Important Questions to Ask Your Financial Advisor

All above-reproach financial advisors want you to know how they operate. They welcome detailed questions about the ins and outs of the investments they suggest and the expenses you will incur. Despite the awkward feelings, you aren’t being disrespectful by asking.

What are the tricks to get started? The way you ask the question can make a big difference. No need to be confrontational, just be transparent. Ask straightforward, curious questions. Work to create safety for the other person.

  • “I’d like to be clear about how you’re compensated for the work you do for me.

How much of your compensation comes from my direct payments to you, how much from fees on my investment, and how much is paid to you by the investment product?”

Again, your goal is to create a conversation that allows them to just tell you about their arrangements—no accusations from you, no defensiveness from them. Another neutral question might be:

  • “I’ve heard that it would be helpful for me to know if my advisor is a fiduciary or not? Can you explain the difference, and are you?” (Fiduciary means your advisor agrees to put your interests ahead of their own.)

They may make it hard for you, “Don’t worry about it. The fee isn’t coming out of your pocket.” This is the wrong answer. You may not write a check or hand over your credit card, but you are indeed paying. A Wall Street Broker laid it out this way. “An investor who paid 2% in fees each year would give up more than $178,000 over 30 years, almost as much money as the $180,000 deposited in the account during that time.”  That amount of money is probably worth being a bit uncomfortable over!

If their answer is vague, they change the subject or don’t give you exact amounts, you’ll need to be even more straightforward. Again, keep in mind that a straightforward approach is the one that highest quality professionals prefer you always use, and they will also use it back. Try these questions:

  • “I always want to know how my finances work, so please explain in detail the way you get compensated.”
  • “I’m uncomfortable with not knowing the details. Please make them clear for me.”
  • “How much money will you personally make in cash commission now, if I select this product? And how much will you make later, in any sort of ongoing or trailing commission?”
  • “Are you earning more from selling me this product than you might if you put me in a similar product from a different company?”
  • “Is there a bonus you are eligible for that comes as a result of this sale? Is your bonus less likely if you don’t make this sale?”

It may be uncomfortable to ask questions but it’s your right to know. For some people a light tone might be more comfortable, “Where are you going to go if you win the incentive for selling this product?”

Try asking your questions in writing.

Writing your question may be more comfortable. As a bonus, a written answer creates accountability for the advisor and lets them know you’re on top of things. If you don’t get a straightforward answer the first time, ask again until you do. Keep politely asking until you clearly understand.

If you feel uncomfortable and stuck, think about any question you might use to open up the conversation:

  • How often do you monitor my investments?
  • Why does this product benefit me?
  • I don’t understand this portfolio. Please explain it to me.
  • Please explain why you have me in this alternative allocation?

 Still stuck? You can ask your other advisors for help. Request that your attorney and other advisers talk with one another. They should all be willing to keep each other in the loop. If someone isn’t, you can ask the others to help correct that situation immediately. (Many of the best advisors suggest having your team work together all the time—so efforts are coordinated in your behalf.)

It’s easy to let things slide and stay with a professional who may not be working in your best interests.

If you’re working too hard, it may be a clue that your advisor is not the best fit for you. If after a couple of tries you can’t get the information you need, it may make sense to interview another advisor to find someone who is easier to talk to.

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Money conversations can be uncomfortable—so we tend to avoid them, approach them with trepidation, or use language that’s pushier than necessary. We can help you help you get more comfortable talking about money and craft conversations that work in your best interest.

We coach key personnel, train teams and work with people of wealth on dealing effectively with the emotions raised by money-related issues. You can get more comfortable so formerly awkward conversations no longer feel awkward.

For more information on fiduciary responsibility:

  1. Watch an interview I did with a fee only advisor, Gavin Morrisey.

  1. You can also check out John Oliver’s Fiduciary and The Retirement Challenge on You Tube. Language is crude at moments so don’t watch with young kids. I wonder if John Oliver can have clear, open conversations with his financial advisors?!

Is Your Financial Advisor Working in Your Best Interest?

Not all financial advisors are created equal. Nor are their fees. The issue that you may need to discuss with your advisor is how they receive their fees and how that may affect whether they lean toward serving your best needs or theirs.

Are you aware that many advisors are not required to make the choice that is most financially beneficial to you? Want to know if yours is? Ask whether they are following the fiduciary standard or the suitability standard. Find that tough to ask? There’s that sticky stuff we feel around money.

