Outside the Box: The 5 questions to ask before choosing a financial adviser

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Choosing the right investment adviser for your needs should be much easier than it is.

Unfortunately, much of the investment advice and wealth management industry remains mired in confusing practices, a lack of transparency, and complex terminology that makes it all too easy to end up with a bad fit.

Even very smart, high-net-worth individuals can stumble into solutions that don’t deliver what they expected in terms of the services provided, the resources at their disposal, the fees they’re paying, and the investment vehicles they can access.

One surprising thing is how many people still view financial advisers as essentially all the same. They don’t appreciate one of the most important dividing lines in the industry — that between Registered Investment Advisers (RIAs) and the rest.

RIAs have a fiduciary duty to act in their clients’ best interest and their fees are independent of the investment products they recommend. In other words, their success is tied firmly to that of their clients.

At the other end of the spectrum are commission-based brokers who get a percentage of whatever product they sell their clients. In between, you have banks, brokers and trust companies that may push clients toward their own in-house products and share fees with third-party solutions.

The difficulty in spotting these vital differences is mostly by design. Many firms are not transparent about the fact they’re not bound to work in your interests and have a stake in selling you certain products.

Most clients weighing the options lack the in-depth understanding of the industry to determine what’s best for them. Following are five key considerations to make the most informed decision:

1. What problem are you trying to solve?

The question that everyone should ask before choosing an adviser is: why do I need help? Is it because you just want your investments and other assets managed, or are you looking for a more comprehensive wealth management solution? The latter involves a more holistic approach to your overall financial situation, including in-house expertise to address estate and tax planning. But it’s important to do your due diligence before signing up and to ask questions about the expertise and services available. It’s not uncommon for firms to sell themselves as wealth managers only for clients to find they don’t provide many additional services.

2. How does the adviser get paid?

If they’re an RIA, the answer is pretty simple: their payment is a percentage fee of your assets under management or a flat fee. But when dealing with other forms of investment professionals, you need to ask probing questions about who’s making money and how. Advertised costs might seem low but there’s a lot of potential for hidden fees eating into your returns, such as through portfolio changes.

3. Who’s on your team?

It’s vital to know what sort of team you have working for you. Who’s making the key investment decisions? Is it being done by one person or a committee with deep expertise and experience? A lot of the leading advisory firms have deep bench strength, but in other cases clients may think they are getting advice from an institution when really, it’s from one individual. What is the depth and quality of their resources? Many firms can tell a good story but might not have the resources to back it up or the partnerships to access the best opportunities. Most clients will want an adviser that can thoroughly dissect and analyze investment opportunities, including through on-site visits, and that can demonstrate strong data gathering abilities.

4. Is your adviser proactive?

As in any good relationship, you shouldn’t be left feeling lonely by your adviser. Make sure you choose an adviser who’s committed to checking in with you and responding to changing events. If you went through the recent coronavirus-driven stock market gyrations without getting a call from your adviser, you may be with the wrong firm.

5. Whose money is it?

It’s interesting how many clients become very passive once they’ve handed over their money, almost as if they’ve forgotten it’s theirs. Often, they ask permission to make withdrawals, or just go along with their adviser’s proposals without asking any tough questions. The money may have shifted from your bank account to an investment account overseen by your adviser, but it’s still yours, so your adviser should be responsive to your changing needs.

There are many options, choose wisely.

At the end of the day, many clients who put value in objectivity are likely to lean toward an RIA solution for the simple but powerful reason that they’re getting someone who’ll be firmly on their team and acting in their best interest. There may be some cases where a non-RIA solution is a better fit. Those with lower wealth levels and simple needs might do better to opt for a basic, low-cost provider. Keep in mind that varying options have advisers motivated by varying dynamics — makes sure you understand those differences and how each choice can result in a different level of service, fees, and advice.

Other investors might go with a bank or broker in order to cement existing relationships, maybe to get a better credit card, elite status, or a lower mortgage rate. These can be valid reasons as long as you go in with your eyes open, understanding the risks and knowing that those operators aren’t in the business of giving away free money.

Jeff Watkins is a tax partner at Plante Moran who works with high net worth clients. Sara Montgomery is a senior manager at Plante Moran Wealth Management who specializes in family education and philanthropy.

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