Questions for My Mom’s Advisor
Last week I had a meeting with a client I’ve been working with since 2009. We’ll call her “Nancy”.
Over the years Nancy and I have had countless conversations about investment strategy, retirement cash flow, tax optimization, estate planning, and anything else that comes up (education spending, buying and selling real estate, the timing of pension and Social Security elections, etc.) Each conversation compounds on one another — if we dive deep on investments in one meeting it may free us up to not have to focus on that for the next several meetings. If we have an “emergency meeting” because the markets and world around us got really scary, we can eventually look back on that discussion to recall what we did, how that decision fared, and draw insights into how we may want to behave in a future scary situation.
Everyone knows that past investment performance is not an indicator of future investment performance — but being able to look back at past decisions, and having a long history to draw from and relate to, is a tremendous advantage for an advisor and client to share. We don’t need a risk tolerance questionnaire, we have history and past decisions to tell us how we feel about money.
This is why it’s so important to do your due diligence and hire well. You should want it to be a long term relationship.
But also, teaming up with a financial professional can be complicated; Are they working for me or for themselves or their firm? Am I going to get scammed? Are they just telling me what I want to hear?
In light of this, this blog contains 20 questions we think will help people make more informed decisions during the matchmaking process.
But before we get to the questions…
Asking a financial advisor to write a Guide for Picking a Financial Advisor can be a little like asking a butcher for “A Guide for Deciding Whether or Not to Eat Meat” — it’s gonna have the potential to be conflict-ridden to help steer the reader towards whatever thing the author is currently doing. I get that.
That said, not every person or family is a good fit for our firm, yet I still genuinely want everyone to have a good experience no matter who they’re working with — Put differently, this guide is what I’d give to my mom if she weren’t a client of Harding Wealth.
Enjoy:
Here are the questions:
1. Are you always a fiduciary?2. What are your conflicts of interest?
3. Do you have an ideal client type?
4. How are you compensated?
5. What costs (other than your fees) will I pay?
6. Do you receive any perks from third parties (like travel, events, etc. from investment companies)?
7. Is there anything other than merit which could lead you to recommend certain products or services over others?
8. Do you have an ownership or financial interest in any other business or operation aside from your work as an advisor?
9. Where do you see your firm going in 5 years? 10 years?
10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance?
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents?
12. What is your investment philosophy?
13. Do you rely on technical analysis or market timing?
14. Do you personally provide service to your clients or are you part of a team?
15. What are your goals as an advisor? As a firm?
16. How do you report investment performance?
17. Which professional credentials do you have, and what are their requirements?
18. How do you get new clients?
19. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term?
20. Who manages your money?
If you ask those questions the advisor will do one of two things:
They’ll say “Wow, you’ve really done your homework!” and be glad you’re doing your due diligence, OR they’ll squirm a little, act annoyed, and think you’re high maintenance…. You know which is the right response for you.
[If you’d like your own downloadable Interview Guide, shoot us an email and we’ll send it to you.]
Below are our responses to the questions above, along with some things we think are worth watching out for.
1. Are you always a fiduciary?
Our Answer: Yes we are always a fiduciary.
Making sure your advisor is bound by a fiduciary duty is an important step in the right direction. But be sure to get in writing that they’re always a fiduciary. Some advisors are a fiduciary in their wealth management practice but can refer you over to the separately held insurance practice and start recommending high commission products.
What to watch out for: Anything that sounds wishy-washy is a bad answer here. There are a few instances where I’m fine with someone not being a fiduciary (like if an advisor confidently says “I’m not a fiduciary all of the time because I help people with term life insurance” that’s okay), but there are few things more important than understanding when someone may have the incentive to not act in your best interest.
2. What are your conflicts of interest?
Our Answer: No advisor is completely conflict free. After all, every financial advisor only makes money if you decide that you need a financial advisor instead of doing the work yourself. In addition to that, our firm earns more fees when your portfolio is larger. So there is a possibility that we could discourage spending your assets to maintain a bigger portfolio.
What to watch out for: Anything related to getting paid more for recommending certain products or making a lot of trades… or if they have a proprietary strategy like a mutual fund or hedge fund.
3. Do you have an ideal client type?
Our Answer: Yes, our niche client is individuals and families heading towards —or already in— retirement who value having guidance around Social Security, Tax Strategies, Estate Planning, and Retirement Income. Also, a significant portion of our client base consists of women between the ages of 60 to 85 who are in need of a fiduciary guide to help align their money with their values.