Let’s start from the beginning.

  1. Many advisors at brokerage firms are paid commissions to sell you products that the firm makes money from.
  2. Some of these advisors are good. Unfortunately, many are just good sales people whose advice is influenced the commissions they get paid.
  3. What makes an advisor money may not be the best choice for you. It may cost you more to buy a product that is no better for you than one that would leave more money in your account (for college, retirement or whatever you are saving for).

You need to ask your advisor which standard they are operating under—fiduciary or suitability. The question might feel to them or you like an accusation because money seems to do that to questions. This is a very important question to get comfortable asking.

  1. The fiduciary standard for Registered Investment Advisors (RIA), or an ERISA appointed Fiduciary, requires that the advisor put your needs ahead of theirs. The fiduciary standard requires that you hear about lower-fee options, if the lower-fee product is of equal quality. Advisors who are fiduciaries must:
  • Put the client’s best interest first.
  • Act with prudence; that is, with the skill, diligence and good judgment of a professional.
  • Not mislead clients; provide full and fair disclosure of all important facts.
  • Avoid conflicts of interest. And if conflicts are unavoidable, they must fully disclose and fairly manage in the client’s favor.
  1. Broker dealers, insurance salespersons or any other financial company advisors are required to apply a suitability standard.
  • They must know you and your financial situation.
  • They must recommend products that are suitable for your situation.
  • They can sell you products that result in them receiving a higher commission than for a comparable product.

If you’re not comfortable asking about fees and professional standards, you could lose a lot of money. The higher fees you pay may be invisible today, but result in dramatically less compounding over the time you own the stock, bonds, or other investment vehicles. Your discomfort may cause your portfolio to be worth thousands, or tens or hundreds of thousands less than it could be.

The other question you need to be able to ask is whether your advisors is fee only or fee based.

Fee-only advisors (look for RIA or ERISA) don’t sell products, don’t accept commissions and operate as fiduciaries.*

Fee-based advisors can sell you investment products for commission.

Again, discomfort in asking questions can cost you way too much!

More information:

  1. Watch an interview at the end of this article that I did with Gavin Morrisey about fees you may be paying your advisor that benefit him/her more than you—and what you can do.

Gavin is former Senior Vice President, Wealth Management at Commonwealth Financial Network and now managing partner at Financial Strategy Associates, a financial services firm in Needham, MA. He and his firm are independent, fee only advisors who will answer any and all your questions.

  1. Check out John Oliver Fiduciary and The Retirement Challenge on You Tube!
  2. Search the Web: There’s a lot of information how financial advisors get paid. In fact, that search led me to many interesting videos and articles.

Don’t avoid money or fee related conversations. If you want to talk with your advisor but feel uncomfortable, we can help you craft a conversation or email that is respectful and helps protect you.

Whether you’re an attorney, or other service professional thinking about raising fees, a dental office aware of the benefits for patients and your business if your team could talk more comfortably about costs, a parent who wishes he/she could talk with adult children about inheritance plans or family business, an adult child who fears approaching the conversation with parents for fear of seeming greedy, we can help you craft conversations that matter. Let us help you get more comfortable talking about money.

Kind of a P.S.

I know this article was long—and yet here’s more. More reasons to be wary. For those of you who have the bandwidth to keep going:

When I was doing research for this article, I came across these powerful and disturbing information-articles that highlighted kickbacks, contests, incentives for advisors. Here is just one of them. The bold is my emphasis.

From CNBC confessions from financial advisors    Friday, 20 Jun 2014

Most investors know their financial advisors take a percentage for managing their portfolios, but they probably didn’t know the mutual fund industry is also giving these advisors commission for pushing specific equity mutual funds, unbeknownst to investors.

I’m not talking about front-end load fees. I’m referring to commissions and bonuses that financial planners get after they put their clients into these funds.

The industry and SEC call these payments “commission” but in reality, they are a “kickback” or “incentive” for financial planners to push specific equity funds, even if they are not in their client’s best interest. This payment structure raises ethical and legality concerns on whose interest is being served: the financial planner or the client.

Even more disconcerting, most investors don’t know this is happening.

I’ve seen how this works following two decades of working on Wall Street for well-known brokerage firms. This payment structure to financial planners is hidden behind a smokescreen that is covered by layers of payments through different sources. First to the brokerage houses, then to the brokers.

