There’s always someone who wants to offer advice, whether you’ve asked for it or not. This is particularly true when it comes to finances. The person suggesting your future actions might be coming from a place of regret or telling you what worked for them. Either way, how do you know if their advice is good or bad?
First, ask yourself if you’re supposed to take the advice with a grain of salt — as happens if it’s your parents or grandparents, or maybe your great uncle’s best friend from college. Their advice may be wise, but it isn’t always accurate. If it’s a legitimate financial advisor, though, be sure to ask these 5 key questions that can help you differentiate between solid advice and suggestions you should steer clear of.
1. What’s Your Fiduciary Role?
Not everyone who gives financial advice as a profession has a fiduciary duty to their clients. Those who do are legally and ethically obligated to act in their clients’ best interests, putting their benefits above the advisor’s own.
Working with someone who has a fiduciary duty to you helps establish a trusted relationship. You know their responsibility is to guide you towards your financial goals, so any suggestions they make are in that vein.
2. How Are You Paid?
Is your advice coming from someone who is trying to sell you a product they receive commission for, or are they giving you what’s truly the best financial vehicle for you?
Advisors get paid to do their job, and that’s to be expected. However, when the person is commission-driven, they receive a percentage of sales for specific products, giving them more incentive to suggest that commissionable item. This relationship between the company and advisor can create a conflict of interest.
Transparency is essential when there’s a relationship that involves money exchanging “hands.” Let’s look at the typical ways a financial advisor gets paid:
- Assets Under Management (AUM) fees, where advisors receive an annual percentage of the assets they manage for a client,
- Flat or Retainer Fees, which are fixed, one-time fees for developing a plan or an annual fee to receive financial advice on demand,
- Commissions on Products, where advisors receive a percentage of sales for selling specific financial products,
- Commissions on Trades, in which an advisor receives commissions for executing trades for a client,
- Fee-Based, providing a blended model of fees and commissions,
- Salaries, where the advisor works for a financial institution that pays them a traditional income.
Receiving commission for sales doesn’t necessarily equate to bad advice, but you should be aware that it’s happening so that you can decide if the product is the best thing for you.
3. What Are the Fees and Expenses I’ll Pay You if I Work With You?
Would you rather work with someone who charges a percentage of AUM or a flat fee? The answer may surprise you!
Ask the fiduciary advisor how much you’ll pay to work with them, including all fees and expenses. This is usually an estimate, but it should be close to accurate. If the advisor isn’t willing to give you a good-faith estimate in writing, that’s a red flag.
Get these estimates from a handful of companies that you’ve received recommendations for, and compare flat fee versus AUM prices. Then, you can decide which one you prefer.
4. What Are Your References?
Financial advisors must go through thorough background checks and security clearances before receiving their certifications. Most of these advisors are happy to show them to you. But if yours isn’t forthcoming, you can check on their records by visiting BrokerCheck on the FINRA website and the Public Disclosure SEC section for Investment Advisors.
Within a few minutes, you’ll know whether there are any legal or questionable reasons you shouldn’t hire a person or company to handle your money.
5. Will You Make Money On My Investment in Other Ways?
You want to believe that someone with a fiduciary duty to you will be transparent with all of the ways you benefit them financially. Yet, if you don’t ask, they may not tell you about the hidden ways they make money from your investments.
Financial benefits from your portfolio can come from revenue sharing in mutual funds, which results in higher fees to you. You may also have higher fees in exchange-traded notes and other securities. For more information on how your advisor benefits financially from your investment and what to watch for, read this article by OJM Group.
Conclusion
Getting advice from your loved ones and friends looks different than it does from a financial advisor. But when it’s time to take a serious look at your investments, ask any potential advisor these 5 questions before you hire them to handle your assets.