THE TOP SIX QUESTIONS TO BE ASKIGN A FINANCIAL ADVISOR IN 2021

Sep 17

If you are looking into working with a financial advisor, you probably have some questions. I always encourage prospective clients to talk to me, and at least a couple of other advisors before they make their decision. I also always give them some ideas for things they should be asking the advisors they meet with. Today I thought I would share those questions with you.

1. Are you a fiduciary…Always?

I wish this question did not need to be asked. I wished saying you are a fiduciary actually meant something. I wish saying you are fee only meant something. But the problem is there is basically no regulation on what requirements you need to fill to use these terms. Finance has a way of being vague and confusing in order to get clients to just stop asking questions. It’s a problem.

To be clear, being a fiduciary means your advisor will ALWAYS and ONLY do what is in your best interest. Most advisors out there, CAN be a fiduciary, many of them are even USUALLY a fiduciary, but you only want on e who is ALWAYS a fiduciary.

To really get an answer to this question you will need to do some work. Ask the advisor how they get paid. Do they get commission from any products? Do they earn vacations? Are they part of any revenue sharing with fund companies? Do they attend events sponsored by mutual fund companies? Many advisors, especially those at the big firms, get paid in a lot of different ways, and they also love to not tell you all of them. But the problem, is if they get compensated by any of those methods, they are probably no longer a fiduciary.

The sad part is that most advisors truly do believe they are fiduciaries, but let me give you a hypothetical situation. A situation I used to see a lot of at my prior firm. An advisor is close to winning an award vacation from his firm. To earn that award he needs to have his clients transfer in an additional $300,000. The advisor meets with a clients who just received a large bonus from work. Happens to be $300,000. The client asks, should I invest this in the market, or payoff my mortgage? Now, I’m not going to comment on what I think that hypothetical client should do, but what do you think that advisor is going to tell the client?

Balanced Capital is ALWAYS a fiduciary. In fact, one of the biggest reasons I started this firm, is because I was tired of working in a world where I wasn’t.

2. What do you specialize in?

20 years ago nobody asked this question. 20 years ago, you couldn’t ask this question, because 20 years ago, most people simply worked with whatever financial advisor had an office closest to their house. Times have changed.

One byproduct of the covid pandemic, is the increasing level of comfort doing business, and even socializing, virtually. Software that was mostly unheard of before the pandemic, became household names. What is amazing about video conferencing, screensharing, and coworking software, is that is has completely blown the lid off of the geographic restrictions that used to be imposed on financial advisors. With more and more financial advisors transitioning to virtual models, you could work with someone down the street, or across the country and literally not know the difference.

Now, instead of doing a google search to see who is close by, you can search for an advisor that specializes in exactly what you need. Are you a budding tech worker with RSU’s and ISO’s that you don’t know what to do with. There is an advisor that specializes in that. Are you a dentist looking to buy a practice? There is an advisor that specializes in that. Are you a soon to be retiree that wants to quit working and do full time mission work on another continent, there is an advisor that specializes in that too. Are you someone interested in green investing who wants a portfolio that helps the planet? I can help you there.

There is quite literally an advisor that specializes in almost everything nowadays. It may take you a little bit of time, but I promise you that if you are someone looking for say, an advisor who specializes in environmentally friendly investing for people who are trying to make a difference in the world, they are out there. And they will do a better job for you than the advisor in the strip mall who specialized in working with “individuals, families, and small business owners.”

I include that last phrase mostly as a joke, but it is all too common in finance. I will never understand this phrase. Think about it. That advisor is literally claiming to specialize in everyone. I like to call that, specializing in nobody. Yet you see it everywhere. Do yourself a favor, when you see this phrase, run.

I’ll also let you in on a little secret, most of us who have a specialty are actually quite friendly with each other. We recognize that we are not the best fit for every potential client we talk to, but we usually know somebody who is. Most of us will happily point you in the direction of the person you would be the best fit with. Would the advisor specializing in individuals, families, and small business owners do that?

