5 Questions to Ask Your Financial Advisor


If you’re unsure if your financial advisor is a best fit for your needs ask him or her the questions below. Follow our guide to what their answers should be and if the responses are not lining up or you’re unsure of their responses feel free to sit down with an investment professional at Kroon & Mitchell for a free review.


1. Are you a fiduciary? Are you a fiduciary for non-retirement accounts as well?

Why is this important?
A fiduciary is a person or organization that is trusted to handle the finances of another person. A fiduciary is bound ethically to act in the other's best interests. In 2017 there is a new proposed Department of Labor Fiduciary standard, the standard, if implemented, would apply only to certain retirement accounts. Non-retirement accounts and 403b plans are excluded. Also excluded are specific definitions of “competence” when handling investment accounts, opening the door to unqualified advisors.
Common response
Yes. I am fiduciary and work in your best interest.
Reality
Many advisors do not adhere to fiduciary standards. Some advisors may be grandfathered into old rules. Under the pending 2017 proposal, new assets may not be applicable because they are not retirement accounts. Lastly, with no definition of “competent”, allowing someone who is “competent” to decide what is in your best financial interest opens the door to those who are neither experienced nor qualified to give financial advice.

2. What is the total investment costs for my accounts?

Why is this important?
The investment field is unique that not all fees are clearly disclosed on a bill. Mutual Funds and Exchange Traded Funds (ETF) have fees which are automatically deducted from your account without a bill or notification. The total cost of all investments fees include advisory fees, commissions, trading costs, custodial fees, surrender charges and more depending on the type of funds.
Common response
1% or a small commission is paid each year.
Reality
The investment advisor may be taking 1% in management fees. However, the investment advisor may be using mutual funds or EFT’s which have fees ranging from 1-1.5%. The total cost of investments fees are typically as high as 2-3% per year. With regards to commission, investment brokers are possibly paid with up-front commission as high as 5.75% with an annual fee of approximately 0.25% paid from the mutual fund.

3. How do my current tax rates and future tax rates impact your investment decisions?

What does this mean?
To have the best investment results you must consider all costs of investing. Your investment strategy should start with your taxes. Paying or not paying taxes can have a big impact on your investments. Tax deferral strategies such as 401k, IRA, ROTH IRA, etc. help defer current income into retirement years when income would be lower.
Common response
We apply tax efficient process or “harvesting” tax losses, etc. We work with a CPA or accounting firm.
Reality
While taxes and investing tend to be two separate people or companies, each area directly affects the other. Typically, the investment advisor does not coordinate with the tax advisor and the tax advisor does not provide investment strategy ideas. All investment decisions have a tax implication in the long-run. When you don’t start with a tax strategy, you may be paying more taxes than needed. Your advisors’ ability to integrate an overall tax and investment strategy is what will ensure long term financial success.

4. Do you review performance of my total portfolio?

Why is this important?
There is only one way to approach investments: from the “total portfolio” perspective. You may hear someone talk about how great an investment performed. When someone talks about a winner they are probably leaving out multiple losers. You need to look at both the winners and losers over time to evaluate how your investments are really performing. A person in their 60s or 70s may say how great their investments have been performing. This is a potential red flag. If someone in their retirement years has investments that are performing really well, most likely they are taking on too much risk.
Common response
We are having a great year or great performance.
Reality
Without a systematic review of performance against an appropriate benchmark of risk it’s difficult to determine how well an investment is performing. Investment statements are often misleading; either listing the unrealized gains/losses which leaves out past losing decisions or the performance on each mutual fund, not the total pool of investments performance. You should be meeting with your advisor annually or semi-annually to review the performance of your investments.

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. They may have a match on 401k contributions. Your employer may have an employee stock purchase plan that allows for a discount on purchases of company stock. Lastly, your company may allow Health Savings Accounts and 401k contributions that would exceed what you could do on your own. As your income rises one key tactic is to look at tools to lower your income during your high income years and defer that income to lower income years in retirement.
Common response
We work closely with your existing plan to help give you the best overall advice.
Reality
Unfortunately to become a financial advisor you’re not required to have a level of experience or education. Simple tests are taken online to receive “certification”. The highest level of certification that the vast majority of advisors do not have is the Certified Financial Analyst or CFA. As important as a CPA for an accountant the CFA is the gold standard in financial advising. Financial advisors are often salespeople, not financial people. Investors are missing opportunities because their advisor, while a trusted friend or advisor, is not as experienced or knowledgeable as they should be. Regardless of income you should always utilize employer options if they exist.

Don’t hesitate to contact us with any of your financial questions.

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