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5 things to ask your investment advisor

On Behalf of | Mar 10, 2022 | Securities Law And Litigation |

When you’re ready to invest, the advisor you choose will have a big impact on how well your investments perform. How do you know you’re choosing someone qualified, legitimate and honest?

Here are five questions you can ask to get through the marketing fluff:

Are you a fiduciary?

As you may have heard, the Department of Labor has passed a rule that requires some investment advisors to be fiduciaries. The DOL’s fiduciary rule only applies to retirement accounts such as 401(k)s and IRAs that are covered by ERISA. That means the plans you participate in through your employer. Other investment advisers may or may not be fiduciaries.

A fiduciary is required to act in your best interest, not just advise you on suitable investments like non-fiduciaries. This is a much higher standard. It may be in your interest to hire a fiduciary even if the cost is higher.

Some non-ERISA investment advisors are fiduciaries. If you’re hiring someone who is not a fiduciary, consider how you will ensure that their investment advice is truly in your best interest rather than just suitable to your goals and risk tolerance.

What is your area of expertise?

Financial professionals specialize in different areas, so it’s important to know what your investment advisor is good at. For example, they may have a background as a stock trader, or they might know a lot about annuities. If there are gaps in their expertise, you may want to bring in other professionals to fill in.

Also, especially in insurance and annuities, some investment advisors only sell a single brand. If that brand meets all of your needs, this could be fine. Before you commit to a single-brand strategy, ask a different investment advisor for their suggestions and run the numbers.

Who will be managing my assets on a day-to-day basis?

A mutual fund might have a team of chartered financial analysts who actually do the investing based on the information gathered by the person you meet with. You want to know you will have access to the real decision-makers on your account, if necessary. At the very least, your investment advisor needs to know and trust who will be doing the actual investments.

What is the average size of your client portfolios?

Ideally, your investment advisor would have experience serving other clients with approximately the same amount to invest that you have. If you go to a firm that tends to work with much larger accounts than yours, you may not get much attention. If you are the firm’s largest client, you might get great service, but they might not have the expertise you need.

How will you be compensated?

The way your investment advisor is compensated may influence their advice. For example, advisors who are paid an annual percentage of the growth in your account have a direct financial incentive to grow your account. However, they could be paid based on other factors, such as commissions, internal policies or promotions. Does their payment structure incentivize them in a way you’re comfortable with?

Before you sign a contract, check your advisor’s background with FINRA

One final note. The Financial Industry Regulatory Authority, or FINRA, maintains a free background check tool called BrokerCheck. You can enter your proposed advisor’s information into the tool, and it will give you a summary of their professional history, education and licensing. It will also tell you whether they have faced legal challenges such as FINRA enforcements or lawsuits from investors.

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