Questions to ask a prospective financial advisor

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Swimmer
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Questions to ask a prospective financial advisor

Post by Swimmer »

I was just speaking with a relative who called to let me know he is retiring next month. He is 64 and wife is 62.

He’s been a saver all his life and has accumulated a substantial nest egg. I wasn’t aware, until today, that he has never learned basic financial/investing principles.

He mentioned that they are meeting with a prospective financial advisor next week. Uh oh. I asked who but he wasn’t sure but he got connected through friends at work. They talked briefly by phone and he’s “a really nice guy.” :oops:

Oh, and he got his clients’ money out of the market just before the 2008 crash. :shock: He’s got charts.

My relative is very interested in learning about investing and now has the time, but he’s skittish about doing it himself. I encouraged him to read this board and to be careful at next week’s meeting. I asked him about fees, and he said that when he told this person what his NW is, the advisor told him that with that much, there would be no fees. Hmmm.

So, bogleheads, I’m asking your help. My relative is looking for a list of questions to ask at the meeting next week. Any advice would be most appreciated.
MittensMoney
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Re: Questions to ask a prospective financial advisor

Post by MittensMoney »

What firm is the advisor with?
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windaar
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Re: Questions to ask a prospective financial advisor

Post by windaar »

Sounds like a salesman and one who shows off about timing the market at that. I guess the 2 questions would be his fiduciary status and where he keeps his crystal ball.
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Mr.BB
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Re: Questions to ask a prospective financial advisor

Post by Mr.BB »

1) what is your AUM ( not including any fees from the mutual funds)
2) what are the specific fees in the mutual funds you are putting me in, and what class are the funds?
3) with the amount of money you be managing for me what is my estimated yearly cost? do not let the adviser off the hook on this question he needs to give you some specific range.
For instance if he's managing a half million dollars and he's a 1% AUM that alone will cost $5,000, should also find out what are the firms quarterly and yearly charges that the advisor is not mentioning.
4) Why are you putting me in the specific funds? ( If the answer is because you'll be well-diversified, the follow up question should be "doesn't a total stock market index fund do the same thing"?)
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."
GlennK
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Re: Questions to ask a prospective financial advisor

Post by GlennK »

Tell him to ask the advisor to pick an index (or a fund that mimics your friends asset allocation), and allow your friend to pay him 10% of whatever he beats the index by. Even on down years, if the advisor beats the index, your friend still pays. But if the advisor does not beat the index, he gets zero.

I tried this with two advisors and neither would take it. So good luck.
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Schlabba
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Re: Questions to ask a prospective financial advisor

Post by Schlabba »

Swimmer wrote: Fri Sep 11, 2020 1:03 pm I was just speaking with a relative who called to let me know he is retiring next month. He is 64 and wife is 62.

He’s been a saver all his life and has accumulated a substantial nest egg. I wasn’t aware, until today, that he has never learned basic financial/investing principles.

He mentioned that they are meeting with a prospective financial advisor next week. Uh oh. I asked who but he wasn’t sure but he got connected through friends at work. They talked briefly by phone and he’s “a really nice guy.” :oops:

Oh, and he got his clients’ money out of the market just before the 2008 crash. :shock: He’s got charts.

My relative is very interested in learning about investing and now has the time, but he’s skittish about doing it himself. I encouraged him to read this board and to be careful at next week’s meeting. I asked him about fees, and he said that when he told this person what his NW is, the advisor told him that with that much, there would be no fees. Hmmm.

So, bogleheads, I’m asking your help. My relative is looking for a list of questions to ask at the meeting next week. Any advice would be most appreciated.
Tell him not to follow the advice of an advisor, tell him to use the advisor to learn and then make his own decisions. It is his money so he should be responsible and make the decisions.

And tell him to read "The little book of common sense investing".
Secretly a dividend investor. Feel free to ask why.
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Nate79
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Re: Questions to ask a prospective financial advisor

Post by Nate79 »

1. What is your fee structure including all fees - ie. How are you paid?
2. Are you a fiduciary? (In writing)

When they hem and haw, stutter and don't answer the questions directly they will know they should run.
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Stinky
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Re: Questions to ask a prospective financial advisor

Post by Stinky »

Mr.BB wrote: Fri Sep 11, 2020 1:34 pm 1) what is your AUM ( not including any fees from the mutual funds)

2) what are the specific fees in the mutual funds you are putting me in, and what class are the funds?

3) with the amount of money you be managing for me what is my estimated yearly cost? do not let the adviser off the hook on this question he needs to give you some specific range.
For instance if he's managing a half million dollars and he's a 1% AUM that alone will cost $5,000, should also find out what are the firms quarterly and yearly charges that the advisor is not mentioning.

