BEFORE HIRING YOUR ADVISOR ASK:

1. Do you Practice Under a Fiduciary Standard-100 % of the time?

A fiduciary financial advisor is legally required to put your interests first. How do you know if the advisor is truly a Fiduciary 100% of the time? Ask the following 2 questions:

i. Are you an Advisor or a Broker?

The core job of an Advisor is to provide recommendations and they are paid a fee as compensation for their expertise. On the other hand, the core job of a broker is to buy and sell investments and they are paid commissions on the products they sell you. This creates a conflict of interest for the broker. I know this personally because I was a broker years ago before becoming an Independent Registered Investment Advisor, (RIA). As a broker I was encouraged to sell the product my firm told me to sell. My firm’s interest came before my clients.

ii. Are you REALLY Independent, or just some of the time?
There are advisors out there who are dually registered as a broker AND an independent advisor. These advisors can charge you a fee for advice AND sell you investments like variable annuities or proprietary funds where they make commissions on top of the fee you are already paying them. Basically, these advisors are only held to the highest legal standard of care “some of the time.”

2. What Kind of Client do You Work with?

You want to know that the advisor has the right expertise to help with your specific situation. Financial Advisors can specialize their advice to groups such as doctors, teachers, or certain age groups and genders. Or they can specialize in a certain topic like Retirement funding, Estate Planning, or Cash flow management.

Be aware of the advisor serving too many clients. Your advisor should be able to meet with you 3-4 times a year and be readily available to talk to you when markets are extra volatile, or when you have a specific question or concern.

3. How are You Compensated? How Much Will It Cost to Work with You?

Before you enter into a relationship with a fiduciary advisor, it is important that you clearly understand their fees. Each State and Federally Registered advisor are required to provide you a document known as an ADV. This document should give you a detailed breakdown of their services and fees. Some common fees you may incur when working with a fiduciary advisor:

• Advice Fees- These can be in the form of hourly fees, one-time project fees, or a percentage of your investments. (This is the only fee you should see on your billing statement.)

• Transaction Fees-These are charged by the custodian (e.g., TD Ameritrade, Fidelity) when your advisor buys or sells investments on your behalf and can range from $0-$50 per trade.

• Expense Ratio- This fee is charged by a mutual fund or exchange traded fund (ETF) to cover operational expenses and can range from 0%-3% per year.

Fiduciary advisors have a responsibility to show you the best product at the right price. When two investments are virtually identical your advisor should recommend the lower-cost option.

For example, you have $100,000 to invest in the S&P 500. Here are two S&P 500 funds with similar holdings but with very different expense ratios (as of 12/18/20):

i. SPDR S&P 500 ETF Trust = 0.0945% or $94.50 per year

ii. Rydex S&P 500 A (R YSOX) = 1.68% or $1,680 per year

That’s a difference of $1585.50 per year in expenses which reduces your total return.

4. What is Your Firm’s Process for Providing Financial Planning Services and Investment Advice?

Ask the advisor: How do you gather my data? How do you analyze my unique situation, and how do you come up with your recommendations? Do you provide customized investment portfolios or use model portfolios? Every client’s situation is unique, and their portfolios should be also. Watch out for being put into a “model” portfolio that the advisor looks at only once a year. And last, how and when will you communicate with me about my investments and /or financial plan?

5. What is your Investment Philosophy?

There are a variety of ways advisors can manage your investments. Does the advisor use low-cost index funds? Do they actively trade individual stocks? Do they engage in passive investing, (buy and hold) or do they engage in active investing ,(market timing)? The advisor should have a well-defined investment philosophy and be able to clearly communicate this to you.

AFTER HIRING YOUR ADVISOR ASK:

6. How do You Decide When to Sell my Investment?

What I have discovered in working and talking with a variety of financial advisors is many don’t have a sell strategy.(Perhaps because many get paid for the amount of assets they manage) Many advisors expect their clients to ride the rollercoaster of market ups and downs. Be sure to ask your advisor their strategy for selling, (the buy side is the easy part).

7. Am I on Track to Meet my Goals?

At least once during the year you should ask your advisor if you are on track for attaining your most pressing financial goal. This could be saving for your first home, for higher education, or retirement. Your advisor should be able to clearly show you how close you are to your goal and/or how much more time you may need in the current market environment.

8. Do You Understand My Taxes?

Each year your advisor should ask for your tax return. Investment planning should be a wholistic exercise and your tax situation can play an important part in designing your overall investment strategy. Consider giving your advisor permission to reach out to your tax advisor on your behalf.

9. What is My Investment Performance Year to Date and what Changes, if any, should be Implemented?

If your advisor is managing your investments, during your annual review ask to see what your investments have returned. Relying solely on the statements from your custodian (Fidelity, Schwab, etc.) does not clearly show your gains or losses from year to year; therefore, your advisor should have another system in place to demonstrate your gains or losses year over year.

10. What is Your Succession Plan? What Happens to Me if You Leave or Retire?

You have this beautiful relationship with your advisor, and you can’t imagine working with anyone else. But the reality is if you hired an advisor older then yourself, odds are they will retire before you. Ask: Who will take care of my account if/when you leave? A good idea would be to ask to meet or interview the successor advisor so you can rest assured you will always be in good hands.

If you would like to work with a fiduciary financial advisor, please schedule a call to find out if we are a good fit!