Sometimes I write articles about interesting or complex topics that I think people could benefit from reading. Sometimes I write articles specifically about my specialty of green investing. And, sometimes, I write articles just as a chance for me to let out some of my rage against the financial industry, and the cesspool it has become.
To write this article I set about putting together a list of questions that can make financial advisors squirm. Now, if you are working with a good advisor, they can answer all these questions easily, and confidently. If you aren’t sure where your advisor stands, ask them a few from this list and just observe.
This will be something of a rapid-fire article. Each question will be followed by two paragraphs. The first, explains why some advisors hate this question. The second paragraph covers the kind of responses you will get from good advisors.
Are you a fiduciary?
Let’s just start with the most important question. Advisors hate this question because thanks to the media, most investors are now well aware of what a fiduciary is, and why they should work with one. That becomes a problem when the vast majority of them are not fiduciaries. Most of them want to be. And they offer account types that allow them to act as fiduciaries, but they cannot answer the question with a simple yes, because there are too many nuances to their compensation structure to allow for it. Thy may try to skirt the issue by saying they are fee-based, or that the CAN be a fiduciary. Don’t let them off with those answers. A few years ago the department of labor tried to put into place a law that would have REQUIRED all investment firms to act as fiduciaries on retirement accounts. The amount of money spent by the big firms to fight this was more than you want to think about.
The only way a good advisor will answer this question is “yes”.
How do you get paid?
Financial advisors have hated this question since the dawn of time because for many advisors, the answer is extremely complicated. Advisors can be paid in the form of commissions, revenue sharing, contingent deferred sales charges, 12b-1 fees, mutual fund trails, management fees, and a few others. Depending on how they are managing your account that answer can have up to three or four components. Describing to a client the four ways that they are paying is not fun.
For a good advisor this question is easy. For instance, here at Balanced Capital, we charge a management fee of 1% per year. That’s it. We even link right to our prices in the main navigation of the website.
How much do you get paid?
For advisors who hate describing how they get paid, because it has so many parts, this question just makes it even worse. Now they must do all of the math. Math that usually involves different formulas for all the different components, which then have to be added together to get a final result.
For a good advisor this question is again, quite simple. To use Balanced Capital as the example again, it takes me all of ten seconds to do the quick math for a client of multiplying their account balances by 1%.
How many ways do you get paid?
This question builds off the prior two and is only worth asking as a follow up if you think your advisor is holding something back. Unless your advisor is a fiduciary, they get paid in more than one way. So, if they haven’t been forthcoming, throw this one at them and see if it makes them rethink their prior answers.
There is no need to ask this question to a good advisor, because they already would have given sufficient answers to your prior questions.
Are there any other incentives?
This is a really fun question to ask advisors who either work for a large firm or earn commissions. The reason those advisors hate this question is because they really don’t want to tell you about the award trips, they can win by selling enough of the right products. Or the fancy dinners and lunches they get taken to by mutual fund companies. The financial industry is loaded with fringe benefits that all represent conflicts of interest.
A good advisor will answer this with a simple “no”.
What products pay you the most money?
Another great question to ask a commission based financial advisor. An even better question to ask an insurance agent. Why do they hate it? Here is a quick summary. Permanent life insurance pays 80-100% of the first years premium upfront. Annuities pay 4-12% upfront. Mutual funds pay up to 5.75% upfront. After they are forced to explain that to you, they may have a difficult time standing behind their recommendation of a mutual fund that charges 5% up front vs a managed account that charges 1% per year and nothing upfront.
A good advisor will have a very easy time answering this question. Balanced Capital for instance, makes the same amount of money no matter what investments we recommend to you. Which makes it quite clear that we have no ulterior motives when we make recommendations.
What are my all-in costs?
This is the first question that really applies to fiduciaries as well as commissioned advisors. Specifically, this question is meant to challenge fee-based accounts, or managed accounts that charge annual percentages (like those at Balanced Capital). The reason this question is important is it gets at what kind of expenses get stacked on to your advisor’s management fees. Is your account made up of low-cost index funds and individual stocks, or does it include mutual funds that tack on an additional cost in the range of .3-1.5%? Some advisors hate this question because it lays bare to the client the total cost they are really paying. Someone who has no problem paying 1%, may have a big problem with paying 2.3%.