4) Why are you putting me in the specific funds? ( If the answer is because you'll be well-diversified, the follow up question should be "doesn't a total stock market index fund do the same thing"?)
Excellent advice. Need to find out about ALL fees and charges.

And a second for having your friend read “The Little Book of Common Sense Investing”. Written by John Bogle himself, it makes a powerful case for index fund investing.
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000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

"How much in dollars will your firm receive in fees from my account this year?"

"Can you beat a Vanguard LifeStrategy fund"?

"Will you refund your fees if you underperform the market?" (edit: it seems regulations may prevent some FAs from doing this, see below)
Last edited by 000 on Tue Sep 15, 2020 12:45 am, edited 1 time in total.
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Toons
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Re: Questions to ask a prospective financial advisor

Post by Toons »

Got Out Of The Market In 2008?
Wrong advisor.
That was the time to get in.
And Stay In
Sounds like someone with some financial acumen
Needs to go with them

:happy
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Grt2bOutdoors
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Re: Questions to ask a prospective financial advisor

Post by Grt2bOutdoors »

Can I see your a copy of your federal and state income tax returns for the past 3 years?
:shock: No, I can't show you that!
Why? Does your boss prohibit it?
:o No, I just can't show you it.
Okay, I don't do business with anyone who can't show me their tax efficient low cost outperforming portfolios.
After all, the reason I accumulated such a portfolio was in part due to my efficiency in paying little to no taxes. :twisted:

End of conversation!

Use the above if you want to get rid of them quickly.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Re: Questions to ask a prospective financial advisor

Post by Grt2bOutdoors »

GlennK wrote: Fri Sep 11, 2020 1:36 pm Tell him to ask the advisor to pick an index (or a fund that mimics your friends asset allocation), and allow your friend to pay him 10% of whatever he beats the index by. Even on down years, if the advisor beats the index, your friend still pays. But if the advisor does not beat the index, he gets zero.

I tried this with two advisors and neither would take it. So good luck.
That's a winner! Better than show me your tax returns for the last 3 years!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
AlwaysLearningMore
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Re: Questions to ask a prospective financial advisor

Post by AlwaysLearningMore »

This was from Paula Hogan (CFP)'s website, before she joined another firm.

When shopping for a financial advisor, the most differentiating question consumers can ask is "Who regulates you?"
• If the answer is the FINRA, you are talking with a broker, i.e. a sales person obligated by law to make financial transactions in accordance with fair sales practices, and someone who is not required to disclose sources of compensation or potential conflicts of interest, and for whom providing financial advice is specifically characterized as being incidental to his or her business.
 
• If the answer is the SEC or state commissioner of investments, you are talking with a registered financial advisor, obligated by law to act as a fiduciary, that is, someone who is obligated to put the interests of the client first, who must disclose both sources of compensation and potential conflicts of interest, and who -- unlike a broker -- may not use testimonials in advertisements. Hogan Financial Management is a registered investment advisor with the SEC.
valleyrock
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Re: Questions to ask a prospective financial advisor

Post by valleyrock »

Ask:

Can you please provide me with a copy of your resume?
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Eagle33
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Re: Questions to ask a prospective financial advisor

Post by Eagle33 »

Read
Bogleheads wiki Investment adviser
White Coat Investor website What You Need To Know About Financial Advisers
Road map of investing success chapter 10 - on your own or hire an advisor
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Mitchell777
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Re: Questions to ask a prospective financial advisor

Post by Mitchell777 »

My advice would be to understand the fees. That's not the only thing, of course, but the one that advisors are often misleading about. Many years ago I went with a relative to a financial advisor her work mates were going to. A "really nice guy" and "no fee". Not to mention he took everyone out to a steak dinner every year. He wanted her in a balanced fund, class C shares, with an ER of 1.75%. Similar to funds like Vanguard Wellington but at several times the expense ratio. When I told him that she decided not to go with him he was suddenly not a "real nice guy". But he is doing well. Living one town over in a $1M house in a low to medium COL area.
Mr.BB
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Re: Questions to ask a prospective financial advisor

Post by Mr.BB »

AlwaysLearningMore wrote: Fri Sep 11, 2020 5:32 pm This was from Paula Hogan (CFP)'s website, before she joined another firm.

When shopping for a financial advisor, the most differentiating question consumers can ask is "Who regulates you?"
• If the answer is the FINRA, you are talking with a broker, i.e. a sales person obligated by law to make financial transactions in accordance with fair sales practices, and someone who is not required to disclose sources of compensation or potential conflicts of interest, and for whom providing financial advice is specifically characterized as being incidental to his or her business.
 
