Add these to the list of must-ask questions for a financial advisor:
- Can you explain how you are compensated?
Are you aware of where your advisor’s compensation is coming from? You wouldn’t, for example, hire a contractor to remodel your home without asking for a breakdown of costs so that you know where your money is going. Your financial management should be no different.
Remember that unless your advisor is a Fiduciary, they are paid in part on a commission schedule. Be wary of creatively re-titled commissions (commonly re-titled creatively as “bonus money”) and watch for hidden fees – 12b-1 fees, for example, are highly variable and can be very expensive, yet most people would never know that they are embedded in certain investment products. A Fiduciary, like my fee-only wealth management firm LexION Capital, does not charge hidden fees or take commissions.
- Can you explain your fee structure?
Be sure that you know exactly how an advisor’s fee structure impacts you, the client. Too often, brokers charge hidden fees that are not clearly disclosed to the client. Those fees are there to benefit the broker’s bottom line – not yours. Be sure to ask to see your returns net of fees (do not assume that data you’re given reflects performance post-fees!).
When you inquire about their payment structure, it should be easy to understand and clearly explained. Does it seem convoluted or unclear? That’s a red flag. You deserve to know exactly what you’re paying for.