Four Questions To Ask A Financial Adviser Before Hiring Them


You've made the decision to whip your financial life into shape and work with a wealth advisor to achieve your goals. Now all you need to do is find a trustworthy advisor who has your best interest at heart. Read on for the four questions to ask before hiring a financial advisor.

1 Are You A Fiduciary?

The most important thing for you to find out is whether your advisor is operating as your fiduciary or not. In other words, do they have to adhere to the fiduciary standard or the lower suitability standard.

Investment advisers, insurance agents and stockbrokers are affiliated with broker-dealers. Such advisors generally earn a commission on the investment products they recommend to their clients. The suitability standard, enforced by FINRA, mandates that such recommendations need to be roughly suitable for their clients, but don't need to be in their best interest.

If you are a savvy investor you may be comfortable with this business model. But if you are new to investing, you probably prefer working with a financial advisor who is legally required to have your best interest at heart. Fiduciary advisors, like Heron Wealth, operate according to the fiduciary standard as mandated by the SEC. They are not allowed to earn commissions and must disclose any potential conflicts of interest to their clients.

2 How Are You Compensated?

Because costs have the potential to erode your investment returns, you need to understand how your financial advisor is compensated for the work they do on your behalf. The advisors affiliated with broker-dealers we mentioned before earn their living from commissions. They are incentivized to sell you the investment products that pay them the highest commission which is a clear conflict of interest.

Instead, fiduciary advisors are not allowed to charge commissions. You still need to understand how they charge though, and get them to confirm their compensation structure in writing before you hire them. At Heron Wealth we charge our clients a percentage of assets under management or a financial planning fee, depending on the work we do for them.

3 Is My Money Held With You Or A Custodian?

Most financial advisors are honest and want nothing but the best for their clients. However, there are some bad apples, like Bernie Madoff, who defrauded his clients over the course of decades. Apparenty he was able to get away with stealing his clients' money because he held it in accounts under his firm's name. In other words, he could do with the money what he wanted without having to ask for his clients' permission first.

The way to protect yourself against such practices is to make sure that you work only with a financial advisor who holds their clients' funds with a well-known custodian such as Charles Schwab or Fidelity. Having your funds held by the custodian means that your wealth advisor cannot access it without your prior written consent. Aside from the documentation you receive from your financial advisor, you should receive monthly statements from the custodian via mail.

4 Do You Work On A Discretionary Or Non-Discretionary Basis?

It is common for wealth management firms to manage their clients' accounts on a discretionary basis. This means that you allow the firm's portfolio manager to make buy or sell decisions about your investment account without them having to obtain your permission beforehand.

It's important that you are comfortable with that approach before hiring the wealth manager. If you prefer to be in charge of all of your trades, you may want to consider working with an investment advisor or firm who will work on a non-discretionary basis. This means that every trade has to be run by you before it can be executed.