• If the answer is the SEC or state commissioner of investments, you are talking with a registered financial advisor, obligated by law to act as a fiduciary, that is, someone who is obligated to put the interests of the client first, who must disclose both sources of compensation and potential conflicts of interest, and who -- unlike a broker -- may not use testimonials in advertisements. Hogan Financial Management is a registered investment advisor with the SEC.
+1
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galawdawg
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Re: Questions to ask a prospective financial advisor

Post by galawdawg »

From Jason Zweig. Nineteen questions to ask your financial advisor:

https://jasonzweig.com/the-19-questions ... l-adviser/
diy60
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Re: Questions to ask a prospective financial advisor

Post by diy60 »

Swimmer wrote: Fri Sep 11, 2020 1:03 pm I was just speaking with a relative who called to let me know he is retiring next month. He is 64 and wife is 62.

He’s been a saver all his life and has accumulated a substantial nest egg. I wasn’t aware, until today, that he has never learned basic financial/investing principles.
Approaching retirement can be extremely stressful for many people. Couple this with a sizable nest egg and this is fertile ground for financial salespeople to pillage. In my limited sphere it was very common for people to be successful in accumulation without any knowledge in investing. There is nothing that I can think of that your relative must act on immediately other than healthcare insurance to bridge to 65. Without knowing any specifics, my general advise would be to leave things as is and learn the basics over the next 9 to 12 months.
Jeff Albertson
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Re: Questions to ask a prospective financial advisor

Post by Jeff Albertson »

diy60 wrote: Fri Sep 11, 2020 7:17 pm
Swimmer wrote: Fri Sep 11, 2020 1:03 pm I was just speaking with a relative who called to let me know he is retiring next month. He is 64 and wife is 62.

He’s been a saver all his life and has accumulated a substantial nest egg. I wasn’t aware, until today, that he has never learned basic financial/investing principles.
Approaching retirement can be extremely stressful for many people. Couple this with a sizable nest egg and this is fertile ground for financial salespeople to pillage. In my limited sphere it was very common for people to be successful in accumulation without any knowledge in investing. There is nothing that I can think of that your relative must act on immediately other than healthcare insurance to bridge to 65. Without knowing any specifics, my general advise would be to leave things as is and learn the basics over the next 9 to 12 months.
Good advice!
NotWhoYouThink
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Re: Questions to ask a prospective financial advisor

Post by NotWhoYouThink »

diy60 wrote: Fri Sep 11, 2020 7:17 pm
Swimmer wrote: Fri Sep 11, 2020 1:03 pm I was just speaking with a relative who called to let me know he is retiring next month. He is 64 and wife is 62.

He’s been a saver all his life and has accumulated a substantial nest egg. I wasn’t aware, until today, that he has never learned basic financial/investing principles.
Approaching retirement can be extremely stressful for many people. Couple this with a sizable nest egg and this is fertile ground for financial salespeople to pillage. In my limited sphere it was very common for people to be successful in accumulation without any knowledge in investing. There is nothing that I can think of that your relative must act on immediately other than healthcare insurance to bridge to 65. Without knowing any specifics, my general advise would be to leave things as is and learn the basics over the next 9 to 12 months.
Exactly this. There is no question your friend could ask that would be helpful if he is unable to understand or refute the answer. The advisor is actually a salesman, and if he has been successful in that career he will have a carefully honed sales pitch that will be low pressure, reassuring, and reasonable sounding. He will have heard carefully practiced questions from people in your friend's situation, and he will have comforting responses for them.

So since your friend doesn't need to "do" anything yet with his life savings, the best advice for him would be to sit tight for a while and do the research mentioned above. If he doesn't like books the wiki in this site and the link above from WCI are excellent.

But it is your friend's money, not yours. So you can point him to some resources and mention that advisors stay in business by taking fees off the top whether your friend's investments grow strongly or not, but you can't make him follow your advice.

Good luck.
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Swimmer
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Re: Questions to ask a prospective financial advisor

Post by Swimmer »

OP here. I knew I’d get excellent responses from you folks! I know he will take your advice to heart. He’s bright, and most importantly, interested in learning.
k b
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Re: Questions to ask a prospective financial advisor

Post by k b »

Please tell this couple not to sign anything or even sign up for anything at the first meeting. They should just take notes, come back and check some key points on this (BH) or a similar site.

