1. Are you a Fiduciary?
Believe it or not many financial advisors are not always required to put the interest of the client first. The only way to be sure that an advisor is held to this higher standard is to ensure that they always will act as a fiduciary.
A fiduciary is the gold standard and it simply states that the advisor will always put the best interest of the client first. There are a few ways to ensure this, receiving an actual signed fiduciary statement when you open an account, or for the advisor to have some credentials (CFP®, CFA…etc.) that require them to sign a fiduciary oath annually (see #5 below).
Fortunately, this is becoming less of an issue as more advisors move to adopting a fiduciary standard, but it is by no means ubiquitous. However, for a good advisor it should be a very easy question to answer.
2. How are you compensated?
Advisors can be compensated in many ways ranging from commissions to asset-based fees to retainer/hourly fees. While none of these methods are wrong per-se, you want to ensure that the advisor’s compensation is linked to your success.
This is why I take an asset-based, fee-only approach, which means that my fee is based on a percentage of the account value. This way if the account goes up, that percentage is now charged on a higher amount meaning I make more, but if their account goes down, I make less. I believe this is the best way to ensure that the advisor and the client are on the same team.
While commissions are not necessarily wrong, they do have many inherent conflicts of interest. For example, many people using commissions will need to sell you something or have you do something in order to get paid. This is not always the best option, many times keeping a fairly stable portfolio of low-cost index funds or individual bonds is the vastly superior choice, but a commissioned advisor would be compensated more for using higher cost mutual funds or recommending a complicated and unnecessary product like an annuity.
So be sure to understand exactly how they are compensated as it will reveal what the underlying motivation is most of the time.
3. What is your “All-In” Fee?
Surprisingly few people know what their advisor is actually charging them, and when they do know it’s normally just the advisor’s fee. Even fewer know their “all-in” fee which typically includes the advisor’s fee, the cost of the funds being used, and any commissions paid on trades.
This is important because it can lead to major differences in cost to the client. Here’s an example to show how much of a difference it can really make:
In this case both advisors charge the same 1% fee on a $700,000 portfolio, however we use our set of pre-screened, best in class ETFs which have a weighted cost to the client of only 0.08%. Advisor B uses actively managed mutual funds which can have a cost of 0.75% - 1% or even higher sometimes. Even assuming the low end of that range, the difference to the client comes out to be almost $4,700 per year in the above example!
Unless those actively managed funds are making up that difference with returns (which they typically don’t, they actually typically underperform) the client of Advisor B would end up with a significantly lower portfolio value, especially over a 10+ year time horizon.
Another important factor to understand how that advisor’s fee (the 1% in the example above) is actually charged. Many firms do a “layered fee” where the first $500,000 is charged at a higher percentage (1.5% is common) then the next $500,000 would be charged at 1%...etc. This means that many people may think their fee is 1% when the actual fee is a blend and closer to 1.25%+. At Anfield we never do that, whatever percentage we charge, we charge it to dollar one. Here’s the numbers on that in a similar example:
As you can see in this example, just by not layering our fees we could save the client $2,500 per year alone.
These two items could cost you thousands of dollars per year, so make sure you ask about all the details.
4. How many clients do you work with?
When I left my previous job, I managed almost 280 accounts for my clients which was simply too much. Many advisors out there will frequently be working on 200+ accounts and the simple truth is that you do not have the time to customize and personalize portfolios and plans for that many clients. What happens is many times clients are lumped together based on age and risk tolerance and put into a model portfolio which may or may not be best for them but makes the advisor’s job much easier and allows them to have more clients and therefore increase revenue.
I firmly believe that no advisor should work with more than 100 clients at a time. I limit my book of business to just 75 clients, as I believe that allows me to give the personalized attention that each client deserves, which ultimately leads to a much better experience.
Therefore, I would recommend that you look for an advisor that works with a smaller group of clients, and to also inquire about how they build portfolios and whether or no they personalize their services to your needs.
5. What are your credentials?
There is a whole litany of possible designations out there for advisors to have and sometimes it looks like alphabet soup after their names. I’ve had many people ask me which ones they should be looking for. I tell them the important questions to ask are:
1. What did it take to earn those credentials and
2. What do they actually mean in regard to how you work with clients?
I may be a bit biased here but typically the top credentials to look for in a financial advisor and investment manager would be the CFA (Chartered Financial Analyst) or CFP® (Certified Financial Planner). To answer the questions above, the CFA took 3-4 years of near full-time study and a deep knowledge of portfolio management. The CFP took a year of classes and another half year of in-depth personal finance study. To answer question 2, in order to use the CFA or CFP® you must sign a fiduciary oath each year and complete 20+ hours of continuing education.
Many advisors will advertise their credentials, but there is now a whole industry of “weekend credentials” which allows some advisors to get letters after their name after just a brief lesson or a simple test (along with a large fee) and many clients don’t know the difference. Don’t just assume an advisor is credentialed because he or she has letters after their name, rather ask them a bit more about them to ensure they are a good fit for you!
6. Who is your Custodian?
Most advisors will have their client’s money housed with some sort of custodian, whether it be a bank or a big financial firm. These custodians are who actually hold your money and provide the statements, tax reporting, and online access.
It’s very important to be sure you know who your advisor’s custodian is and to ensure that you can access your account without having to go through the advisor every time. It’s important because it provides protection against a Bernie Madoff type situation since you have an independent third party sending you detailed monthly or quarterly statements showing exactly what happened in your account, and you have 24/7 online access to be able to check in on your account whenever you want.
If your advisor can’t give you a straight answer on this, that could be a sign of an issue.