Being a financial advisor for the past 16 years, I know what lies behind the curtain in our industry. And, while things are slowly becoming more transparent, we still have a long way to go before reaching complete transparency.
As a consumer, though, you only know what you’re being told or at least how much you can find from doing your research on Google. The information is out there, but only so many people have the time to find out the right questions to ask.
Today, I want to shed a little more light on the financial services industry and cover 3 crucial questions you must ask your financial advisor. This goes for whether you’re working with one or you’re just beginning the search.
These are the questions I would want to know if I were in your shoes. These are the questions that will shed light on how much you’re paying, what you’re paying for, and if there are any conflicts going on behind the scenes you should know about.
Now, you’re not just asking what you’re paying your financial advisor. That is included in the question, but you want to know all in what are you paying.
So, let’s break it down to a few different questions. The answers will be in either a percentage or a flat dollar amount.
How much am I paying you, my financial planner, annually?
Am I paying commissions or a fee of some sort?
How much am I paying within the investments I hold?
Are there any transaction fees? If so, how much?
Is my account liquid or am I locked in?
Do I have to pay the custodian, where my account is being held?
Are there any other fees I am paying?
These questions will begin to open your eyes to what’s happening behind the curtain. Because, believe it or not, a lot of these fees can be buried in the fine print, and you have no idea they are even being taken out.
Once you have a total amount of all fees you’re paying, you need to determine if the value being provided justifies the cost. Whether you’re paying .50% or 5% you have to determine if it’s worth what they are providing. This takes us to our next question.
If investment management is their value proposition, then they should probably go back to the 80’s. Investments are basically a commoditized market, today. Financial advisors don’t have access to some top-secret investments nobody else can find. Most of the time, you could buy the same ones if you wanted.
Plus, with today’s technology, a computer can manage your investments. They can do a good job and typically charge a lot less. Don’t get sold on investment performance or believing they have a superior investment strategy. While it may sound enticing, rarely is that the case.
So, the next logical question that goes with this one is, why aren’t they providing other services or why don’t you know about them, and what their cost is if it’s not already included.
A true financial planner should provide, or at least offer to provide, comprehensive personal financial planning. This includes investment management, but that’s only one piece of the pie.
They should look at your entire financial picture. This includes cash flow management (budgeting), debt management, road map to financial independence, insurance planning (life, disability, health, auto/home, etc.), tax planning, estate planning, credit card recommendations, savings account recommendation, etc. The list goes on and on. Basically, anything you can think of that affects your personal finances and more.
While we are getting better at providing these types of services to our clients, we still have a long way to go. Many financial advisors are still caught up in the investments game, without paying much attention to everything else that’s happening in their client’s financial lives.
Granted, we have to get paid, but if you’re paying 2-3% every year, you better be getting a whole lot more than just investment management. I think you get the point. Let me step down from my soapbox, so we can move on to the final question.
In our world, you can either be a fiduciary or a broker. Here is a link to the official definition of fiduciary from Cornell Law, but know it’s the highest standard of care and what they are recommending is always in your best interest (rather than someone else’s).
A broker only has to recommend what is suitable for you, rather than what’s in your best interest. This is where the conflict of interest comes into play. Suitable can be a loose definition and easily argued.
When something is merely suitable, often, there’s some conflict of interest working behind the scenes. There’s a good chance they’re getting paid more for recommending one “suitable” investment over the other. Even though both are suitable, which one do you think they will suggest?
I’m not saying every broker is doing something shady behind the scenes, but it’s you not knowing whether they have the option that becomes the issue. Your financial planner must be transparent with you.
While I am biased because I’m a fiduciary and know what I’m recommending is in my client’s best interest, most clients have no idea this conflict even exists. So, ask whether they are a fiduciary for EVERYTHING they do for you. I emphasize everything because, believe it or not, they can be a fiduciary with some things and a broker with other things.
Yes, I know, it is confusing as hell. Regardless, ask the question and get informed.
Next time you sit down with a financial advisor, you MUST ask these three questions. If nothing else, it will provide you some insight and transparency to what goes on behind the scenes.
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein. NextGen Wealth LLC is registered as an investment adviser in the states of Missouri and Kansas, and is notice-filed in the State of Texas. As such, it may only transact business with residents of those states and residents of any other state where otherwise legally permitted subject to exemption or exclusion from registration requirements.
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