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Working With a Financial Advisor Starts With Asking The Right Questions.

By Jennifer Thompson

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September 18, 2020

Working with a good financial advisor can make a huge positive impact on your future. We hear countless stories of clients who have lost their savings to dishonest advisors. And complaints about advisor incompetencies. Educating yourself on the financial services industry may help you select an advisor you can trust to help you build your net worth and achieve your financial goals.

 

Jennifer Thompson Compelling 365

As we enter another period of tremendous volatility and economic uncertainty triggered by this pandemic, working with a good advisor can make a significant impact on your financial future. Working with an advisor is most beneficial during periods of volatility.

Jennifer Thompson Tolerance for Volatility

 

Whether you are working with one or not, these are five questions to ask your advisor:

 

What is her licensing? And her fiduciary duty to you.

Working with a financial advisor

The financial services industry is broad, from mutual funds to individual equities, foreign exchange, and insurance. To be able to advise and sell each of these requires a different set of accreditation and licensing.

It always starts with you and what you need. What are your financial needs? What stage in life is your household? Are you just starting your career? Do you have young children? If you have a young family, you may not have had time to build sufficient wealth to care for them, should you die or become disabled. Your Insurance needs may be paramount at this stage in life.

JENNIFER1 THOMPSON

Are you a savvy investor, and all you need is someone to bounce ideas? Then you may require an advisor with a different set of licensing. Know what you need and hire someone who can deliver to those needs – both in their accreditation and licensing.

Working with a good financial advisor is working with someone who has your best interest at heart. This is key! A fiduciary duty obligates an advisor to act solely in the client’s interest. Not all advisors have a fiduciary duty towards their clients. Work with someone who does. It protects you when the parameters are clear.

How is she compensated?

Does her firm compensate her with a percentage of the assets she manages? Or is she receive a commission for transactions on an account? Or is she paid a salary regardless of how you chose to invest? Does this even matter to you?

Generally, you don’t pay for advice. You pay a fee to the financial firm to manage your assets or purchase one of their products – whether it is an insurance policy or an investment. It does not necessarily mean your advisor won’t be objective. But you may want to be aware of how your advisor is compensated.

What is her investment philosophy?

Your advisor’s investment philosophy is critical when it comes to providing investment advice and building a portfolio. Does she fall for the latest fad? Or is she focused on your investment goals and your risk tolerance? Many advisors are compensated more for new issues. If you find your advisor regularly calling you to promote a new issue, you may want to question him.

You want an advisor that proactively calls you to deepen the relationship so she knows more about your household financial goals. You will want to ask her how often she connects with her clients.

How are the accounts insured? 

Jennifer Thompson Advisors

Most financial institutions pay a premium to protect accounts (up to a certain dollar amount) if the financial institution is facing insolvency. For example, The Federal Deposit Insurance Corporation (FDIC) protects your accounts up to at least $250,000 for an individual account and up to $500,000 for a joint account if an FDIC-insured bank or savings association fails.

Jennifer Thompson Compelling 365

Photo by Austin-Distel

The FDIC does not protect accounts that hold investment assets such as stocks, bonds, and mutual funds. The Securities Investor Protection Corporation (SIPC) does that. Directly from their website: “SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.”

Full disclosure of fees

Jennifer Thompson

The common complaint against the financial services industry has been it’s fee and commission structure. In particular “hidden fees: like MERs (management expense ratios). Fees can come in the form of transaction fees – from the purchase and sale of individual stocks and bonds. It can be an annual fee of a percentage of the assets the firm is managing for you. This is generally between 0.5% to 2% of the value of your assets.

In the case of mutual funds, there are also fees embedded by the mutual fund company – which is over and above what your advisor charges. Find out as much as you can about the fee structure of the financial institution managing your assets.

In Summary

Many people feel they can manage their finances without an advisor’s help. A study titled Advisor’s Alpha.estimates that clients who work with a good financial advisor receive an average of a 3% increase in the value of their portfolios annually. Over time this adds up to a large amount. A good financial advisor is one who is able to manage investor behavior. Especially in times of market volatility when people are most likely to overreact. 

This post contains affiliate links. I may receive a commission for products you purchase through these links. For more information, see my disclosure here.

Through coaching, webinars and public speaking Jennifer helps people and businesses discover how to create success on their terms. She has written numerous self-published books on money: Women and Money: 7 Principles Every Woman Needs to Know to Be Financially Prepared in Any Economy and Growing Up With Money: Raising Financially Resilient Kids in an Age of Uncertainty.

jenniferthompson@compelling365.com

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