When you hire a Financial Advisor it’s of utmost importance that you understand who you are hiring and the relationship that you are entering into. There are many different types of Financial Advisors, and each provide different types of services and relationships. One saying that he/she is a Financial Advisor can mean a few different things. These are the questions that you can ask to to help you understand who you are or will be working with so you can make the decisions and choices that work best for you.
1. Are you a Fiduciary?
Fiduciaries must provide services in the best interest of the client, while non-fiduciaries need only to recommend what’s “suitable”.
1A. Why are you/are you not a Fiduciary?
The answer to this question will provide clarity to how your Advisor operates?
2. How do you get paid?
Basically, there are two ways Financial Advisors get paid; through commissions or fee-based. Commissions are paid when products are sold, such as Mutual Funds, Life Insurance, Stocks, Bonds, etc. Product sales only need to be “suitable” for the client. Fee-based means that the Financial Advisor is paid a flat fee for services or and hourly fee, and/or a percentage of your assets (typically 1%) that are managed. There are Advisors that are also a combination of both commission and fee-based, and finally there are Advisors that are “fee-only”. Typically, the “fee-only” Advisor will be a Fiduciary.
3. Who regulates you?
The SEC (Securities & Exchange Commission) and FINRA (Financial Industry Regulatory Authority) are government regulatory organizations created and working to protect the U.S. Public. If an Investment Advisor is not regulated by the SEC or FINRA, then they would be regulated by their respective state regulatory agency.
4. What services do you provide?
Does your Advisor only provide Investment Management? Or do they provide additional services Retirement Planning? Tax Planning? Estate Planning? Insurance Needs? Budgeting? Education Planning? Or do they have professional relationships and they can direct you to the appropriate professional for any of the above needs?
Transparency is extremely important in all aspects of business. Some people may feel uncomfortable asking these questions, but if should be a priority to understand your business relationship especially when you are entrusting someone with investing your life savings. These pointed questions will provide clarity and protect you.
To make the Q&A easy, NAPFA (National Association of Personal Financial Advisors) provides a fantastic Comprehensive Financial Advisor Questionnaire.