Why, How, What: Three Questions You Should Ask Any Advisor

“We charge 150 bps to seek out alpha in diversified sectors of the equity markets…”

Many people are caught off guard when they sit down with a financial advisor, as if they hear a different language. The industry jargon is meant to both confuse and impress, putting you on the defensive in the hope that you will stop asking questions.

When engaging an advisor, you should ask three questions before you leave the room:

1. WHY aren’t I the priority?

Upon ordering at a restaurant, you ask the waiter for a recommendation. Under the suitability standard, they can offer up the fish. What they don’t disclose is that the fish is on its last day and the kitchen is pushing it.

Under the fiduciary standard, the waiter is obligated to recommend the Tuscan salad. Knowing you’re trying to lose weight for that Hawaii vacation next month, they recommend what’s in your best interests.

You don’t have to choose the fish or the salad, but there is peace of mind in knowing that you have someone who is legally obligated to look out for you.

Suitability: the advice meets the objectives and means of the individual.

Fiduciary: the advice is legally obligated to be in the individual’s best interests.

Questions to pose to the advisor:

• Are you a fiduciary?
• In what situations will you not be acting in my best interests?

2. HOW do you get paid?

A professional athlete signs one of two types of contracts—fully guaranteed or incentive-based. The guaranteed contract removes the concern of the fine print coming back to bite you. The incentive-based contract leaves the door open for ambiguity around the fine print and confusion as to what the player is paid.

Clients are beginning to recognize the conflicts of interest inherent in a commission-based system.

There are essentially two ways to be paid in the financial world: commissions and fees. Many in the financial industry believe matching a client to a product is worth a commission. However, in today’s market, educated clients are beginning to recognize the conflicts of interest inherent in a commission-based system.

The way to free yourself from conflicts around selling products is simple: choose an advisor that doesn’t sell them. When an advisor declares themselves to be “fee-only,” they are removing any ambiguity when it comes to compensation. A “fee-based” relationship sounds similar, but the two are not equal. A fee-based structure leaves a lot open to interpretation.

Questions to pose to the advisor:

• When we have a conversation, am I going to “buy your advice” or are you going to “sell me your product”?
• Are there are incentives tied into your decision-making such as receiving more compensation?

3. WHAT services do you offer?

Imagine putting a puzzle together without seeing the picture on the box. You are handed piece after piece without an understanding of what it is supposed to look like.

Now think about doing a puzzle as a kid and staring at the picture for a while, planning your attack. You group together edges and corners, then gather up all the blue pieces in the ocean, and the brown pieces of the boat. Managing the whole puzzle adds efficiency versus managing piece by piece.

If your advisor is looking to add value across your entire balance sheet, they will steer the conversation toward what is happening in your life.

When you sit down with your advisor, the conversation can be directed in one of two ways: account-specific or holistic. If your advisor makes money on investing your brokerage account, they are going to be sure to tell you how well that account did and why.

If your advisor is looking to add value across your entire balance sheet, they will steer the conversation toward what is happening in your life.

A holistic manager will find ways to add value to your entire net worth, not just the one account.

Questions to pose to the advisor:

• Are you just going to be looking at one piece or are you going to help us with the entire puzzle?
• Do either of us even know what the final picture is supposed to look like?

 People seek out advice on many subjects, but rarely feel confident vetting out the expert in the room. Now when you enter the room and hope to find a trusted advisor, you can begin the conversation with why, how, and what.