3. Where is my money kept?

Let me introduce you to what may be a new term for you; third party custodian. I’ll tell you a fun fact too; Bernie Madoff did not use one. In the investing world, a custodian, is what we call the firm who holds your money and securities. And, as it sounds, a third-party custodian, is an entity that is entirely separate from your financial advisor and their firm.

In a perfect world, this wouldn’t matter. In a perfect world, there would be no crooks and fraudsters looking to run away with your life savings. But as you probably know, the world is not perfect.

At third part custodian is the best way to eliminate this risk. If your cash and investments are held by a firm different than your financial advisor, your advisor has literally no possible way to run away with your money, because they do not have your money, they simply have access to direct the investments in the account.

Balanced Capital uses a company called APEX Clearing Corporation as our third-party custodian. Not only do they hold your investments, they also are responsible for printing your statements, and send out fund prospectus’ etc.

4. What are my total all in costs?

Did you know that the financial services industry is pretty good at hiding your costs? Probably not shocking information for you. While fiduciary financial advisors are significantly better at being upfront with you than their commission based counterparts, they sometimes still forget to go over all of the costs associated with your account.

Management fees. These are common to fiduciary advisors. It sometimes goes by different names. Annual fee, AUM fee, annual expense ratio etc. Basically, this is the amount you are paying your advisor to manage your investments.

Internal expense ratios are what often get left out. To be fair, most advisors don’t leave this out because they are trying to trick you, they simply leave it out because it’s not what you are paying THEM. However, it is something you should be aware of, as all of the fees you pay eat into your returns at the end of the day, and the range of expense ratios is quite large. Stocks, and individual bonds carry no expense ratios, ETFs are fairly low cost generally somewhere in the 0.03-0.3% range, but mutual funds can go up to as high as 1.5%. If you are paying your advisor 1.2%, and they put you into a fund with an internal expense ratio of 1.5% that start you off in a pretty deep hole.

At Balanced Capital I do everything I can to minimize these expense ratios. I build portfolios out of stock, and fixed income ETFs which typically keeps this under 0.1%.

Keeping those costs down, means you keep more of your growth. It’s also one of the only things that I, as an advisor have complete control over. At the end of the day, I do not dictate what the market is going to do next year. But I do have control over how much of your account will go towards fees and expenses.

5. How many clients do you have, and how many do you plan to have 10 years from now?

Chances are when you are interviewing advisors, you are looking for some you lie, and trust. Someone you feel like you can talk to about anything, and truly has your best interest at heart. If that is you, I think you are doing the right thing. All of those characteristics are hugely important when selecting the person you are going to work with. But what if that advisor’s plan is to grow their business, until they can bring on other advisors, so that they can step away and retire. Will you be as comfortable working with whomever your advisor hires to fill their chair? What if you don’t get along? What if you don’t trust them?

All of those reasons are why you need to ask your advisor what their vision is for their practice, or their firm. If the personal relationship is the most important thing to you, it would make sense to not get involved with an advisor who is planning to build a business and retire early. You would probably be best suited by an advisor looking to build a small practice to run themselves.

6. How long is my money tied up for?

The first purpose of this question is to weed out any insurance agents pretending to be financial advisors. All they have to offer is annuities, and life insurance that come with significant lock ups and surrender schedules. The last thing I would ever want to see someone do, is unknowingly put hand cuffs on their own money.

Some financial advisor client agreements come with binding contracts that will lock you in for a certain period of time. I don’t recommend signing one of those no matter what reasons the advisor gives you.

The first is simple, even if your relationship is great, you never know what tomorrow holds. You do not want to be stuck working with someone whom you no longer like, or trust.

The second is all about confidence. I don’t have any lock up period at Balanced Capital, because I am confident in the service I provide my clients. I know that I do a great job for them, so they won’t want to leave. Because I know I will do a great job for the, I don’t feel like I need to attach any strings to their account. If clients don’t want to work with me, they can simply send an email and we will end the relationship that day. Any advisor worth working with, will do the same.