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1. How is the advisor compensated?

Arguably the most important question you can ask your advisor. Incentives are a powerful motivator, and even the best advisor can be compromised when given incentives that do not align with the client’s best interest. A quick way, (although not foolproof) is to ask if your advisor is considered a “fiduciary”. Being a fiduciary means the person is legally required to do what’s in the best interest of the client. If the advisor is considered a fiduciary and does not do what’s in the best interest of the client (i.e. selling a product solely for the benefit of the advisor), then they’re leaving themselves open for lawsuits. Consider working with a fee-only advisor since their business model by default dictates they act as a fiduciary. If the advisor works based on commission, be very skeptical, since products can offer a wide variety of commissions to the advisor. The advisor may be incentivized to sell higher commission products that are deemed “suitable” for the client, but not necessarily what’s in the client’s best interest.

2. What is the advisor’s investment philosophy?

Does the advisor have a passive or active approach to investing, or maybe a combination of both? How does the advisor determine an appropriate asset allocation for a client? What factors warrant changes to client’s investments; for example, changes to a client’s circumstance versus changes in market environments. There is no perfect answer, as a wide variety of investment philosophies can drive long term success. However, you should look for an advisor who has a disciplined process, and one that can be reasonably/easily explained in plain English. Some of the best investment strategies can be very simple, but require behavioral coaching to make sure the client sticks to the chosen strategy. Don’t be sold on complicated investment strategies that you can’t understand; the finance industry has developed jargon over the years to keep consumers from asking important questions.

3. How does the advisor select investments and products; are there any proprietary products?


This goes along with question 1 and how an advisor is compensated. Again, if an advisor works for an overarching corporation, that does not necessarily mean they’re bad, however, they often have incentives from the corporation which may or may not align with the client’s best interest. The corporations are concerned with driving profits and appeasing shareholders, which can sometimes trickle down to the clients being taken advantage of. An example of this abuse can come from proprietary products. Many large broker-dealers and investment firms own mutual fund subsidiaries, whose funds their advisors can recommend to clients. Advisors may be incentivized to use a particular fund family because they are owned by the overarching corporation, regardless of the fund is the best one for the client. Proprietary products are not necessarily the number one thing to be wary of, it’s just better to have an advisor who you know has no incentive to recommend one investment over another.

4. What value does the advisor provide beyond investment returns?

With fee margin compression and investment automation, investment returns should not be the sole value provided by your financial advisor. Does your advisor provide advice on other financial aspects of your life? For example, budgeting and cash flow, protection planning, education planning, estate planning, and tax planning. You should look for an advisor who provides holistic advice, meaning they’re looking at how each aspect of your financial life is connected. The investment returns are only a piece of the pie.

5. What are the advisor’s expectations of you?

What does the advisor expect from your relationship? How often are you expected to meet and review your financial situation? Ask the advisor what their ideal client relationship looks like so that you can both properly set expectations. Setting expectations for both the client and advisor is crucial in creating a successful partnership. Discussing finances can be emotional, therefore it’s important to work with someone who you can trust and be open with.

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