They should do more research before handing over their assets to anyone.
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Swimmer
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Re: Questions to ask a prospective financial advisor

Post by Swimmer »

Thank you all very, very much!
petulant
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Re: Questions to ask a prospective financial advisor

Post by petulant »

GlennK wrote: Fri Sep 11, 2020 1:36 pm Tell him to ask the advisor to pick an index (or a fund that mimics your friends asset allocation), and allow your friend to pay him 10% of whatever he beats the index by. Even on down years, if the advisor beats the index, your friend still pays. But if the advisor does not beat the index, he gets zero.

I tried this with two advisors and neither would take it. So good luck.
That would be illegal for a registered investment advisor.
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unclescrooge
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Re: Questions to ask a prospective financial advisor

Post by unclescrooge »

000 wrote: Fri Sep 11, 2020 5:07 pm
"Will you refund your fees if you underperform the market?"
So basically you're telling him that he needs to be aggressive regardless of whether it's appropriate or not, else you will fire him.

An honest adviser would show you the door.
000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

unclescrooge wrote: Sat Sep 12, 2020 8:27 pm
000 wrote: Fri Sep 11, 2020 5:07 pm
"Will you refund your fees if you underperform the market?"
So basically you're telling him that he needs to be aggressive regardless of whether it's appropriate or not, else you will fire him.

An honest adviser would show you the door.
No, "the market" could include the bond market.

Although you are probably right they wouldn't like that question very much.
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unclescrooge
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Re: Questions to ask a prospective financial advisor

Post by unclescrooge »

000 wrote: Sat Sep 12, 2020 8:41 pm
unclescrooge wrote: Sat Sep 12, 2020 8:27 pm
000 wrote: Fri Sep 11, 2020 5:07 pm
"Will you refund your fees if you underperform the market?"
So basically you're telling him that he needs to be aggressive regardless of whether it's appropriate or not, else you will fire him.

An honest adviser would show you the door.
No, "the market" could include the bond market.

Although you are probably right they wouldn't like that question very much.
It's not that they wouldn't like it. The only person who would agree to it is either clueless, or dishonest. They would say might as well get paid for a year. I'll take on more risk. If it pans out, great. If not, that's okay. They weren't going to hire me anyway.

So basically you are filtering for dishonesty.
000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

unclescrooge wrote: Sat Sep 12, 2020 8:45 pm It's not that they wouldn't like it. The only person who would agree to it is either clueless, or dishonest. They would say might as well get paid for a year. I'll take on more risk. If it pans out, great. If not, that's okay. They weren't going to hire me anyway.

So basically you are filtering for dishonesty.
Sure...

But if they can't beat [insert favorite lazy portfolio here] and someone was able to find this site, why hire the advisor?

Why not just recommend coming to this site instead of a list of questions for the advisor??

How will a person who is too ignorant to do their own investing be able to verify if the advisor answered the questions honestly???

So arguably any question will result in "filtering for dishonesty" if independent verification is not possible.
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BL
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Re: Questions to ask a prospective financial advisor

Post by BL »

Contacting here is a good idea.
Another possibility would be to contact the PAS at Vanguard. For just 0.3%/year AUM, they would set up and manage a portfolio of low-expense ratio index funds and act as a fiduciary: ie., look out for your best interest, not theirs. I believe they even tell you ahead of time what they suggest, so you can back out if it doesn't suit you.

Also consider getting a recent copy of Jane Bryant Quin How to Make Your Money Last for good simple to read suggestions on questions that may come up. It is better to read just one subject at a time so it is a great book to have on hand.

Also suggest you read this 16-page ETF: https://www.etf.com/docs/IfYouCan.pdf
Even though it is meant for Millennials,it is a good review of all the things we need, and includes a section warning about those who are out to get your money such as "advisors".
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unclescrooge
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Re: Questions to ask a prospective financial advisor

Post by unclescrooge »

000 wrote: Sat Sep 12, 2020 8:52 pm
unclescrooge wrote: Sat Sep 12, 2020 8:45 pm It's not that they wouldn't like it. The only person who would agree to it is either clueless, or dishonest. They would say might as well get paid for a year. I'll take on more risk. If it pans out, great. If not, that's okay. They weren't going to hire me anyway.

So basically you are filtering for dishonesty.
Sure...

But if they can't beat [insert favorite lazy portfolio here] and someone was able to find this site, why hire the advisor?

Why not just recommend coming to this site instead of a list of questions for the advisor??

How will a person who is too ignorant to do their own investing be able to verify if the advisor answered the questions honestly???

So arguably any question will result in "filtering for dishonesty" if independent verification is not possible.
Many people aren't cut out to invest their own money. Same as many people aren't cut out to build their own houses, change their own oil, cook healthy meals or workout on their own every day.

The adviser's role isn't to beat anything. It's to make sure the client doesn't do anything stupid and mess up their financial life.

