Five Questions to Ask Before Hiring an Advisor

Are you held to a fiduciary standard of care?

This question should have only one answer - YES.  A fiduciary standard of care is the highest legal duty one party can have to another - quite simply, a fiduciary is required to act in your best interests at all times.  By comparison, brokers are held to a much lower standard of "suitability", which does not necessarily obligate them to act solely in your best interests.

How are you and your firm compensated?

This is a simple question, but the answer may surprise you.  Most advisors' compensation is some way tied to the products that they sell to you. This creates a potential conflict of interest, as it may be difficult to know whether the products being used are the best for you, or simply pay the highest commissions.  The only sure way to avoid this conflict is to work with a fee-only advisor who does not receive any product-based compensation.  Compensation for financial advisors is not always transparent, so be sure to ask for full disclosure.

Are you limited to certain proprietary products?

Many firms that advise individual investors may recommend (or even require) that their clients use proprietary investment products.  Again, this creates a potential conflict of interest between the client and the firm.  Your advisor should be free to survey a variety of options before selecting those that are best for you.

How important will I be to you and your firm?

Large banks and brokerages often have many lines of business in addition to investment management.  These businesses, including investment banking, commercial and retail banking, insurance, and/or proprietary trading, are unrelated to (and may even be at odds with) serving indvidual investors.  The fewer distractions your advisor (and the firm) has, the more confident you can be that you will get the level of attention and service you deserve.

How will we work together?

A truly successful advisor-client relationship involves a deep level of understanding and trust.  This trust can only exist if the advisor takes the time to fully understand your investment objectives and goals, as well as how those goals fit into the larger picture of your life.  Be sure that your advisor will be available to meet with you regularly, and that they have placed limits on the number of client relationships they have, so that you can be confident this will not change in the future.  Addtionally, ask to see the reports generated for clients - they should be clear and concise, but should also provide you with all of the relevant information about your accounts including your net of fee performance against appropriate benchmarks.