Ferri: 3 Big Questions To Ask An Advisor

March 26, 2014

3. How much do you charge?

Costs matter. Advisers need to be paid for their services, but they should not be overpaid. Consider what services you’re seeking and how much you should pay for each service and overall.

Self-managed investors who seek as-needed investment advice may consider purchasing this advice by utilizing an hourly fee financial planner or hourly fee investment adviser. This adviser doesn’t need to be local. An hourly fee adviser who works out of New York and one who works out of Texas have access to the same markets and the same products.

An adviser who manages money on an ongoing basis should be paid according to the amount of money they manage. An asset management fee (AUM) is fair because the adviser is looking after the portfolio daily and they have overhead costs based on the amount under management.

Often an adviser will charge an AUM fee for both investment advice and portfolio management. While this is fair if the overall fee matches the amount of overall service provided, I believe all-in-one AUM fees is where mispricing occurs most often. If you’re seeking simple advice as needed as well as a managed portfolio, don’t pay for concierge services.

What about performance?

Past investment performance may or may not be a relevant question to ask. It depends on the adviser’s investment philosophy. A passive adviser who recommends a fixed asset allocation to low-cost index funds based on your long-term needs does not control what happens in the markets. So, a discussion of past performance is rather useless. In contrast, past performance may be a question to ask an adviser who tries to beat the market using security selection or tactical asset allocation.

Philosophy, services and cost are the three big questions I would start with when hiring an investment adviser. Chances are you’ll find someone you’ll be able to work with over the long-term when you’re satisfied with the answers to these three questions.



This blog, which first appeared on Rick Ferri’s blog, is part of a regular series of articles on ETF.com featuring some of the most influential voices in the world of index and passive investment. Ferri is the founder of Portfolio Solutions, a Michigan-based registered investment advisor with about $1.2 billion in assets under management.


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