Hiring a financial advisor can be stressful. You’re trusting someone to help you accomplish one of – if not THE – most important things in your life. That’s why you need the leg up. And the best way to do that is to know what matters, what doesn’t, and the critical questions to ask a financial advisor before hiring them.
Seeing Through the Smoke and Mirrors
The institutions and Wall Street broker-dealers have spent the last century building their grandeur. And they want to hold onto that power, forever. As consumers have gotten smarter, the traditional industry has had to do a lot to cloud your vision from what’s really going on.
For example, a lot of people don’t even know what their investments are truly costing them. And costs matter – a lot. They directly impact your bottom line. When investing, you can incur fees and other costs at almost every turn, from the advisor fee, to the institution’s fee, to the cost of the funds in your portfolio (your expense ratio), taxes, and more. And unless you explicitly go digging, most of these costs will remain hidden from you.
They also try to saturate your brain with a lot of fancy terminology to describe those of us qualified to offer financial advice – broker, CFP, CFA, CMT, advisor, investment manager, financial planner, portfolio manager, and so on. Which combination of the alphabet do you choose? While you should do some basic investing research before hiring a financial advisor, I say ignore the words and letters. Instead, find out what this person actually does and how they conduct business. That’s what matters more.
The next few paragraphs will give you the most important bit of information you should consider when hiring a financial advisor – and that’s knowing the difference between an advisor and a broker.
Advisor vs. Broker: Who Has Your Best Interest at Heart?
It’s critical that you understand what I’m about to say – Most people 1) don’t realize that most advisors aren’t fiduciaries, and 2) don’t realize that they’re not actually working with an “advisor.”
Before the 90s, there used to be a known distinction between advisors and brokers. In fact, there’s still a hard distinction between the two – it’s just not known to most people. It was in the 90s when the traditional industry stopped calling their salespeople brokers, and started calling them advisors. Ever since then, they’ve done a good job keeping the catch-all “advisor” category alive and well.
The biggest distinction is that advisors are fiduciaries. This means they represent you, and are legally obligated to work in your best interest. No one else’s. They typically charge a flat fee of assets you have under their management, and that is how they’re compensated. Basically, they have zero to no conflicts of interest, because their loyalty lies specifically with you.
On the other hand, brokers are not fiduciaries. They work for an investment firm (commonly known as a broker-dealer), and are representatives of that broker-dealer. Not you, the client. Brokers are obligated to sell the products offered by that broker-dealer. When it comes to products, a broker’s standard is “suitability.” This means if an investment is suitable, but not necessarily the best or conflict-free, they can still sell it to you. They’re paid on commissions from the broker-dealer they represent, not by you. The need to sell among brokers is high.
The 5 Most Revealing Questions to Ask a Financial Advisor Before Hiring Them
There are numerous questions, theories, and strategies for picking an investment advisor. But I believe it really comes down to asking a few core questions that get to the root of what matters most – what this person stands for.
Here are what I believe to be the five most revealing questions to ask before hiring a financial advisor. Take these questions with you when you conduct your interviews:
1. Are you an independent advisor or a broker? Your first question should get to the root of whose best interests they represent – yours, or an institution’s. I started Jarred Bunch because I was passionate about making a difference in people’s lives – so much so, that I walked away from a cushy, six-figure job in corporate America to strike out on my own. I remember being so excited about building a company that was going to change the industry. On the day my business cards arrived, I looked on the back and saw in writing, “Scott Jarred is a Registered Representative of so-and-so big Wall Street broker-dealer.” This was the opposite of who I am, the opposite of what Jarred Bunch stands for. I couldn’t make money work for people – I was still working for and being controlled by the man. So, we broke free from the chains, and became an independent Registered Investment Advisory firm (RIA).
2. Who pays you? If they’re truly an advisor, their answer should be something like, “You pay me.” They should clearly lay out how they charge their fees, and disclose all costs associated with doing business. Down the road, if you decide to work with them, you should also ask for complete transparency on portfolio costs. Brokers, on the other hand, are paid commissions by the broker-dealer they represent. In addition to the conflicts of interest this can create, it can also cause them to jack up your advisor fees – they have to make money after the broker-dealer takes their cut off the top.
3. Are you legally obligated to act in my best interest? The answer to this must be yes. All the time, no exceptions. If they’re a true advisor, their answer will be yes. This is their duty as a fiduciary – they are legally bound to act in and offer solutions that represent your best interests. Brokers are legally bound by contracts with their broker-dealer, and must act in the best interests of that broker-dealer. Yet another red flag that they’re not a true fiduciary.
4. What is your firm’s history and current professional standing? In other words, you can ask to see a copy of their Form ADV. This is a registration document that advisors must submit to the SEC and to state securities authorities. Form ADV is divided into two parts. The first part discloses specific information about the Registered Investment Advisory firm that is important to regulators. This includes things like name, number of employees, nature of the business and so on. The second part acts as a disclosure document, and includes information on fees, any conflicts of interest that may be present, any disciplinary actions, if they act as a broker-dealer and more.
5. What do you think you can help me accomplish in the next three years that would make my life significantly better? During the interview, take the opportunity to outline your top priorities, and give the high-level overview of what reaching your full financial potential looks like to you. Note that you should be doing most of the talking when you get to this point. The advisor’s job should be to listen, and hear what value you’re looking for them to add to your life. Then ask them what specific steps they can take to help you get there – so that when you guys meet three years from now, you’ll feel like the time you’ve invested in this relationship has been worthwhile. Not only does it give you a glimpse into how well the advisor aligns with your values, but also gives you a clue as to whether they view the world with an abundance or scarcity mindset.
Why Does It Matter to You?
Two of the most important people in your life are your doctor and your financial advisor. Cliché, I know, but something that I believe.
In fact, think about hiring a financial advisor in terms of what made you pick your doctor. Would you have chosen them if they told you their loyalty lied with anyone but you, the patient? If they said that they have to represent the best interests of an outside group, not you? If they only offered you one treatment option, regardless of whether it was the best thing for you, because that’s what the group who controls them allows?
Heck no. So, why then, would you consider hiring a financial advisor, one of the most important people in your life, who conducts business this way?
That’s why it’s so important that above all, you ensure you’re working with a true advisor – not a broker using the traditional industry’s smoke and mirrors to make you think they’re an advisor. This means that you’ll have a fiduciary on your side – someone who’s bound to the same principle of “First, do no harm,” as your doctor. You’ll have hired someone who goes to work for you every day, and who you can count on to educate, guide and counsel you toward reaching your full financial potential. While it will be their job to listen to what it is you want, it’s their responsibility to protect your financial well-being. If you ask them to do something they believe would threaten your well-being, it’s their job to explain why you shouldn’t. Just like your doctor would do if you asked them to perform an unnecessary or risky procedure.
In the end, your decision for hiring a financial advisor comes down to what you value in a person who is responsible for playing this role in your life. After all, this is your financial life, no one else’s. But just remember, you get one shot at your financial journey. And failure is not option. So, I would caution you to hire wisely. I promise, if you find the right advisor, you’ll never want to leave them, because they’ll help you live the life you want.