Finding the right investment advisor for you can be challenging. No doubt, you’ve met plenty of investment advisors who are quite willing to take your money and invest it, but how can you know what you are really getting and if it is the right advice for you? Asking the right questions will help! Don’t do what my Uncle Robert did! He admitted to making the mistake of hiring many financial advisors in his life and then telling them how to manage his money. The lesson he passed down to me was that instead of telling them how to manage his money, he should have asked them good questions before hiring them, and then trusted them to manage his money! Here are a few suggestions of good questions to ask your advisor when deciding if he or she is right for you.

1. Why did they become an advisor?

Find out why your advisor wanted to become an advisor in the first place. You would hope he or she doesn’t say, “to make money.” Although I’ve heard that, it really isn’t a why but a result. What you are looking for is what motivates him or her get out of bed in the morning—why he or she is inspired to be an advisor. For more thoughts on the “Why” of careers, here is a great TED Talk. 

2. How do they make your investment recommendations?

Ask what kind of research your advisor engages in and how much time per week they spend doing it? You want an investor who is picking stocks after researching them, not by accident, or by what is trending. This would also be a good time to ask about their educational background, credentials, and licenses. Related to this conversation is asking your advisor, if willing, where his or her own money is invested and why. It would increase your confidence if the holdings are the same investments that he or she is recommending for you. However, keep in mind that your advisor may have different financial planning goals than you.  

3. How does this investment or asset allocation fit into your financial plan?

Seek out an advisor that looks at your entire financial picture, not just what you have for them to invest. Therefore, you’ll need to understand your own financial objectives, your risk tolerance, and your future goals. What if you don’t fully understand your future financial goals? Your financial advisor should ask you questions and then work with you to craft a solid financial plan for your future. If you are satisfied that your advisor understands your desires, you can be more confident in their investment decisions on your behalf. You and your investor should then stick to the plan. You want to look at your investments with a telescope and your budget with a microscope. In times of media hysteria or market downturns, investors make some of the biggest mistakes in their portfolio. The last thing investors ought to do is react out of pure emotion. The smart thing to do during these times is to revisit your financial plan and ensure it is still in alignment with your asset allocation, your risk, and meeting your financial goals. Then relax.

4. How do they get paid, and do they have a sales quota? 

Know how your advisor gets paid. This is extremely important because different investors earn money in different ways. Some are paid hourly, some earn fees based on investments—which may lead to conflicts of interest—and some are commission-based, meaning they earn a percentage on the number of specific products they sell. These commission-based investors are essentially salespeople. You want to find someone who is compensated based on objectivity. This is the advisor who makes recommendations based on what is the best investment for the client, not on what will compensate the advisor most. Having worked in the financial industry for 30 years, I know the awful truth that banks and financial institutions have quotas to fulfill. Unfortunately, firms often put pressure on their advisors what buckets they want them to fill.

Two strong follow-up questions about payment include:

  • Would they be willing to get paid only if your portfolio makes you money?
  • Do they get paid on 12-b-1 fees? (This is considered an operational expense and is included in the fund’s expense ratio. It is generally between 0.25-1%.)

If your advisor doesn’t give you the impression that he or she has your best interests in mind with your investments and with your money, you might need to find someone new.

5. Are they required to do what is “best” for you, or what is “suitable”?

Understand the difference between the fiduciary and suitable standard when choosing a financial advisor. The fiduciary standard requires that an advisor put clients’ interests first. This standard is adhered to by Registered Investment Advisors (RIAs) and enforced by the Securities and Exchange Commission (SEC) or state securities regulators. Meanwhile, the suitability standard requires that a broker make recommendations that are suitable based on a client’s personal situation. However, the standard does not require the advice to be in the client’s best interest. Brokers, also known as registered representatives, are held to the suitability standard, which is enforced through a self-regulatory organization called the Financial Industry Regulatory Authority (FINRA). Aside from the “Clients’ Interest First” difference, the fiduciary must disclose any potential conflict of interests that might arise as a result of advice (i.e. commissions on a product), whereas a broker does not have to disclose this conflict. In essence, the broker’s loyalty/duty is to the broker-dealer (employer) whereas the investment advisor’s loyalty/duty lies with putting the clients’ interest first.

Final Thoughts

Money is a big part of our lives. Sadly, some people are not always completely honest or trustworthy when it comes to managing our money. Fortunately, many investors are honest. You don’t have to take the financial journey alone. With these great questions, you should be able to find an advisor that will help you achieve financial success and accomplish your life goals.

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. Judy Hulsey (“Judy”) works with Allgen Financial Advisors, Inc. (“Allgen”), which is an investment advisor registered with the SEC. Neither Judy nor Allgen provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by Judy and Allgen. It is not intended to be a solicitation or offer to sell investment advisory services to residents of any state in which Allgen is not currently authorized to do so. The Disclosure Brochure, Form ADV Part II, which details the business practices, services offered, and related fees of Allgen, is available upon request.