The financial world is a tricky one to negotiate. Sometimes it can feel like there is someone looking to advantage of you at every corner. You can go in asking for advice and you leave with a string investments you never knew you wanted. While it’s true that these people exist, and probably too many at that, the financial world does have its fair share of good guys. You just have to ask the right questions to make sure.
Are you a registered investment adviser?
This may sound like a strange, even embarrassing question to ask, but you are not asking it to catch them out or expose them as a fraud. For some reason only known to the financial world, a person can have a dual role as both a broker and a fiduciary. So how can they be unbiased when their main goal surely is to get a commission out of you? That’s a very good question and no doubt there is a conflict, but the fact is that dual role is currently still legal and all you can do is ask them directly: are you a registered investment advisor?If they say no, just shake them by the hand, tell them it’s nice to meet them and leave. They almost certainly won’t lie. If they are a broker and they say yes to your question they are putting themselves in more trouble than than it’s worth.
What would happen if you hired a advisor in the dual role of broker and fiduciary? Well put it this way, they would only serve your interests when they were advising you. As soon as they have finished, you potentially become their target for selling the latest product. It’s like they are Jekyll and Hyde, but without the excuse that they can’t remember the antics of the other.
Are you or your firm affiliated with a broker-dealer?
Again this question is designed to find out if these people are going to be solely advising you or trying to sell you so called great new opportunities. If they yes, they will probably try to sell you investments further down the line. You may want to buy investments at a later date, but of course it is much better for you to go freely to a broker of your choice. Often you can find out their role without having to speak to them. Just go to their website and look what it is says about them at the bottom of the page. If it mentions anything about the FINRA (the Financial Industry Authority) or the SIPC (Securities Investor Protection Corporation) the chances are they are a broker. You are welcome to hire their services as a financial advisor if you want, but let’s face it, all they do, and naturally so, is steer you towards their own products.
Does your firm offer proprietary mutual funds or separately managed accounts?
These questions are important because these financial advisors have all sorts of ways to lead you in to parting with your money. If they answer yes to this question it would likely mean that in some point in the future they will be trying sell you either a propriety mutual fund or a separately managed account – two things that you never knew you wanted and needed so badly. Both choices will prove far more profitable for them plus – yet again – you cannot rely on them for unbiased advice. Make your excuses and move onto the next company.
Do you or your firm receive any third-party compensation for recommending particular investments?
If there is one question you want them to answer straight it’s do you or your firm receive any third-party compensation for recommending particular investments. You need to know that your advisor is not going to reap any rewards from your custom other then the satisfaction of helping you out. Some of these rewards such as kickbacks (receiving payments in exchange for them giving them your service) are illegal and of course they won’t mention any illicit activities to you. The only way you can make a good guess is if they answer yes.
What’s your philosophy when it comes to investing?
Once you have verified that they don’t have a side job in trying to sell you other products you can start to find out more about them. This question will help you understand if their philosophies are close to your own.
What financial planning services do you offer beyond investment strategy and portfolio management?
If you trust your advisor you may think about asking questions about your financial account and investments in your old age. This could be anything from pensions to college education for your children and even grandchildren. The more successful you become as you get older the more options are open to you.
You may find that the advisor is not able to offer much else other than put you in contact with someone that can give you the appropriate advice. If you feel more comfortable dealing with just one person, you may consider finding an advisor with more strings to their bow. In particular you would be advised to find one that can advise you on tax efficiency. Note that anyone with broker status is legally exempt from providing you with tax advice.
Where will my money be held?
You will obviously want your money in a secure place, which should always be a third party. With that in place, once you have signed a limited power of attorney over to your advisor, he or she will have the right to manage your money but not the right to take it out of your account. Additionally, it is your account, under your name, meaning that you keep the account no matter what happens between you and your advisor.