This hidden-fee structure was addressed in the Dodd-Frank reforms, which went into effect on January 1, 2014. Under Dodd-Frank, disclosures for “commission” or “kick-back fees” are now required for pension and 401k retirement accounts, but accounts that aren’t regulated by the Employee Retirement Income Security Act were excluded from the new law.

 

Money: Getting More Comfortable Asking for It

Our attitudes and beliefs about money are often based on fear and inaccurate assumptions, which “cost” us both financially and emotionally. And the longer we stay stuck in our mistaken and anxious money notions, the higher the price we pay.

Not sure if you have money issues standing in your way? Ask yourself:

Is there anyone you haven’t sent a timely bill to?

Are you avoiding raising your fees because you aren’t sure how to explain them to your clients or patients?

Do members of your team stumble when they need to ask for retainers or recommend high-priced treatments or services?

Are you comfortable having salary conversations with team members?

Here are a couple of quick thoughts that my clients have found useful.

If you raise your fees or suggest high value/high priced services in an effective way, the odds are clients aren’t going to think what you assume they will. People I have worked with on fee and money issues have reported predicting that their clients would probably be thinking:

“Who does she think she is charging this much money. She wouldn’t be worth it.”

“That service wouldn’t be worth that much, no matter how good it was.”

Instead their clients eventually report that they actually thought:

“I would probably find a lot of value in talking with her.”

“That seems like a fair fee for the service. It’s a relief to find someone to help me move this forward.”

“That’s a lot of money, but I need to figure a way to manage it.”

Another quick way to check your personal degree of money comfort is to list some current “asks” or money conversations you want or need to have. Do you generally create a positive assumption, or a scenario where you’re rejected or rebuffed? Chances are that if you start with a negative assumption, your fears or avoidance are costing you money. You may be avoiding important conversations or communicating a lack of confidence. Either can be stopping you or your team members from dealing effectively with money issues.

Creating a new way to approach fee and money conversations can be as simple as taking a quick look at your negative tendencies around money and then creating new scripts that you can use to ease into more powerful money dialogues. We have seen clients try out new assumptions and suddenly find comfort talking about money and charging more reasonable fees.
Success is measured in many ways, but earning less than you’re really worth isn’t one. Don’t allow discomfort or old assumptions to stand between you and providing well for your family, your team and yourself.

I used to be dreadful talking with my clients about fees. If I can do it, you can too. Want a good laugh? Ask me about the fee-agreement I used in my first private practice! Want to have your own discomfort a thing of the past? Give me a call.

Making Meaningful Holidays Last All Year

Whether family income is $25,000 or $2,500,000, it is possible to fashion more meaning, purpose and fun in holiday celebrations. So this year be intentional about what you want to accomplish and find ways to involve your whole family, or work team. Here are a few things I’ve found important to keep in mind:

People Who Spend Money To Do Things Feel Happier Than Those Who Spend Money To Buy Things

Think about what you might do this year as a family. Listen to each person and decide on something that would be good for everyone. You might try an immersion program to learn a new language, cooking lessons, a play in New York, or a sports event.

Give Others an Experience

You can also create a cost-free experience by serving food at a homeless shelter, inviting a person in need to a holiday meal, or helping at a local animal shelter. These and many other activities create memories that last.

Share with Others

Giving to others is both a responsibility and a pleasure. Involve your children in your philanthropy by communicating what you do, “I’m going to donate money this year to support things I care about. Usually I give money to _________, _______, and _______. This year I’d like to hear where you think a donation would do the most good.

Children can get a quiet lesson in limited means, can help look for what actually works, and learn that certain organizations only exist because people give support, etc. Find a place they can donate their less used toys and electronics-
and give them the personal joy that comes with giving.

Bring it to Your Workplace

If your workplace holiday party is getting stale or too rowdy, create a different atmosphere-Invite families, bring in some simple entertainment, invite a few non-profits to join you and present gifts from you and your employees, together wrap small presents for a nursing home or hospital to give out.

Holiday traditions were created over the years by families and communities doing things that felt meaningful and fun. And each generation has a responsibility to bring fresh energy and renewed awareness to the celebration. What might you do differently this year?

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I also discussed this topic in the most recent episode of my monthly cable TV show, Shrink Rap. Click this link to watch it: http://cvp.telvue.com/player?id=T01497&video=176034