1) Are you compensated by commissions, fees, or a combination of both, if we decide to move forward with a business relationship?
We believe the best compensation arrangement, which has your best interests in mind, is one where you pay a financial advisor an advisory fee, with a declining scale, based upon the size of your portfolio. It’s not ten times harder to manage $5,000,000 than it is to manage $500,000, and you should obtain significant discounts at higher asset levels.
Virtually every product in the investment world can now be offered without a commission (including variable annuities, which can make sense in some situations, by the way). When you buy products that pay commissions from a financial advisor, keep in mind you’re paying that person in advance for future (promised) advice and service.
Most financial advisors are much more confident in their ability to overstate the benefits (and misrepresent or omit the drawbacks) of a high commission product like a variable annuity or equity index annuity that pays a 6 to 7% commission or more, than they are in retaining you as a client for 6+ years in a 1% per year advisory arrangement.
2) What are your professional designations, and how long have you been in financial services?
There’s a difference between licenses and designations. Investment licenses like the Series 7, (the General Securities License), allow a representative to sell most securities like stocks, bonds, and mutual funds. Three investment designations offer the best training and/or continuing education requirements for financial advisors: CPWA®, CFA, and CFP®. Click on the links below to learn more about these programs.
It’s important that an advisor has worked with a mentor early in their career, or currently works with a senior advisor — no matter how long they’ve been in the business. Working with a good mentor or as part of a wealth management team can shorten an advisor’s learning curve tremendously. Knowing what not to do is just as important as knowing what to do in financial services.
3) What is your investment philosophy, and how do you or your firm manage risk?
Whether it’s sports, business, or financial services, the group or team with the best people, systems and processes usually win in the long run. Your advisor should be able to articulate in ten minutes or less, the general process of how they go about allocating wealth, while staying within your risk tolerance. The details will take much longer, of course, but the philosophies that guide them, and the general strategies employed, should be easy to understand.