towards it that is in your best interest.
Fee-only: These advisors are paid an hourly rate or flat fee (a percentage). They do not sell any commission-based products and therefore remove potential conflicts of interests. An example of a fee-only advisor is one who charges a percentage based on the overall assets managed in the investment portfolio. Within this percentage, they most likely provide other services like financial planning, retirement planning, tax planning, estate planning, etc. No selling is involved with this model. It is truly about the services provided.
Fee-based: These advisors get paid by the client but also from other sources such as commissions from the financial products they sell.
3. How do you invest your personal portfolio?
This is a great question to ask any financial advisor. A good advisor should personally invest in the same investments they recommend. The overall allocation may look different, but in general, it should be the same type of investments with the same type of investment philosophy. If an advisor wants to put your money in only a couple of very expensive mutual funds or investments that aren’t well diversified, this is a big red flag. More than likely, they are getting paid a commission or it has some incentive tied to these recommendations.
4. What is your firm’s investment philosophy?
Having an investment philosophy that has been well thought out, put together, and more importantly, historically implemented and followed is very important. Among other things, how an advisor views the world of investing, reacts to market fluctuations, approaches trading, controls costs, and how they conduct due diligence on asset managers make up the philosophy. In simple terms, every investment decision goes back to whether or not it follows the investment philosophy. This will play out in your investment portfolio so it is important to understand what theirs is and what impact it will have on your portfolio. Some chase returns while others believe markets are efficient. Some think they can control the market outcomes, while others think the real control lies in the costs. A good advisor should be able to walk you through their investment philosophy and explain the impact it will have on your portfolio. It will then be up to you to decide if your personal investment philosophy compliments the advisor you work with.
5. What will happen to my account if you retire or leave the firm?
Having a succession plan in place is a good idea for all firms. It is inevitable that an Advisor will retire one day or decide to leave. Having as little disruption as possible in your investment experience is the goal. To accomplish that, every Advisor at the firm should do things similarly and all share the same investment philosophy to accomplish this.
Hopefully, we have armed you with enough questions to start your search and have a successful outcome. If you do your homework and ask the right questions, you should end up in good hands. At ML&R Wealth Management, we would be happy to answer any questions you have regarding your finances and investments. We are a fee-only Fiduciary registered with the SEC and always put our clients’ interests ahead of our own.