Five Questions to Ask a Financial Advisor

Cheri Franklin |

At Clarity Capital Advisors, we believe that investors are entitled to have answers to these basic and fundamental questions.

Question #1: Who do you work for?

On the surface, this may seem like an unnecessary and facile question, but its answer has profound implications for how your assets will be managed. To answer it, you may want to ask the more basic question, “Who pays you?” There are several possible answers to this question, but the most important one is whether your advisor is paid exclusively by you (fee-only) or paid by providers of financial products that he recommends (or more accurately, sells) to his clients. In the latter case, payments could be transaction-based (e.g., a commission received on buying a fund with a front-end load) or asset based (e.g., a trailer fee received each year on a fund sold to a client). Note that some advisors can be paid by both you and through commissions received (i.e., a fee-based advisor). Due to the potential conflicts of interest arising from commission-based payments and adherence to a suitability rather than a fiduciary standard of care, we believe that investors are best served by fee-only advisors.

Question #2: How are you paid for your services?

Please note that for this question, we are only discussing fee-only advisors who act as fiduciaries for their clients. However, as Tamar Frankel, a securities-law professor at Boston University points out in the Wall Street Journal of 4/8/2016, “A fiduciary doesn’t have to be Mother Teresa.” An example that comes to mind is a fee-only advisor that charges 2% (or more) of assets annually. Poke around on, and you will find many firms that charge advisory fees of at least 2% annually. What is especially outrageous is that some of these firms tout the cost savings advantage of using index funds. It kind of defeats the whole purpose, wouldn’t you say? Aside from asset-based fees, there are two other primary methods by which fee-only advisors are paid—an hourly or a flat annual retainer fee. Each method has its plusses and minuses, but in this era of lower expected returns compared to long-term historical averages, it is crucial for investors to keep their costs low, regardless of the payment method. At Clarity, we have opted for the flat retainer fee model (depending on the complexity of your situation) because we believe that it is the fairest to our clients and the most transparent of the three alternatives.

Question #3: What are your qualifications and experience?

The first thing to understand is that anyone can set up shop and call themselves a financial advisor or planner. To be clear, this does not mean that someone who does not have a designation after his or her name is somehow disqualified from the profession, as there are plenty of talented and knowledgeable professionals who serve their clients well without having an alphabet soup of degrees and designations. Nevertheless, someone who is looking for a new advisor would do well to look for designations that signify mastery of a relevant body of knowledge as well adherence to a code of ethics and standards of professional conduct. One such designation is the CFA (Chartered Financial Analyst). Equally important to qualifications is experience working with actual clients.

Question #4: Is your money invested the same way that you would invest my money?

We are aware of deplorable situations where financial advisors own low-cost index funds for themselves yet put their clients into high-cost actively managed funds. This will never happen at Clarity Capital Advisors.

Question #5: Can you explain your planning and investment philosophy in a few easy-to-understand sentences?

One of the warning signs for Madoff was his refusal to explain how he got his fictitious returns. A simple rule that will benefit any investor is never to invest in a way that you don’t understand. At Clarity our approach to investing is simple. We rely on the global financial markets to deliver returns based on the combination of risks taken by each of our clients, and we limit those risks to those that carry a positive expected return. We keep your costs low so your assets have the best chance to grow. Our approach to planning is goals-based with prioritization among needs, want, and wishes. Creating a wealth plan to maximize the probability of achieving your goals is the cornerstone of the Clarity client experience.