Chances are, if you have a some money in the markets or in an IRA, you have a broker or, perhaps, a financial advisor. It’s probably someone assigned to you by your brokerage or a friend of a friend in the business.
And it’s likely that you have no idea how your broker makes a living. Fair enough, since your broker probably doesn’t know much about your particular line of business, either.
Except that it’s not fair at all. You get paid by an employer who is careful about how you spend your time and how you are incentivized to perform. Your broker is employed, too, and not just by a bank. Your broker also works for you, the client.
Do you keep tabs on his or her activities? Do you understand how your actions might incentivize the advisor to perform on your behalf? If not, here are five questions to ask your financial advisor right now:
1. Are my investments really suitable to me?
“Suitable” is the key word here, and it’s inscribed in law. A broker should be recommending investments, be they stocks, bonds, funds or even cash accounts, that are suitable to you. A near-retiree shouldn’t be dabbling in leveraged commodities trades, and a young person with a long time horizon shouldn’t be sitting in cash. Get your broker or advisor to explain exactly why each investment you own truly is suitable to your situation.
2. Who pays you besides me?
This is a biggie. You probably recognize that your broker collects commission for trades done on your behalf. But does he or she get paid for recommending a specific mutual fund? Is that fund in fact the best choice for your personal investment goal?
3. Do you manage my money, or does someone else?
Brokers once subsisted on commissions and had to do a lot of trading to manage client portfolios, activity that might have been warranted and might have been just for the purpose of earning commissions, a practice known as “churning.” Today, most brokers take in assets and then hand them over to a professional manager at their own firm. Who is that person? What do they know about your and your goals?
4. Are you a fiduciary?
Another biggie. A fiduciary is very different from a run-of-the-mill broker. He or she is bound by the law to put your interests ahead of his or her own, not just to seek out generally “suitable” investments. Some advisors who are fiduciaries charge by the hour and some charge a percentage of your total portfolio for continuing guidance. Find out which and make sure you understand those costs.
5. What is a reasonable return from my investments?
No advisor should ever be promising you a specific return. Why? Because it’s misleading and opens them up to legal problems later on. Be very wary of anyone touting market-beating numbers or any numbers at all. Rather, focus on the overall cost of their advice and how well that advice lines up with your own expectations of risk and reward.
Markets go up and markets go down. A diversified portfolio of inexpensive index funds can get you where you need to go with a minimum of surprises and a minimum of risk. You can get a really great risk-adjusted portfolio for a surprisingly low price — if your advisor is playing it straight.