The answer from a good advisor can vary a little bit here. At Balanced capital we use low-cost index funds and stocks to keep all in costs under 1.05%. We do that because we believe that cost is a variable we can control, while performance is a variable that cannot be completely controlled. But some advisors use funds with greater expenses because they believe they can get you additional return by doing so. I’m not saying they are wrong; I’m just saying they should have a good reason for why they use the more expensive funds.
Do you have any disclosures?
Most advisors don’t hate this question. The only ones who do are the advisors you should avoid. Disclosures is code in finance for getting caught breaking the rules. This can be anything from forging signatures to mishandling client funds.
A good advisor will simply say “no”.
What qualifications do you have?
Believe it or not, the bar to call oneself a financial advisor is tremendously low. If an advisor works from an insurance company, they likely only have insurance licenses. You would be terrified to know how easy that exam is to pass, and they are asking you to trust them with your life savings. Don’t allow an advisor to lean on their brokerage firm to add credibility either. A big firm name on a business card does not mean that individual is any more qualified than someone else. In fact, it can mean the opposite. Big financial firms are known for taking people from other industries, sending them through some sales training, and then stamping them financial advisors and sending them out into the world.
A true financial advisor at least carries some licenses in securities. These can be the series 7, 66, 63, and a few others. Even better is if your advisor carries additional credentials like the AAMS or CFP designation.
How long have you been an advisor?
The financial advisor professional has an extremely high burnout rate. If a training class at a large brokerage firm has 20 trainees, you can expect that within a year only 5-7 will be left. After two years that drops to 3-4. And after three years only 2-3 of them will be around still. What that means, is the industry is absolutely loaded with financial advisors who have two or less years of experience. So, there is a good chance, if you ask this question the advisor will hate telling you they have been in the business for only 18 months.
There really isn’t a right or a wrong answer here. Experience certainly helps in this industry, but it isn’t everything. In my opinion, honesty and integrity matter a lot more in experience when it comes to finding an advisor. That being said, if you choose to work with someone without much experience, make sure they are at least humble enough to acknowledge when they may be in over their head, and seek help where it is needed.
How many clients do you have?
Here are some quick numbers for you. The average fee only fiduciary advisor has less than 200 clients. The average insurance agent has over 2000. Who do you think is ultimately going to get better service? Advisors with enormous client lists will hate answering this question.
A good advisor will give you a relatively low number here. The simple reality is that each individual advisor, if they are doing a good job, really only has time for 200 clients. If they take on more than that they will not be able to handle all of the tasks that come with managing investments and creating and monitoring client financial plans.
Do you have a specialty?
There is one thing that financial advisors do, that drives me crazy more than anything else. The majority of them do it, and they don’t realize how completely stupid it sounds. It usually shows up somewhere on their website; “I specialize in working with individuals, families, and small business owners…. So, who exactly does that NOT include? This is the question that most advisors will proudly answer, but so few of them realize how hard they should be cringing as those words come out of their mouth.
In 2021, there is no reason you need to simply work with the financial advisor who has an office closest to you. Thanks to the internet, you can find an advisor who specializes in literally anything you need. Just google it. You can find an advisor who works with dentists. An advisor who specializes in doctors with over 100k in student loans, or an advisor who only invests in companies that have women on the board of directors. To be fair, most advisors are completely capable of working with absolutely anybody, so it’s not a death knell if an advisor doesn’t have a real specialty. It’s just a sign that they are a little clueless about where the industry is headed.
Hopefully this list is a good start for you. Especially if you are actively looking for an advisor, these will help narrow down your choices and make sure you are talking to someone who is worth their salt. If you already have an advisor, and reading this article made you a little bit uneasy, you may need to consider asking some of these questions to your current advisor, and just see what they say.
