When it comes to managing your money, you want someone who is not only trustworthy, but a fiduciary with ethical responsibilities to the government, the industry, and clients. But first, what questions should I ask a prospective advisor? Before you hand over your hard earned money to another person, be sure to ask these questions to a prospective advisor. The key thing is not the answers, but how to interpret the answers. For guidance in how to interpret your prospective advisor answers as well as how to monitor your advisor on an ongoing basis, please see my book The Safe Investor (Amazon, B&N, IndieBound).
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- What kind of education have you (the advisor) received that is relevant in helping me invest and plan my retirement? There are so many different initials and licenses after the names of brokers and advisors that it can be confusing trying to figure out if the person with whom you are working with truly has passed the necessary exams. Via the references, make sure you know that the person with whom you are speaking is actually the same person registered with regulators.
- How long have you lived in the area?
- How much relevant experience do you have? I recommend at least ten years’ experience. In the world of investing, you really want the person helping you to have personally lived through a couple of investment cycles, just so you know they have seen what can go wrong.
- Have you had any problems with other clients in their investing or with any regulators?
- Since FINRA allows for complaint records to be scrubbed, have you ever had a complaint that was subsequently scrubbed?
- What kinds of complaints have any of your clients had in the past?
- What are your most relevant professional designations?
- Can you tell me about the rest of your office? Do you have a superior? Partner? Other juniors to help you out? An administrative assistant? What is their experience? For guidance in how to interpret your prospective advisor answers as well
as how to monitor on an ongoing basis, please see my book The Safe Investor.
Delving into the the Advisor’s investing methodology:
- Is there a particular area of investing in which you are more skilled than others?
- Do you have a particular style or philosophy about investing?
- What kinds of products and services do you frequently recommend? For example, do you prefer exclusively index funds and ETFs, or a mixture of actively managed funds? Or do you prefer to do the investing yourself?
- How broad is the universe of funds you select from? Do you employ specific limitations or screening tools?
- What are your recommendations and weightings typically based on?
- How do you view performance? Risk assessment? Can you show me some examples of how your selections have performed?
- How frequently do you turn over the portfolio? (meaning how often do you buy and sell the positions in the account?). If the advisor trades too frequently, the commission costs to the customer could eat at the profits and returns of the entire portfolio. This activity can also signal that the investing activity could be at a higher risk profile than what is normally required.
- How do you help me decide my tax consequences in managing the portfolio? Are you willing to review the issues with my tax accountant? And how about my trust agreements—do you have experience with trust lawyers?
- What is your view and expertise specifically in international investing?
- What is your view about commodities? Real Estate funds?
- Can you tell me the two biggest mistakes in investing that you ever made?
Asking about the Advisor’s Clientele:
- What can you tell me about your other clients?
- How long has your longest client been with you? How long has the average client been with you? Has anyone left you? If so, why?
- What is your minimum client portfolio size? What is your average? Your largest client size? Do you make exceptions? How do you typically handle family accounts?
- Is it possible to get two or more client references from you? Also, may I talk to the custodian or broker or manager that covers the security and operations of my account?
Fee or Compensation Structures
- Can you list all the fees you will possibly charge me?
- Can you help me understand over the year the total amount of commissions, fees, and other expenses I will likely incur, including brokerage, custody, fund investment management fees, as well as your advisor fees? Can I get this information in writing from you?
- What is your philosophy about fees? Do you always look to see which funds have the lowest management fees?
The Adviser’s Future Plans
- Why did you decide to become an advisor?
- Why did you choose this particular way/firm to provide advice?
- May I ask how old you are?
- How long do you plan to actively run your practice? If something happened to you, do you have a plan for what would happen to my account?
- Are you building succession planning into your practice now by training junior people? Do any of your assistants or coworkers have ownership in your practice? Or an agreement to eventually inherit your business?
Other Intangibles to Look For
The “fit factor” At the end of the discussion with the advisor, you have to ask yourself a few questions:
- Does the advisor bug you? After spending 30 minutes or so, did the person annoy you, or make you feel inferior? More simply, would you prefer not to spend any more time with them?
- Did the advisor really listen to you, or just pretend to listen to you
- Did you find yourself not wanting to share your financial situation with this person? Did something inside your head say, “I don’t trust this person enough to reveal my real fears or desires when it comes to financial matters?”
- Was this advisor genuinely interested in what your spouse had to say? If you have a partner or a spouse, one of you is going to outlive the other. Both of you need to feel that the advisor genuinely listens and factors into his analysis what both of you think. The advisor should naturally involve both of you in the questions, the answers, the discussion, and the solution. If either you or your partner is not comfortable with this candidate, you should definitely talk to other advisors.
The key personality trait you are looking for is whether the advisor has the confidence to respectfully disagree with you when it is the right thing to do and explain why an alternate path might make more sense. After all, you are also paying them to educate you about investing. If all he does is agree with you and do just what you think you want, he is likely doing you a disservice. The independent compliance oversight process in any advisory firm or institution needs to be firmly in place, and as an investor, you want to verify who is overseeing compliance in the office where you are dealing. Feel free to ask to talk to the compliance manager if you have any doubt about a product or service. Since then, I have met other advisors that are so anxious to please a customer, so anxious to get any kind of sale; they will say “yes” to whatever the customer is asking.
The Process for Review after the Interview
Never say yes to the prospective advisor on the spot, especially after only one meeting. You are busy and may not necessarily enjoy this process, but you would ask for a second opinion if it was a life threatening operation. Do the same for your financial life. Besides your accountants and attorneys, who else can you involve in evaluating your advisor’s answers? Do you have any acquaintances that sit on charitable boards with a reserve fund that needed to be invested for the long haul? CFOs of even small companies can have an interesting perspective.
Above all, make sure to interview at least one other investment advisor, preferably from a different type of firm. Throughout my career, I have been amazed at how much I learned simply by conducting more interviews. Invariably, you will learn new questions to pose to the advisor whom you favor. Lastly, make sure to review carefully the agreements with the advisor, as well as the account-opening documents of related firms. Take nothing for granted. If you do not understand something, talk to your lawyer.