3 Investment Advisor Questions

Investment advisors are licensed people who can provide very specific recommendations on how you should invest. I don’t just mean “buy and hold” or “dollar cost average” or similar – I mean they can (and do) provide very specific direction and recommend individual stocks, bonds, funds, diversification models, and everything else related to investing. They can also help understand risk tolerance and market fluctuations to help calm their clients during times of volatility. Often someone with an investment advisor will meet with them on occasion, listen to their recommendations, and say “sure, make it happen” and the advisor will execute the trades, taking care of everything for them.

Really, there isn’t much that an investment advisor does that most people couldn’t do on their own. BUT, there are a lot of things we could all do on our own that we don’t – sometimes for good reason. Most people don’t change their own oil in their cars, or do their own taxes, or cut their own hair. Sure, they could do these things with some studying, practice, and effort, but few do. Similarly most people are fully capable of doing the research to understand investing concepts and managing their own investment portfolios – but a large percentage of people don’t and they’d rather outsource it to a professional.

While I’m a huge DIY fan and think people should be more educated and involved than they are, it isn’t for everyone. In this case I’m certainly not against people working with an investment advisor. There are some things that they should know about that relationship though – that far too few (a scary low percentage) of people really understand. The topic is a pretty big one, but to get started, here are three questions that everyone should absolutely understand about their relationship with their advisor.

How do you charge for services, and how much?

Very few things in life are free, especially quality products or services by trained professionals. It’s the same case with investment advisors. They make money from working with you – as they should. They are trained and licensed, have to deal with a ton of compliance issues, experience decent amounts of business overhead, and of course need to feed themselves!

But when I talk to people about this topic very few people who work with investment advisors know how their advisor gets paid. No idea at all. Never even thought about it. They might get paid every time a trade is executed. They might get paid a percentage of the amount of money they invest for you. They might get paid bonuses for putting people into specific investments. They might even get paid by a combination of these methods plus others.

If you are paying for a service you should definitely understand how that payment is going to happen, so the first question to ask your financial advisor is: How do you charge for services, and how much?

How much did you make from my account last year?

While on the topic, take the next step and ask the second question: How much did you make from my account last year?

Again, investment advisors are professionals and need to be reasonably compensated, so expect that you are paying them. You should know how much you paid them last year though. And not just how much you paid them directly, but how much they made from your account. Perhaps you didn’t pay them anything but they got big bonuses from putting you into certain investments. That seems like something you should know, right?

If someone gets compensated for recommending specific products to you (as even we do on the site sometimes with affiliate relationships) that creates a potential conflict of interest. It doesn’t mean that the person is doing anything outside of your best interest, but it is something you should be aware of – and you should understand their policy on this type of compensation and how it might influence their actions.

This leads into the third question you should ask…

Are you acting as a fiduciary for me?

What is a fiduciary? Per Investopedia it is “a person or organization that owes to another the duties of good faith and trust. The highest legal duty of one party to another, it also involves being bound ethically to act in the other’s best interests.

Did you catch that last part? “bound ethically to act in the other’s best interests“. If an investment advisor is acting as a fiduciary for you then your best interests need to come ahead of their own. If the best investment for you is one that makes no money at all for them, well, as a fiduciary they need to tell you that.

On the flip side, if they aren’t acting as a fiduciary for you, then they are nothing more than a salesperson whose job is to sell you products so they can make money. This doesn’t mean that they aren’t recommending something that is in your best interests, it just means that they don’t have to. They would be free to sell you whatever product pays them the most.

Go as these questions now

Hopefully you understand how important it is to know the answers to these questions. If the thought of asking your advisor these questions makes you uncomfortable – get over it. It’s your right to know, and their legal responsibility to disclose, the answers to these basic questions.

There is a good chance (we hope) that the answers won’t cause any concern for you. Regardless you always want to be an educated consumer, and this certainly applies to financial services that you are paying for also.

Want Help With Investing?

As a fee-only financial advisor, I can help you clarify your dreams and priorities, then develop an actionable plan to achieve your goals. Having a financial plan for your life includes much more than just investing, but intelligent investing is definitely part of the solution. Reach out and let's talk about how I can help you maximize your money to achieve the life of your dreams.