There are many resources previously listed which give good questions. Such as how they are compensated, which designations they own, do they have any complaints against them, are they a fiduciary, etc which do not focus on performance and thus do not filter out honest advisers.
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

Wow. So many of the responses here smack of ignorance. Let me give my responses. (FYI - I'm a registered rep.)

Let's start with the stupid questions first:

"Where do you keep your crystal ball?" If a client asked me that, I would probably show them the door. It's arrogant and insulting.

"I'll pay you 10% of however much you beat the index." No. That's illegal.

"Will you refund your fees if you underperform?" No. That's illegal.

"Can I see a copy of your tax return?" My tax return is absolutely none of your business whatsoever. I MIGHT (heavy emphasis on MIGHT) be willing to show you my brokerage statements with the amounts redacted. But even that is worthless, because I might have multiple accounts that I show to different people, depending on what they want to see.

-----------

Here are some questions that are somewhat valid.

"Can you beat a Vanguard Life Strategy Fund?" I don't know what a "Vanguard Life Strategy Fund" is, so I can't answer the question. And to be honest, if somebody said that, then they're probably not an ideal client.

"What are the specific fees in the mutual funds you are putting me in, and what class are the funds?" If a client asks this, then they want to haggle over prices, and that's the only thing they'll ever think about. They will probably always be a thorn in my side. Nonetheless, I would tell them. And if they said, "I can go to Vanguard and get a better price", I would tell them to do that. I do not waste time on clients who would rather go to Vanguard or some other "dial an advisor" program. I don't hate them, but I won't work with them if the only thing they see is a price.

"What is your fiduciary status?" I'm a registered rep, which means that I can either act as a fiduciary, or I can NOT act as a fiduciary. And yes--it sometimes make sense for advisors to NOT act as fiduciaries, such as when "selling" the client life insurance. (I have some pretty strong feelings around this topic. That's a thread of its own.)

"What is your fee schedule?" I believe this is required by law. It is certainly required by my B-D. Generally, it's 1.5% for the first million, and 1.0% after that. (No need to post any snarky comments about how I'm ripping people off. You've said it before, and I've heard it before. I'm not changing my mind, and neither are you. We disagree. Let's move on.)

"Can I see your resume?" or "What are your credentials?" I am a CPA, CFP, CFA, and I have an MBA in Quantitative Finance. I have spent over 5,000 hours with my nose in a book studying to become the best advisor I can. (That's not including my Bachelor's, which is in a totally diffent discipline.) You are welcome to compare that to any advisor in the area, because I have more education and credentials than anybody within a hundred miles of here--and that is an objective, verifiable fact. Note - that fact doesn't necessarily make me a "better" advisor (whatever "better" means), but it sure beats NOT having the education. It at least proves that I have dedication to the discipline.)

-------------------

At the end of the day, I (like most advisors) only want to work with clients who see the value we provide (relative to what they can do themself) and want to pay me accordingly.

If a client asks "Will you do it for the same price as Vanguard?", the answer is no. You want to pay rock-bottom prices for a "dial-an-advisor" program? Then do that. You want to pay a company 30 basis points for them to tell you which of their proprietary mutual funds to invest in? Call Vanguard. That's not what I do.

I recognize the fact that not all people want what I have to offer. That's fine. I wish you good luck, and I want to part as friends. But this is what I do, and this is what I charge. Either you accept that, or you reject it.

I don't have a problem with people challenging my competency as an advisor (eg - what are your credentials). Nor do I have a problem with them asking technical questions (eg - what is your investment philosophy). But if they say, "I don't want to pay," then my answer is, "Then don't pay."
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arcticpineapplecorp.
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Re: Questions to ask a prospective financial advisor

Post by arcticpineapplecorp. »

if the advisor won't sign either of these forms (fiduciary oath and explanation of how paid), then run, do not walk away:
http://www.thefiduciarystandard.org/wp- ... vidual.pdf
https://static1.squarespace.com/static/ ... rm-rij.pdf

the advisor will likely avoid signing it blaming it on their compliance department which disallows outside forms blah blah blah. don't buy it (literally, not just figuratively speaking).
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. get a plan: www.bogleheads.org/wiki/Investment_policy_statement
Greenman72
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

^That's EXACTLY what I would say. And I would refuse to sign it. (Talking about the fiduciary oath. Didn't look at the other one.)

And that is not an admission of guilt, nor is it a sign that I do not act in the best interests of my clients. Nor does it mean that I will do a better or worse job than a person who DOES sign it.

You need only search the internet and court records, and you will find a whole host of "fee-only, fiduciaries" who have defrauded their clients. You won't see the myriad more who aren't frauds--they're just incompetent.

