It’s interesting that most stockbrokers, financial planners, and insurance agents and their clients have a principal-agent problem. A principal-agent problem is a situation where the objectives of the employer (client) and the employee (advisor) simply don’t align. That is, the advisor doesn’t necessarily act to promote the well-being of his or her client. If a stockbroker is getting paid for each trade he puts in, he will get paid regardless of whether or not your investment performs well.
To address such situations, it is critical to choose your advisor wisely. At this point you might be wondering: “How do I know which adviser is right for me?”
Here’s how. Ask your advisor the following questions (and expect the following answers)!
- Are you always a fiduciary, and will you state that in writing? (Yes.)
- Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
- Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)
- Will you itemize all your fees and expenses in writing? (Yes.)
- Are your fees negotiable? (Yes.)
- Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)
- Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)
- Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
- Do you pay referral fees to generate new clients? (No.)
- Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)
- Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
- What is your investment philosophy?
- Do you believe in technical analysis or market timing? (No.)
- Do you believe you can beat the market? (No.)
- How often do you trade? (As little as possible)
- How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividendsor interest income, over the short and long term.)
- Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications aremarketing tools masquerading as fancy diplomason an adviser’s wall.)
- After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)
- Who manages your money? (I do, and I invest in the same assets I recommend to clients.)
Do you find this information useful? Have a similar experience? Let us know in the comments. If you have any other finance questions, you can tour our Finance Forum or connect with our partners at our Finance Directory.