In case you missed it, The Wall Street Journal's Jason Zweig recently wrote an article titled "The 19 Questions to Ask Your Financial Advisor". Zweig, who writes a fantastic weekly column titled "The Intelligent Investor", wants consumers to receive good financial advice. To him, that means financial advisors, stockbrokers, and insurance agents should always act as fiduciaries, which means they should act in their clients' best interests.
I wholeheartedly agree. Honestly, I can't believe this is even up for debate.
Some background: Last year, the U.S. Department of Labor released a rule which, once implemented, will require all financial professionals who provide retirement planning advice to act as fiduciaries for their clients. In addition, financial professionals must disclose all conflicts of interest and clearly disclose all fees and commissions paid by the client. Financial professionals who work on commission, primarily brokers and insurance agents, will be impacted the most. In general, these are the professionals unhappy with the rule. Unfortunately, the deadline for compliance has been delayed from January 1, 2018 to July 1, 2019. In the meantime, changes to the rule may severely weaken the rule or kill it entirely.
So how do you determine whether or not a financial planner will act in your best interest? Ask an advisor the right questions and listen for the best answers. Below, you'll find 19 questions to ask an advisor. You'll also find the answers, in parenthesis, Jason Zweig suggests you listen for. I've also included my answers to the questions, which are in bold.
Use these questions when interviewing an advisor - and interview at least three. Good luck with your search!
1. Are you always a fiduciary, and will you state that in writing? (Yes.)
2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)
4. Will you itemize all your fees and expenses in writing? (Yes.)
5. Are your fees negotiable? (Yes.)
6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)
7. Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)
8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
9. Do you pay referral fees to generate new clients? (No.)
10. 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.)
Investment management is important, but I believe true financial planning means looking at all aspects of a client's financial life.
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
12. What is your investment philosophy?
I believe it is impossible to consistently beat the market. Therefore, I use passive investments, such as low-cost index funds, in client portfolios.
13. Do you believe in technical analysis or market timing? (No.)
14. Do you believe you can beat the market? (No.)
15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)
As seldom as possible, typically less than twice a year.
16. How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)
After all expenses on a quarterly, 1-year, 3-year, and 5-year basis. I can compare performance to a benchmark, such as the S&P 500 Index, but I prefer not to because it's not an apples-to-apples comparison.
17. 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 are marketing tools masquerading as fancy diplomas on an adviser’s wall.)
I hold the Certified Financial Planner designation (CFP®).
18. 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.)
I cannot guarantee a rate of return. Conservatively, 3% to 4% is realistic, but markets have their ups and downs.
19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)
I do and I use the same investments I recommend to my clients.