A fiduciary oath is meaningless.
NotWhoYouThink
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Re: Questions to ask a prospective financial advisor

Post by NotWhoYouThink »

Greenman72, I agree that many of the questions and challenges mentioned in this thread are just silly. Also, I don't plan to hire an FA because I'm pretty confident of how I want to manage my portfolio on my own.

But as you mention, not everyone wants to do that, and many people shouldn't because they panic or maybe they can't quit tinkering. So for someone in that situation, what do you think would be a good way for that investor to interview prospective advisors? If we don't want to manage our friends' money but want to help them, what would help?
Last edited by NotWhoYouThink on Mon Sep 14, 2020 4:21 pm, edited 1 time in total.
000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

Greenman72 wrote: Mon Sep 14, 2020 10:17 am "I'll pay you 10% of however much you beat the index." No. That's illegal.

"Will you refund your fees if you underperform?" No. That's illegal.
Citation?
Greenman72
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

My .02 (and please note--I'm very biased):

Find somebody who's a CPA. Somebody who actually prepares tax returns as well as providing investment advice. The ability to leverage the Internal Revenue Code will provide far greater value than "stock-picking".

If you go to a "regular" FA, they will speak very generically about taxes. EG - Let's assume the client wants to do a R Roth Conversion.)if you ask them, "I want to take $100k out of my IRA. How much will I owe in taxes?" They will answer with, "Well, IRA distributions are taxed at ordinary income. So whatever your income tax bracket is times $100k is how much you owe." The client says, "I'm in the 15% bracket." So the FA responds, "Okay. Then you'll owe $15,000 in tax."

If your financial advisor also does your taxes (like I do), I can say with certainty, "You are in the 22% tax bracket. (Most clients have absolutely no idea what bracket they're in. Heck--I'm a tax professional. I prepare my own tax return. And I cannot tell you what bracket I'm in without looking it up.) However, once you do that (assuming next year's return looks like this year's), $54,000 of that will be at the 24% tax bracket. Once we do the math, it comes out to $24,000 in additional tax. But before we do, let's see if that will affect any deductions or tax credits." (This is where having professional tax software comes in handy--only CPA's will have professional software.) "It looks like doing a Roth Conversion will lose you your Child Tax Credit and some education credits, which are worth about $4,000. That means that you have an effective 28% tax rate on your Roth conversion. And even then--you don't have any funds outside the IRA to pay the tax, which makes it a moot point. Based on what I'm seeing, I think we shouldn't do a Roth."

Conversations like this are tricky--even with professional software, because we have to do the Roth conversion prior to 12/31, but we won't have the tax return done until March or April. And we can't undo the conversion anymore. So we have to do a complete tax projection (which takes a lot of time--unless this person's return is so easy a trained monkey could do it), which is only as good as the inputs. (The classic "garbage-in, garbage-out" problem.)

If it's that hard for a CPA with professional software and the client's tax history, it's probably virtually impossible for a "regular" FA to do.
Last edited by Greenman72 on Mon Sep 14, 2020 3:50 pm, edited 1 time in total.
Greenman72
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

000 wrote: Mon Sep 14, 2020 2:53 pm
Greenman72 wrote: Mon Sep 14, 2020 10:17 am "I'll pay you 10% of however much you beat the index." No. That's illegal.

"Will you refund your fees if you underperform?" No. That's illegal.
Citation?
Can't cite anything, because it's common knowledge.
Just like I can't cite that "B" comes between "A" and "C" in the alphabet. I just know it.
LiterallyIronic
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Re: Questions to ask a prospective financial advisor

Post by LiterallyIronic »

Greenman72 wrote: Mon Sep 14, 2020 10:17 am I don't hate them, but I won't work with them if the only thing they see is a price.
What is there beyond price?
000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

Greenman72 wrote: Mon Sep 14, 2020 3:09 pm
000 wrote: Mon Sep 14, 2020 2:53 pm
Greenman72 wrote: Mon Sep 14, 2020 10:17 am "I'll pay you 10% of however much you beat the index." No. That's illegal.

"Will you refund your fees if you underperform?" No. That's illegal.
Citation?
Can't cite anything, because it's common knowledge.
Just like I can't cite that "B" comes between "A" and "C" in the alphabet. I just know it.
Ok. I don't think financial advisor fee structure regulations are as commonly known as the alphabet.

So I have no reason to believe the fee arrangements asked about above are in fact illegal.

