1. Are you held to a fiduciary standard when providing investment advice and constructing investment portfolios?
The only acceptable answer to this question is yes, as it means your advisor is required to act in your best interest. If an advisor can accept commission-based compensation (usually evidenced by holding a Series 7 securities representative license), then there’s no guarantee that they’ll always be held to a fiduciary standard. You can use FINRA’s Broker Check tool to see whether an advisor holds a current Series 7 license (as well as whether they have a clean disciplinary record). Finally, listen carefully for the term “fee-based”, which is often confused with the RIA “fee-only” model. Fee-based leaves the door wide open to potential conflicts of interest such as selling products and insurance.
2. How are you compensated? Do you receive commissions or share fees with anyone or anything you recommend to clients?
Fees are a critical component in building and managing investment portfolios. Unfortunately, fees can also create confusion because, in the retail world, it can be nearly impossible to understand the “fee drag” in a portfolio. Fee drag comes from many sources, including management fees, custodial charges, transaction fees and commissions and mark-ups, just to name a few. It’s important to understand the total amount of fees you will be paying before you make any decisions. Ask for a summary of fees including the initial fees for portfolio construction as well as ongoing fees. You should receive this information in a form that’s clear and easy for you to understand.
3. Will there be a team working with my family that can tailor an investment strategy to my family’s unique needs? If so, who is on the team and can I call them directly?
In general, it’s rare that a cookie cutter approach will work for everyone. For starters, most clients have existing portfolios; the initial transition usually requires planning and thought so that a new strategy can be implemented with low tax and fee drags. From an account management standpoint, large firms may appear to offer an impressive array of resources; however, it is often the case that no one on the “team” other than the broker and his direct employees will have direct interaction with your actual portfolio or family situation. While a team approach is important, it’s clear that you need to understand how the team members and business model will serve your family.
4. Is there a centralized investment committee and investment process that everyone in the firm follows?
A centralized investment committee and common investment process helps deliver the best thinking of the firm to each and every client. The challenge is combining this with customized portfolios for each client’s individual circumstances. Portfolios can be engineered in a centralized fashion using an institutional process; however, to incorporate a family’s unique needs it’s necessary to create a customized asset allocation and investment strategy. This customization allows a firm to optimize for legacy and tax issues, illiquid holdings and cash flow needs. It’s important, though rare, to find a firm that has the discipline and resources to provide this balance while serving more than just a few families.
5. Do you recommend any proprietary products when constructing an investment portfolio?
If a firm recommends or uses proprietary products, that is often a big “red flag.” Be sure to take a careful look at the track record of the products and ask in-depth questions about them. Sometimes proprietary products are used or recommended because they benefit the investment firm or broker, and may not be the best choice for the client. Be particularly cautious of situations in which the firm limits its clients’ investments to a select group of proprietary products, as often that creates a conflict of interest between the broker and the client.
6. Do you provide monthly reporting with portfolio benchmarks? If so, does it include benchmarks at the asset class level on a household basis?
We’ve all seen what the usual bank, brokerage, or custodial statements look like and how confusing it can be when accounts are spread out across multiple custodians. Having clear, concise, and useful consolidated reporting is an absolute must. Reports should be structured to help you understand progress toward your goals, your advisory team’s overall performance, as well as how each product is working in your portfolio. At a minimum, your reports should include a consolidated household overview that includes net of fee portfolio returns, a custom portfolio risk benchmark, and appropriate benchmarks for each asset classes. Additionally, as the asset allocation changes over time, the portfolio benchmark should be updated to reflect these changes.