5 Questions You Must Ask Your Financial Advisor

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An important relationship in your life might be one you never think about. It’s the relationship you have with your Financial Advisor.  You might only see them once a year or perhaps not even that.  But they are looking after your money so you should get to know them a bit more.

If you don’t have one and are looking for one, it’s always good to interview a couple of people.  It’s just like hiring a babysitter, you want to make sure they are up for the job. Maybe you already have a Financial Advisor, it’s still a good idea to re-interview them so you can assess if they still fit your needs.

I’ve prepared 5 questions that you must ask your financial advisor to help you interview your financial advisor.

BTW, what’s the difference between a Financial Advisor and a Financial Adviser anyway? Read on to find out!

Financial advisor is a very broad term and job title. In turn, the services they provide will be very varied too.

These questions are designed to help you understand what services they are offering and how they can help you reach your goals.

The first question you must ask your financial advisor: Are You Registered With the Securities Commission?

If yes, are you registered as an adviser or a dealer?

The Securities Commission is the government regulator for investments, from those who issue them to those who sell them.

They put in place certain requirements for financial advisers to make sure they have sufficient knowledge and experience to give proper advice to investors.  For example, in Canada, the securities commission is based on Provinces, but their requirements are similar, Registrants are to have earned the CFA designation and have at least 4 years of relevant experience working under the guidance of an existing Registrant.

This type of Registrants is called “Advising Representatives”.  These individuals are licensed to provide advice regarding investing and investments.  Advice like if you should invest in this or that, if you need more equities or bonds in your portfolio and if this fund is right for you. They are required to act in the best interest of their clients and not their employers or even themselves.

There is another type of registration at the commission and that is the “Dealing Representative”.  That registration means that this person is authorized to sell you products and has sufficient knowledge of the investments and the market.

You can find a quick reference guide to the types of registration here.

If they are not registered with the securities commission or even with an industry self-regulatory body, then they are really just salespeople with the title of “Financial Advisor”.

The upshot: Financial Advisers are registered and acting in your best interest (Fiduciary).
Financial Advisors are there to offer you products to choose from.  They have no obligation to act in your best interest.  While many Financial Advisors are good, honest people, there are going to be bad apples who just wanna make a sale.

 

The second question you must as your financial advisor: Are the Investing Services You Offer “Discretionary” or “Non-discretionary?”

 

Non-discretionary

The term “discretion” means who is controlling the transactions in the portfolio.  Who is making the buying & selling decisions?  If it’s you, then they are offering “Non-discretionary” services: Financial Advisors do not have decision making powers.

It would look like this; you meet with the Financial Advisor and they ask you if you want to be in Fund A or Fund B after telling you about them.  In this case, you choose; you think Fund B is more suitable for you.  Or if you get a chunk of money and you tell them that you want to buy stock ABC with that money.

Discretionary

If on the other hand, your Financial Advisor makes all the decisions in the portfolio (where you don’t have to sign anything besides the account opening paperwork) and reviews the results with you annually, then they might be offering “discretionary” management.

Neither one is better than the other, it’s about what level of control would you like to have.  Some people can’t be bothered with the details.  They just want to sail in a general direction and want someone else to do all the thinking and deciding.  Others want to have a say in every decision.  It’s a matter of personal style.

The conflict would be if you didn’t want to make any decisions, maybe because you don’t know enough about the markets, and you are with a non-discretionary Financial Advisor.  And because they didn’t ask for your direction and you don’t volunteer any, no decisions are made.  Or worse situation would be where your Financial Advisor is trading on your behalf when they don’t have the authority to do so.

The third question you must ask your financial advisor:  What Are Your Qualifications?

 

The investment industry and finance, in general, have dozens of certification programs and designations.  Some are more relevant than others in terms of investing.  The number of letters after a person’s name is not an indication of if they are a good Financial Advisor or not.