Of course, they may be. I don't know. That's why I asked for a citation.
Carol88888
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Re: Questions to ask a prospective financial advisor

Post by Carol88888 »

Can you beat the market? If they say yes, you should run. They are probably taking on more risk than you are aware of to do so.
Northern Flicker
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Re: Questions to ask a prospective financial advisor

Post by Northern Flicker »

You could mention that there are much cheaper ways to get a managed account:

Vanguard PAS
Fidelity Freedom Index Income FIKFX
Vanguard Target Retirement Income VTINX
Vanguard Managed Allocation VPGDX
Vanguard LifeStrategy Moderate Growth VSMGX
Risk is not a guarantor of return.
Greenman72
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

NotWhoYouThink wrote: Mon Sep 14, 2020 2:43 pm But as you mention, not everyone wants to do that, and many people shouldn't because they panic or maybe they can't quit tinkering. So for someone in that situation, what do you think would be a good way for that investor to interview prospective advisors? If we don't want to manage our friends' money but want to help them, what would help?
Back to the original question: Assuming that you can't find a CPA, or don't want to pay one (which is another mistake, IMHO)....

I honestly can't think of any good questions. As many people have pointed out, once you have the ability to judge an FA, you no longer need one.

Some general guidelines:
1. Never go to a wirehouse. Never, never, never. (If you see their commercials during an NFL game, stay far away.)

2. Never invest in anything that issues a K-1. If you don't know what it is, ask your advisor. If they don't know what it is, stay away.

3. There's nothing wrong with asking the fiduciary question. I just think it's a distinction without a difference. Either you're doing right for your client, or you're not. Just because an RIA is more fiduciarier or more objectiver doesn't mean that you're getting any better advice. There are a lot of incompetent CFP's touting their fiduciary standard.

4a. Ask them if they only help with investments, or if they assist with tax planning or other comprehensive financial planning. (If all they offer is a basic asset allocation and quarterly rebalance, then all you're getting is investment advice, which you can get in an asset allocation or glidepath fund.) Since almost all advisors will say, "I'm comprehensive", then ask something similar to the aforementioned Roth Conversion. If they say, "ask your tax advisor", then they're probably a salesman. If they say, "Bring in your tax return and we'll look at it together", then you're dealing with somebody who is at least paying lip service to comprehensive planning. (Hey--it's a start.) If you ask any technical questions, you'll be able to tell who is a salesman and who is a professional.

4b. Here's another technical question that any non-salesman should be able to answer: "When do I have to start withdrawing from my IRA? And how much do I have to withdraw every year? How is that amount calculated?" This is not a hard question to answer. (The answer lies in IRS Publication 590-B.) And if they can't answer it, or if they stutter over it, then they're a trained salesman--not a professional.

4c. Here's another question that you can use to probe--the classic "invest vs. pay off the mortgage" question. Again--the answer is less important than the discovery process, or HOW they answer the question. If they ask to see your statement, then compare the amount you're paying (%-wise) to the amount you're receiving on Treasuries, and state an opinion based on the facts, then you're probably talking to a professional. If they hem and haw about generic stock market performance, you're probably talking to a salesman.

5. It's okay to ask how much you pay in fees. Just know that you are going to have to pay them. That's how we get paid. If you don't want to pay them, then don't ask for my advice. (It's kinda like Disneyland. If you want to play, you have to pay.)

6. It's okay to ask about the investment philosophy. If they have one, they'll tell you what it is. If they give an ambiguous answer, like "We use capital market expectations to help determine your asset allocation, which helps control risk and drive returns...", then ask them to be more specific. If they stutter, or say "Let's get a portfolio manager on the line", then they're probably a salesman. That said--just because their philosophy is different from yours doesn't make it bad or wrong. Different professionals have different opinions. I, for example, am a believer in the DFA/Three factor model. It hasn't worked in years. But I can explain it to a client and how it works in practice.

7. I would ask about education and credentials. Granted, not every retail FA is a CFA or has a PhD in Economics. And just because a person can pass the CFP, that doesn't mean that they're necessarily good. But (IMHO) at least having a respected designation or some "real" education is better than NOT having one. At least it shows some devotion. Plus--if a person is going to trust you with their life savings, the least you can do is study for an exam. Especially one as easy as the CFP (which I have a low opinion of).

8. It's okay to ask how long they've been in the business. I'm just not sure how much it tells you. A person who has been in business for 30 years may really only have one year of experience--repeated 30 times. And somebody who just entered the business yesterday may have ten years of tax prep experience behind them. (We all started somehwere.) But if somebody's been in business for 20 years, then they're probably going to be around for a while.

9. I would also ask about other tangential experience that is NOT financial product sales. As I've said elsewhere, I spent ten years in a tax accounting firm before I started my own. Doesn't mean that I understand "investments" per se, but at least I have other related experience to draw from. If they say, "Well, I was a high school track coach for fifteen years before I started selling mutual funds", I would run.

