5 Questions to Ask Your Financial Advisor
Knowledge is your most valuable asset. Hold your financial advisor to the same standard as your accountant, doctor or attorney. As your financial situation has shifted over the years, you should feel confident with the level of education and experience your advisor has to execute your current financial goals. If you're not sure what to ask your financial advisor, don’t worry, we’re here to help. We’ve assembled a list of five questions to ask your financial advisor and a guide to evaluate the responses you receive.
1. Are you a fiduciary?
Why is this important?
A fiduciary is a person or organization trusted to handle the finances of another person, who is ethically bound to act in the other’s best interests.
Common response
Yes. I am a fiduciary and work in your best interest.
Reality
There is no definition of “competent” under current fiduciary standards opening the door to those inexperienced or unqualified to give financial advice. Some advisors steer clients towards a particular investment product (such as mutual funds, annuities, and variable annuities) to receive a personal commission or product-based compensation – that is a clear conflict of interest. Make sure the advice you receive is unbiased from someone with your best interests in mind.
2. What are the total investment costs for my accounts?
Why is this important?
The investment field is unique in that not all fees are clearly disclosed on a bill. Fees can be deducted from your account without a bill or notification.
Common response
1% or a small commission is paid each year.
Reality
Depending on the account, total investment fees can be up to 2-3% per year. Investment brokers may also be paid with up-front commission as high as 5.75%. Ask your advisor to provide full transparency with all costs deducted from your account.
3. How do my current and future tax rates impact investment decisions?
Why is this important?
Taxes have a large impact on your investments, which means you may be paying more taxes than needed. Tax deferral strategies such as 401k, IRA, ROTH IRA, etc. help defer current income into retirement years when income may be lower.
Common response
We use tax efficient processes, or work with a CPA/accounting firm.
Reality
Taxes and investing tend to be two separate entities, where investment advisors and tax advisors do not usually coordinate with each other; however, your advisors’ ability to combine an overall tax and investment strategy may ensure long term success.
4. Do you review the performance of my total portfolio?
Why is this important?
Without a systematic review of performance against a set benchmark of risk, it’s difficult to determine how well an investment is performing.
Common response
We are having a great year!
Reality
Advisors may focus on one high performing stock or fund vs looking at the entire performance over time. For example, if a person in their 60s or 70s has a high performing investment they may be taking on too much risk. You should be meeting with your advisor at least annually to review the overall performance of your investments against your predetermined benchmarks.
5. How do you integrate the options from my employer into your investment advice?
Why is this important?
Your employer may have some of the best investment tools available: a match on 401k contributions, an employee stock purchase plan or Health Savings Account.
Common response
We work closely with your existing plan to give you the best overall advice.
Reality
An advisor may not be acting in your best interest if they’re not encouraging you to fully fund employer options like a 401K, ESPP (Employee Stock Purchase Program) and Health Savings Accounts. Advisors don’t make a commission on these accounts so may not discuss these investment tools with you or may not recommend fully funding these accounts.