*Note: we think it’s important for firms to have ideal clients they work with. If Kevin Durant were now looking for a Phoenix-Area wealth advisor I’d be happy to have him as a client, but my expertise isn’t designed around 34 year olds with net worths of $200 million.
What to watch out for: Be skeptical of firms that claim to work well with anybody and everybody. With that said, in the early years at Harding Wealth we brought on almost anyone who wanted to work together as we established the firm. If the advisor and firm is just starting out then it’s fine to serve “everybody,” but over time they should probably have developed a niche.
4. How are you compensated?
Our Answer: Our fees are tied to the portfolio under our management. The standard arrangement is an annual fee of 1% on the first $1,000,000 and 0.5% above $1,000,000 broken into quarterly payments and they’re negotiable.
What to watch out for: We generally believe advisors shouldn’t receive commission for their advice — this brings the potential for them to offer you something that pays them a big commission rather than being the thing that’s best suited to help you get to your goals. If anyone says “you don’t pay me, the insurance company pays me” I would end the meeting on the spot.
5. What costs (other than your fees) will I pay?
Our Answer: Client accounts are held at Charles Schwab and Altruist, which are notorious discount brokerages. They charge trading fees on certain securities (mostly mutual funds) and may charge you for using features like margin loans against your accounts. We have no incentive to increase their profits, so our approach as a fiduciary actively looks to lower your overall costs. Additionally, we think mutual funds and ETFs are a great way to achieve cost effective diversification — these funds have expense ratios. Again, we don’t have any incentive to buy more or less expensive funds, so we aim to only have clients incur reasonable costs which we believe are worthwhile.
What to watch out for: If the trading fees are excessive, or if there are countless fees for every administrative need (like transfers, wiring funds, annual maintenance fees, etc.), be somewhat concerned.
6. Do you receive any perks from third parties (like travel, events, etc. from investment companies)?
Our Answer: If someone sends us a tin of popcorn for the holidays, we eat it. If someone tried to send us an iPad, we’d send it back. We aim to avoid situations where a third party is providing anything more than education so we can maintain our objectivity when choosing investments for client portfolios.
What to watch out for: It would be bad if an advisor went to the Super Bowl last weekend because she put her clients in an expensive hedge fund or something similar.
7. Is there anything other than merit which could lead you to recommend certain products or services over others?
Our Answer: No. The pursuit of client objectives is the determining factor.
What to watch out for: “Yes, we have an exclusive arrangement to recommend “XYZ” funds and they pay us on the back end.”
8. Do you have an ownership or financial interest in any other business or operation aside from your work as an advisor?
Our Answer: No. At some point we may have an interest in a different kind of business (like tax preparation, for example) but we currently do not.
What to watch out for: If they answer “yes” and state that they run a proprietary hedge fund, mutual fund, limited partnership, or insurance agency it could mean some eventual cross-selling. It’s not a bad answer if they say “yes, my kid has a lemonade stand.”
9. Where do you see your firm going in 5 years? 10 years?
Our Answer: I see the firm growing slowly and deliberately by serving the right kinds of people. We don’t have aspirations to be a giant firm, but I also want to broaden our impact with more families. At 39 years old I feel confident we’ll have at least another 20-30 years of working this way with clients.
What to watch out for: There is no bad answer here, just try to understand what kind of operation you’re joining and whether you’re going to be 1 out of 150 clients or 1 out of 10,000. It matters.
10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance?
Our Answer: We believe investment management is just a portion of your financial life, and that you can’t advise the investments without understanding the other pieces.
What to watch out for: Again, there’s no bad answer here, it depends on your situation and what you’re looking for.
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents?
Our Answer: No. We refer solely based on the merit of those individuals and our confidence in their ability to help our clients.
What to watch out for: If someone says, “Yes. We receive a portion of the revenue you spend with those professionals in exchange for our referral.”
12. What is your investment philosophy?
Our Answer: This one should probably have its own blog, but here’s the short version of what we believe:
Unnecessary complexity is the enemy. You don’t need 100 individual holdings to have a beautifully-crafted portfolio.
Picking individual stocks is a hard strategy to pull off consistently, so we often prefer funds.
High cost funds tend to underperform lower cost funds, so we often prefer lower cost funds.
Strategies with a lot of active trading tend to underperform buy-and-hold strategies, so we often prefer less active strategies.