10. I would also ask how much "real" training they have. When I started at the wirehouse (before I went back to school to become a CPA or CFA), I got two days of training. (Yes--you read that correctly. TWO DAYS.) And your annual "firm element" training on anti-money-laundering doesn't count. I want to know if you've actually attended a real, technical conference like the AICPA's ENGAGE conference. (Not just your B-D's "here's the product du-jour--and here's how to sell it" conference.)
Last edited by Greenman72 on Mon Sep 14, 2020 3:49 pm, edited 1 time in total.
Greenman72
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

LiterallyIronic wrote: Mon Sep 14, 2020 3:10 pm
Greenman72 wrote: Mon Sep 14, 2020 10:17 am I don't hate them, but I won't work with them if the only thing they see is a price.
What is there beyond price?
Did you read anything that I just wrote? (The first post. Not the second.)
Greenman72
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Re: Questions to ask a prospective financial advisor

Post by Greenman72 »

000 wrote: Mon Sep 14, 2020 3:14 pm
Greenman72 wrote: Mon Sep 14, 2020 3:09 pm
000 wrote: Mon Sep 14, 2020 2:53 pm
Greenman72 wrote: Mon Sep 14, 2020 10:17 am "I'll pay you 10% of however much you beat the index." No. That's illegal.

"Will you refund your fees if you underperform?" No. That's illegal.
Citation?
Can't cite anything, because it's common knowledge.
Just like I can't cite that "B" comes between "A" and "C" in the alphabet. I just know it.
Ok. I don't think financial advisor fee structure regulations are as commonly known as the alphabet.

So I have no reason to believe the fee arrangements asked about above are in fact illegal.

Of course, they may be. I don't know. That's why I asked for a citation.
You can take my word for it that they are.
And if you were a prospect, and you asked that question (twice), I would say "The answer is no. And that's final. If that's a dealbreaker, then I'm sorry." I wouldn't continue to engage a conversation with somebody who won't take my word for it after telling them twice.
000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

Greenman72 wrote: Mon Sep 14, 2020 3:53 pm You can take my word for it that they are.
And if you were a prospect, and you asked that question (twice), I would say "The answer is no. And that's final. If that's a dealbreaker, then I'm sorry." I wouldn't continue to engage a conversation with somebody who won't take my word for it after telling them twice.
Edit: based on the provided link below, it seems what you are saying is partly correct, but not in all circumstances.
Last edited by 000 on Tue Sep 15, 2020 12:47 am, edited 1 time in total.
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unclescrooge
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Re: Questions to ask a prospective financial advisor

Post by unclescrooge »

000 wrote: Mon Sep 14, 2020 3:14 pm
Greenman72 wrote: Mon Sep 14, 2020 3:09 pm
000 wrote: Mon Sep 14, 2020 2:53 pm
Greenman72 wrote: Mon Sep 14, 2020 10:17 am "I'll pay you 10% of however much you beat the index." No. That's illegal.

"Will you refund your fees if you underperform?" No. That's illegal.
Citation?
Can't cite anything, because it's common knowledge.
Just like I can't cite that "B" comes between "A" and "C" in the alphabet. I just know it.
Ok. I don't think financial advisor fee structure regulations are as commonly known as the alphabet.

So I have no reason to believe the fee arrangements asked about above are in fact illegal.

Of course, they may be. I don't know. That's why I asked for a citation.
A simple Google search takes you to SEC website, and a much more informative article from Kitces:
https://www.kitces.com/blog/performance ... sk-taking/
000
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Re: Questions to ask a prospective financial advisor

Post by 000 »

unclescrooge wrote: Mon Sep 14, 2020 11:44 pm A simple Google search takes you to SEC website, and a much more informative article from Kitces:
https://www.kitces.com/blog/performance ... sk-taking/
Well that was easy. I guess it's not illegal in all cases after all.
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unclescrooge
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Re: Questions to ask a prospective financial advisor

Post by unclescrooge »

000 wrote: Tue Sep 15, 2020 12:05 am
unclescrooge wrote: Mon Sep 14, 2020 11:44 pm A simple Google search takes you to SEC website, and a much more informative article from Kitces:
https://www.kitces.com/blog/performance ... sk-taking/
Well that was easy. I guess it's not illegal in all cases after all.
It only covers registered investment advisors. Most FAs are not RIAs
rockstar
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Re: Questions to ask a prospective financial advisor

Post by rockstar »

Sometimes, I think, investors need therapists more than they need advisors.

What does your friend hope to get out of a financial advisor?
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