There’s a lot you have to know about your financial adviser, but they may not tell you everything you need to know. You may not be getting the whole story from them and it will cost you if you’re not asking the right questions.
As the Department of Labor’s “best interest” retirement advice rule hangs in limbo — thanks to the Trump Administration and Wall Street — you’re still on your own when it comes to vetting investment advise.
Here are four essential questions:
1) How will you act in my best interest? Generally, this is a difficult question for most advisers. In the past, advisers on commission could sell or recommend any product they liked. Unfortunately for clients, these products earned broker-advisers commissions and weren’t going to help their clients.
Under the new DOL Rule (if it can overcome opposition by Trump and Wall Street), advisers must prove that what they sell will help you financially. While that’s still loaded with problems, it puts the onus on the adviser to think of your needs first.
2) Do You Have Any Conflicts? Many advisers do, such as when they sell “house” products that come loaded with fees. At the very least, they have to disclose how much they will earn from a recommendation. Any “proprietary” product should be avoided, because it’s loaded with high fees and commissions.
You should ask if another product could be lower in cost and offer higher returns. This should be the job of your adviser, but it’s always important to ask.
3) Are you charging “reasonable” fees? Again, this is a tough question because you’ll need some comparisons to answer this fully. In their mind, their fees may be reasonable compared to other advisers, but you may be able to get a better deal.
How do you do comparison shopping efficiently? If offered a mutual or exchange-traded fund, look up the fund’s objective. Say you’re looking at an S&P 500 Index Fund. They’re all alike, but some charge more than others.
Enter “cheapest S&P 500 Funds” in a search engine and see what comes up or just go to ETFdb.com. You can quickly find the least-expensive fund in every category, then compare with your adviser’s picks.
4) Are your recommendations “prudent?” This is another vague legal term, so you’ll have to customize it to your situation. Are you saving for retirement? Trying to pay off student loans? Then chances are you may not need another retirement vehicle if you’re already saving.
It’s always hard for financial consumers to know what’s appropriate for them. But one red flag that always works for me is the commission and fees. If they are charging you a lot for any product, then chances are it’s not in your best interests.
Although every adviser will have to disclose their compensation, it’s up to you to decide if their advice is prudent. For that, you’ll have to do your homework and be honest on what you need — and don’t need.
One sure way of vetting whether an adviser in working in your best interest? Ask them if they’re a fiduciary. This is a specific legal term that means that they are bound by law to act in your best interest. They don’t always do, but you can sue them if they don’t.