Five Questions People (Almost) Never Ask Their Advisor

| April 6, 2015 | 0 Comments

I meet with a lot of people who are looking for financial advice. Their needs and financial knowledge vary greatly. And yet, it amazes me how rarely I am ever asked five simple, straightforward and utterly critical questions, which will go a LONG way towards helping you differentiate good advisors from salespeople.

Each of these questions is designed to help you untangle the web of conflicted interests inherent in financial services. It is important to understand what biases have influenced the advice you’re being given and the products that are being recommended to you. So here are my top five questions for you to ask your next (or current) advisor.

Are you willing to itemize all of your sources of revenue from the products and advice that you sell me?

When you work with a plumber or electrician, you expect an itemized bill showing the work done and the parts you purchased. However, good luck trying to get an insurance salesman to detail what you’re paying him or her in commissions and fees. It’s embarrassing for many to admit how much you’ll pay in commissions, but you definitely have a right to know.

Do you accept (or pay) referral fees?

A Registered Investment Advisor is required to disclose this information on Form ADV, but a broker representative generally isn’t. But you need to know if the accountant who sent you to a particular advisor is being paid for that referral. It’s also important to know if your advisor gets paid for sending you to his favorite attorney.

Have you ever been fined or disciplined by a regulator, or sued by a client?

Wouldn’t you want to know if your broker is a regular in the arbitration process? And yet, this might be the most important question I’ve never been asked. Now granted, Bernie Madoff had never been fined or sanctioned. But a lot of very unscrupulous people have been. And it’s pretty easy to double check their answer on the FINRA ( and SEC ( websites.

Are you held to a fiduciary standard at all times?

I probably get this question more frequently, since it has become much more common for families to be looking not just for specific products but for genuinely unconflicted advice. Even so, the current rules allow some advisors to work both as a broker and an advisor simultaneously. In this dual capacity, the advisor may have his “fiduciary” hat on while giving advice about goals and allocation, then put on his or her “broker” hat while picking the products that the client ultimately purchases. This is a very subtle shift that most people won’t notice, but it allows the advisor to talk like a fiduciary while still taking commissions from product providers.

The good news is this is fairly easy to spot. Broker representatives are required to say so and their website or brochure will have to say something like: “John Doe and Jill Smith are Registered Representatives of XYZ Financial. Securities offered through XYZ Financial, Member FINRA/SIPC.”

Do you provide comprehensive planning or just investment management?

Most financial advisors focus on investments or insurance, because they are the most profitable. Some will talk a good game about planning without actually doing any.

Comprehensive financial planning – in which the advisor will help the client evaluate every financial decision, including estate planning, tax planning, philanthropy and more – is actually quite rare. If your advisor says he or she is a comprehensive planner, ask for concrete examples of how they have helped a client with something that you are concerned about. And then ask how they get paid for that non-investment or insurance advice.

By doing a little extra homework and taking the time to interview several advisors, you can find the one who will work best for your needs and your situation.

This column is prepared by Rick Brooks, CFA, CFP®. Rick is Director and Chief Investment Officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at Rick and his family live in Mission Hills.

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