10 Questions to Ask Before You Hire a Financial Adviser

Most people don’t know how to hire a financial adviser. Often we will get a referral from a friend or a professional such as a lawyer or account. Often these are good methods of finding a good investment adviser. But, if you are creating a family trust and want to hire a financial adviser to manage the money in the trust, you probably want a traditional personal financial adviser or financial consultant. You should talk to more than one person before you choose. These companies provide complete investment management and holistic financial planning. Some are solo practices and others are part of a larger firm such as Raymond James, Merrill Lynch, Morgan Stanley or many others.

For my money, I would stay away from a solo practitioner since this firm probably cannot provide the broad array of services you may require. Also, solo firms don’t have the oversight you want for your trust and can lead to mismanagement and loss of trust assets.

Here are 10 questions to ask before you hire an Investment adviser:

1. Are you a fiduciary?

A fiduciary works in the best interest of the client. Nonfiduciaries typically only to recommend products that are “suitable” — even if they’re not the lowest-cost or most ideal for you. You’re paying a financial adviser to use his or her professional experience to do for you what you can’t do yourself which is make good quality investment choices – not just choose “suitable” investments.

2. How do you get paid?

Advisers can use a variety of fee structures. To keep it simple and avoid conflicts of interest, focus on fee-only advisers. They don’t get commissions for selling products.

Fee-only advisers might charge a percentage of the assets they manage for you (1% is common), a flat fee for services or an hourly fee.

Advisers who are paid on commission only make money on your account when they buy and sell. This is usually not in your best interest – it’s in the commission-based advisers interest and should be avoided at all costs.

3. What are my all-in costs?

In addition to paying the adviser, you may or may not incur other fees — and you’ll want to know what they are before you hire the investment adviser and move all of your money to his/her firm. Fees can decimate your savings over time. A recent survey found that a 1% mutual-fund fee (which you would incur in addition to the 1% fee the financial adviser is charging) could cost millennials $590,000 in retirement savings. Your financial adviser can and should only recommend investments that don’t carry additional fees. Fidelity, Vanguard, and many others are good examples of funds that don’t carry fees.

4. What are your qualifications?

Perhaps the should be the first question you ask: Financial professionals can have a confusing list of initials behind their names. Whether a financial professional goes by “investment adviser” or has the CFP designation, it’s your job to vet them. The Financial Industry Regulatory Authority’s (“FINRA”) professional designations database will tell you what they mean; if there are any education requirements; if anyone accredits the designation; whether there’s a published list of disciplinary actions; and if you can check professional status.

Go to the FINRA website to check an adviser’s record at BrokerCheck.

5. How will our relationship work?

Put another way: How much access will you have to the adviser? You want to know how often you’ll meet and whether he or she is available for phone calls or emails outside of scheduled appointments. If you are new to managing money, you may need a significant amount of handholding. Not all advisers are ready to give you this level of service.

6. What’s your investment philosophy?

It’s important to ensure you have the same investment philosophy. Here’s why: “You have to believe in what they’re doing to stick with it, When financial advisers really do their job is when the market is down and they can convince you to stick to the same page, so you don’t sell at the bottom of a market cycle.

It’s also important to make sure you and your adviser align on investment style. For example, if impact investing is important to you, you may want to ask whether or not your adviser will be able to help you create a portfolio that aligns with your values.

Also ask: Who are your typical clients? Find an adviser who is used to a situation like yours and able to help you meet your goals.

7. What asset allocation will you use?

You’ve heard how important it is to be diversified, right? Your asset allocation is how you create a diversified portfolio. This is what drives most of your returns.

Depending on your age and whether you are investing for income or growth, you probably don’t want someone who is just going to pick U.S. large-company stocks, your portfolio should include domestic and international stocks, and small-, mid- and large-cap companies.

8. What investment benchmarks do you use?

Advisers should use benchmarks that directly relate to what they’re invested in, or be able to explain why they don’t.

Some managers will use a “straw-man benchmark.” For example, the adviser says: “My goal is to beat the Standard & Poor’s 500.” This means the adviser will compare performance to the S&P 500 as a measure of his or her performance.

9. Who is your custodian?

Ideally, your financial adviser has hired an independent custodian, such as a brokerage, to hold your investments, rather than act as his or her own custodian — à la Bernie Madoff, the notorious financial advisor who defrauded clients through a multibillion-dollar Ponzi scheme.

That provides an important safety check. If your adviser sends you performance information … and it tells you how much the adviser says is in your account, you should be able to go online any minute and double-check.

10. What tax consequences do I face if I invest with you?

This helps ensure the adviser has your tax bill in mind when making financial decisions. And asking about taxes and fees is a way to explore what your estimated net return might be.

11. Bonus: Can the firm your financial adviser works for be a trustee for your trust?

This can be important if you are setting up a special needs trust or if you are putting a large sum of money into a trust for a minor. It is often very beneficial to have a professional trustee both for professional oversight but also for continuity if the beneficiary is young and the funds in the trust must provide care for many years. This can occur for example if a minor is the recipient of a large lawsuit settlement. A corporate trust manager such as Garden State Trust or Peapack Gladstone Bank and Trust are two good examples of professional trustees that can not only manage the money in the trust but also do all of the accounting and reporting as well as prepare and file tax returns. A corporate trustee usually does not charge any additional fees for this service if the funds are under the management of the trust company. If there is a separate financial adviser who is managing the money, a typical fee might be 3/4 of 1% annually (charged monthly). Such an arrangement can provide a great deal of oversight to your funds and ensure your financial adviser is not overcharging you and is making sound investment choices.

What they are: An investment adviser is an individual or company who is paid for providing advice about securities to their clients. Although the terms sound similar, investment advisers are not the same as financial advisors and should not be confused. The term financial advisor is a generic term that usually refers to a broker (or, to use the technical term, a registered representative). By contrast, the term investment adviser is a legal term that refers to an individual or company that is registered as such with either the Securities and Exchange Commission or a state securities regulator. Common names for investment advisers include asset managers, investment counselors, investment managers, portfolio managers, and wealth managers. Investment adviser representatives are individuals who work for and give advice on behalf of registered investment advisers.

So in plain English – there are advisors who are nothing more than stock brokers and then there are Advisers who are true planning professionals.

Choose Wisely.

When making your choice of financial adviser, do it very carefully. Interview more than one potential adviser and ask each one the questions above. Then, consider each potential adviser’s answers carefully.

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Todd Murphy

Todd Murphy is an estate planning lawyer in Morristown New Jersey where he helps modern families of all ages plan for the future.

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