Market forecasting is fine for entertainment but shouldn’t be relied upon for making tactical adjustments.
Risk and return tend to go hand in hand. More risk, more return. Less risk, less return. Be wary of anyone who claims otherwise.
Behavior is just as important as investment selection.
There is more to the investment universe than Big US Stocks: Small and mid-sized companies, international stocks, real estate, etc.
(*We have studies and data to support each of the above claims).
What to watch out for: Avoid practitioners who claim there is only one “best” way to build wealth. There are a lot of different paths to get to where you need to go —the key, more than anything, is that you are willing to stick with what you choose.
13. Do you rely on technical analysis or market timing?
Our Answer: No.
What to watch out for: We think “Yes” is often a bad answer.
It’s not that there aren’t people who can do this well, it’s just that a short term technical outlook often has nothing to do with your life or why you’re investing in the first place. Staring at short term charts —and making big bets as a result — is often counterproductive to your long term goals.
14. Do you personally provide service to your clients or are you part of a team?
Our Answer: Clients and prospects always start out meeting directly with me (Adam), and I currently handle all financial planning and investment advice within the firm (although we’ll be expanding some of that capability to Kayla Goo in the coming months). When clients need administrative help with their accounts they can work with either Kayla or Cinnamon Martinez.
What to watch out for: We believe it’s worth avoiding situations where the person hosting the initial meetings is not who you’ll be working with. This likely means they chose that person to run those initial meetings because they’re a good salesman and are more focused on you becoming a client than building a relationship with an advisor.
15. What are your goals as an advisor? As a firm?
Our Answer: We love this work and the people we work with, so we want to continue growing at a reasonable pace without getting too big to give our clients the service they deserve. Continuing to grow allows us to hire more staff and offer greater service to our clients.
What to watch out for: I believe a high growth firm is more concerned with prospective clients than they are current ones. I often recommend that firms have no more than 150 clients per advisor, with an ideal number being closer to 100.
16. How do you report investment performance?
Our Answer: Our clients receive weekly portfolio updates in their email inbox each Sunday, monthly account statements from Altruist or Charles Schwab, and on-demand detailed performance reports (generated by us) at their request.
What to watch out for: We think advisors should not rely solely on custodial statements (like Schwab, Altruist, Fidelity, etc.) for performance data.
17. Which professional credentials do you have, and what are their requirements?
Our Answer: I’m a CFP (Certified Financial Planner). We think this credential, along with the CFA (Chartered Financial Analyst) and CPA (Certified Public Accountant) marks, are good at displaying competency and the ability to abide by a code of ethics.
CFP Code of Ethics
CFP Certification Process
What to watch out for: Many financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall. More letters behind someone’s name does not automatically equal competence (in fact, it may signal that they’re more concerned with looking competent than actually being competent.)
18. How do you get new clients?
Our Answer: Some advisors host steak dinners or “free” educational seminars to meet potential clients. We don’t operate that way. Instead, we typically meet people through an introduction from current clients, or from our affiliations with Smart Asset or the Smartvestor network.
What to watch out for: We have respect for anyone who wants to grow their business as long as the messaging is honest and transparent. I would simply beware of anyone who’s making bold, unsubstantiated claims in an advertisement or seminar — if it sounds too good to be true it probably is.
19. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term?
Our Answer: This one is kind of a trick. One one hand, an advisor can give you an actual quote of the yield on a long term bond and be fairly confident in this being a dependable rate of return for that portfolio — and an advisor can also review historical performance of other investments as an educational tool. However, we don’t give any kind of promise of future returns related to stock, bond, or real estate portfolios. Instead, we hone in on what we can control: costs, diversification, tax optimization, and investor behavior.
What to watch out for: If an advisor promises you something in advance — and if that promise sounds too good to be true — run.
20. Who manages your money?
Our Answer: We use the same kind of investments we recommend to clients (mutual funds and ETFs) and our accounts are held at the same institutions (Altruist and Charles Schwab).
What to watch out for: We like it when people eat their own cooking. Beware of anyone who skirts around this subject.
Whew, that’s a lot, right? To me, it’s a small price to pay to have to (hopefully) never change advisors again.
Measure twice, cut once.
That’s all for today.
Adam Harding
CFP | Advisor | Smartvestor
www.hardingwealth.com
*The above is for informational purposes only and should not be considered investment, tax, or legal advice.
