11 Questions To Ask A Potential Advisor

March 05, 2014

These aren’t easy times for investing, which is why the right professional help could make all the difference.

Six years after the worst economic downturn the U.S. has seen since the Great Depression, the U.S. and other developed markets remain volatile, interest rates are at historic lows and emerging markets are as challenging as ever. Being an investor today requires expertise, if not stomach, and—many would argue—the right professional advice.

Hence the challenge: How do you go about finding the right investment advisor for you?

The Securities and Exchange Commission has an entire library of literature it recommends you read before deciding on a professional or on any investments. Finra, too, offers a tool that allows anyone access to the professional background of advisors in a database that currently includes information on more than 440,000 individuals. The regulatory body’s message is simple: Do your homework.

Now, in a culture of self-helpers and quickly growing do-it-yourself investment platforms that allow access to just about every corner of the market, perhaps the first step in this process is deciding whether you want to pay for professional advice when it comes to securing your financial future.

The folks at BAM Alliance—a group of independent advisors who spend a lot of time on investor education—would say everyone, no matter how smart, would benefit from a professional investment advisor.

“If we look at the impact of behavioral finance on investors returns, we believe everybody would benefit from an advisor,” BAM Advisor Services’ Joe Goldberg, director of retirement plan services, told ETF.com. “Money is an emotional thing, and human emotions can cost highly intelligent people significant amounts of money when making mistakes.”

“The discipline that an advisor provides is extremely important,” Goldberg, who talks across the country about the process of picking the right advisor, added.

The Questions You Should Ask

The first thing you should ask a prospective advisor is whether he or she operates in a fiduciary capacity.

“The nation’s population is fairly uneducated when it comes to the difference between a fiduciary standard of care and a suitability standard,” said Goldberg. “The majority of the nation’s wealth is still managed under a suitability standard, which is that there is no legal obligation for an advisor to do what is in the investor’s best interest.”

It is often the case where an advisor invests part of your portfolio under a fiduciary standard (like your equities allocation) and part of it under a suitability standard (like your fixed income) where they can generate commissions. In fact, some wire houses have been “blurring” those lines, offering a mix of fee- and commission-based service to the same investor, Goldberg notes.

As an investor, you want to make sure your entire portfolio would be managed under fiduciary care.

“If you’re looking to trust somebody to manage your wealth and give you unbiased advice, there is absolutely no reason anyone should ever hire an advisor that is under no legal obligation to do what is in your best interest,” Goldberg explained. “Most people just assume that advisors are acting in your best interest, but they’re not.”

Another key question you should ask of your prospective advisor relates to fees.

Allan Roth, of Wealth Logic, argues that the most important question to be asked is, How much are the total fees I’ll be paying?



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