7 Questions to Ask an Advisor to Make Sure You Are in Good Hands
“If you don’t understand the incentives of your advisor, you’re liable to discover that you’ve done wonders for his financial future while potentially wrecking your own.”
— TONY ROBBINS, UNSHAKEABLE
We can’t take credit for any of this, but when we find helpful resources we like to pass them long. We want to share with you the 7 questions that Tony Robbins suggests you ask before you place your financial future in the hands of an advisor.
Oh and by the way, even if you are working with someone already, you owe it to yourself to get the answers to these questions. Trust us, you won’t regret it!
1. Are you a Registered Investment Advisor?
If the answer is no, this advisor is a broker. Smile sweetly and say good-bye. If the answer is yes, he or she is required by law to be a fiduciary. A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. But you still need to figure out if this fiduciary is wearing one hat or two.
In case you were wondering, we ARE Registered Investment Advisors.
2. Are you (or your firm) affiliated with a Broker-Dealer?
If the answer is yes, you’re dealing with someone who can act as a broker and usually has an incentive to steer you to specific investments. One easy way to figure this out is to glance at the bottom of the advisor’s website or business card and see if there’s a sentence like this: “Securities offered through [advisor’s company name], member FINRA and SIPC.” This refers to the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation, respectively. If you see these words, it means he or she can act as a broker. If so, run! Run for your life!
In case you were wondering, we ARE NOT affiliated with a Broker-Dealer.
3. Does your firm offer proprietary mutual funds or separately managed accounts?
You want the answer to be an emphatic no. If the answer is yes, then watch your wallet like a hawk. It probably means they’re looking to generate additional revenues by steering you into these products that are highly profitable for them (but probably not for you).
In case you were wondering, we do NOT offer proprietary mutual funds or separately managed accounts.
4. Do you or your firm receive any third-party compensation for recommending particular investments?
This is the ultimate question you want answered. Why? Because you need to know that your advisor has no incentive to recommend products that will shower him or her with commissions, kickbacks, consulting fees, trips or other goodies.
In case you were wondering, we DO NOT receive commissions from any investment product we offer. We DO receive commissions on insurance products and commodities accounts, but will only use those for clients at their request.
5. What’s your philosophy when it comes to investing?
This will help you to understand whether or not the advisor believes that he or she can beat the market by picking individual stocks or actively managed funds. Over time, that’s a losing game unless the person is a total superstar like Ray Dalio or Warren Buffet. Between you and me, they’re probably not.
In case you were wondering, we DO NOT attempt to time the market.
6. What financial planning services do you offer beyond investment strategy and portfolio management?
Investment help may be all you need, depending on your stage of life. But as you grow older and/or you become more complex financially: for example, you may need to deal with saving for a child's education, retirement planning, handling your vested stock options, or estate planning. Most advisors have limited capabilities once they venture beyond investing. As mentioned, most aren’t legally allowed to offer tax advice due to their broker status. Ideally you want an advisor who can bring tools for tax efficiency in all aspects of your planning-from your investment planning to your business planning to your estate planning.
In case you were wondering, we DO align ourselves with the appropriate specialist in areas that are outside of our scope. We DO believe there is truth to, “you can’t be all things to all people,” which is why we take the approach that if we don’t know the answer, we will find someone to appoint to your team to make sure that we are making a plan that is most tax efficient in all areas.
7. Where will my money be held?
A fiduciary advisor should always use a third-party custodian to hold your funds. For example, Fidelity, Schwab and TD Ameritrade all have custodian arms that will keep your money in a secure environment. You then sign a limited power of attorney that gives the advisor the right to manage the money but never to make withdrawals. The good news about this arrangement is that if you ever want to fire your advisor, you don’t have to move your accounts. You can simply hire a new advisor who can take over managing your accounts without missing a beat. This custodial system also protects you from the danger of getting fleeced by a con man like Bernie Madoff.
In case you were wondering, we DO use a custodian who is also one of the largest and most reputable in the investment world, Interactive Brokers.
With these 7 questions and a bit of the why behind each of them, you are now more equipped than 90% of America to make a great decision on which advisor to work with!
As always, our hope is to educate and empower you, so you can feel confident in all your financial decisions.