However, you do want to look for someone who does have training that is industry-based and not company based. If they say they have a lot of training by their financial institution, that means they are only getting 1 source of information.  And while the Financial Advisor may be very well-meaning, they may be getting very biased information.

Another reason to understand more about their qualifications is to know if they are wandering outside of their expertise.  If they have qualifications in the mutual fund industry, that doesn’t mean they should be offering you tax advice.  Likewise, someone who’s qualification is in accounting isn’t allowed by the Regulators to give you investing advice.

It’s also a good idea to ask them how they are keeping up with the industry.  Since things are changing all the time, especially with technology, some financial concepts and theories get disproven or a better theory might be proposed.  Whether the Financial Advisor uses these new theories is not as important as knowing about them so they can make that analysis.

Another question you must ask your financial advisor: In Your Investment Recommendations, Which Products are Sub-advised or are a Fund of funds?

 

Most Financial Advisors you meet are not picking stocks and making buy & sell decisions when not in meetings with you.  Those decisions are often delegated to a dedicated team within their company.

Those dedicated teams are specialists at what they do and have a lot of experience and expertise.  So much so that sometimes other firms want to tap into that.

Sub-Advising

In order to do that, the second company creates a fund but might have another company’s dedicated team make the decisions.

Sometimes this is the best decision since that company didn’t have the expertise in their own employee pool, they went out and got that expertise.  But of course, when you contract out, you have to pay for that expertise.

This adds a layer of fees to the fund because now, 2 companies have to make money instead of just 1.

 

Fund of Funds

A Fund of Funds is what it sounds like.  They are funds made up of other funds.  Most Target Date Funds are this type.  I think of them as that the fund did the slicing and dicing and then packaged it all up for me.  They are very convenient since everything is done for me.

But again, sometimes there is another layer of fees that’s not obvious.  The Target Date fund might have a fee for itself, and all the slices of funds inside might also have fees too.  You never see these fees because they are part of expenses that are deducted from the total value and not counted as “management” since the provider of the Target Date fund isn’t doing the “management” themselves.

The most important question you must ask your financial advisor: How Are You Compensated and What is Your Bonus/Incentive Structure?

 

This question is the most complicated, but in some ways, the most important of all.  Because Financial Advisors are all human and influenced by rewards and money.  That’s not a bad thing.  But we have to make sure the person we are working with is incentivized to provide the service we need them for.

Things that might influence the type of service or product is commissions and trailer fees.

 

Commissions and Trailers

Commissions are a form of direct compensation where a certain amount is paid to whoever makes the sale.  It doesn’t really matter what the sale is, just that they made it.

Trailer fees are a series of commissions.  They are attached to certain fund products or clients.  Almost always invisible to the investor, these are behind the scenes payments that reward the Financial Advisor for keeping a client in a certain fund or in a certain department/company.

Fee-Only and Assets-Under-Management

Some Financial Advisors are “fee-only” meaning that you are paying them each time you interact with them.  They are not rewarded by selling you any product and are just looking to match you up with the right product.

Other Financial Advisors charge you based upon your “assets-under-management”.  This means that they charge you a small percentage calculated based on the size of your portfolio.  If your account grows, their compensation grows to – in direct proportion to how much your portfolio as grown.  In this way, their interest is more inlight with yours as you both want higher market values.

There is a general thought that commissions and trailers are bad and fee-only is good.  But those are generalizations.  If you have discretion over your account and you don’t do a lot of trades, then a commission-based approach might work.  If you need a lot of investment advice and a lot of interactions, then the fee-only approach can get expensive over time.

 

In the End, What It All Boils Down To

There are no ‘right’ or ‘wrong’ answers to any of the questions. They are to help you understand where the Financial Advisor is coming from and what exactly are they offering. This way, you can evaluate if they have what you are looking for and are a good fit with your style and will be able to help you achieve your dreams and goals.

Download these questions and another very important question to ask your Financial Advisor.  Bring this cheat sheet to your next appointment.