Important Questions to Ask an Advisor

by | Mar 4, 2015 | Asset Management, Investor Behavior

So you’ve found an investment advisor you’re potentially interested in working with, sounds great. What are the important questions you need to ask him or her before getting started? As an advisor, I know a few questions that investors absolutely need to ask. Unfortunately, these aren’t always the questions that get asked.

What Should I Be Asking a Prospective Advisor?

DO ask how much their advice will cost you. This is super important. Not only do you want to know how much their advice will cost you, but you also want to know if they receive any additional forms of compensation. Additional forms of compensation may include (but are not limited to) commissions, fees, kickbacks, bonuses, vacations, etc. Carl Richards, writer of a popular New York Times finance column, recently wrote:

“I suggest asking financial professionals two questions: How much do I pay you? And who else is paying you?”

It’s crucial to know whether you’re getting unbiased investment advice or being sold products. When somebody gives advice while also receiving compensation from a third party, it’s tough to believe their advice won’t have a conflict of interest baked into it. Do they really think that universal life insurance policy is necessary or do they just want the juicy commission attached to it? Ask them if they’re a fiduciary and also if they’re dually registered? Too many investors don’t ask the right questions, and end up regretting their hasty decision years later. I wish investors could simply trust that advisors will always do that right thing for them, but that’s not the world we live in. Do yourself a favor and find out how any prospective advisor will be paid. I recommend avoiding advisors with conflicts of interest, but that’s just my opinion.

DO ask about the prospective advisor’s strategy. While you might believe that investment strategies are a foreign language you’ll never understand, it’s really important to have a grasp on how your money will be invested. An advisor should be able to easily explain their strategy to you. Albert Einstein once said that:

“Everything should be made as simple as possible, but not simpler.”

We believe this applies to investing as well. If an advisor really believes in their strategy, they’ll be able to simplify it into a digestible, uncomplicated format and share it with you. The strategy should be something that you believe in and feel comfortable sticking with. No investment strategy is going to be the best every year. In fact, most strategies experience stretches of underperformance that can last longer than a year. That’s why you need to be sold on your advisor’s strategy, their ability to stick with it, and (most importantly) your ability to stick with it.

DON’T base your decision to invest off of last year’s performance numbers. I’m not naive, I know that most investors really only care about performance numbers. That’s why I’ll never stop stressing the importance of strategy over returns. A really excellent way to underperform over time is to jump around from strategy to strategy every year. Michael Batnick of Ritholtz Wealth Management did a great study last year that applies well here. He measured several different smart beta strategies vs. the S&P 500 from 2007 through November 18, 2014 (the date of his post). The results tell the story:

“What’s funny is that the only strategy that didn’t hold up to the S&P 500 is jumping from winner to winner. If every January you invested in the prior year’s best performing strategy, you would have substantially under performed.”

Investors need to find a method of investing that works for them. By “works for them”, I mean makes you feel as comfortable as possible. An investor’s best bet at long term success lies in finding their strategy and sticking with it. If you’re not willing to give a method time, you’re likely to be disappointed by the results.

It’s incredibly important to find out how any prospective advisor will be paid for their services. It’s equally important to find an advisor who utilizes a strategy you believe in. They should be able to provide details on their fees and strategy in a completely transparent and understandable format. Josh Brown of Ritholtz Wealth Management put it perfectly writing:

“Smart investors don’t obsess over performance track records, they ask about costs and conflicts.”


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