Market Pulse: Searching for a financial adviser? Here’s what to ask
October 1, 2014
A month ago the wealth management editor at The Wall Street Journal ran an article on why, after only nine months, he fired his financial adviser. He thought he knew how to evaluate financial advisers; he didn't.
The problem he had with his new adviser was that they had different investment philosophies. When evaluating an adviser you should understand his investment philosophy and strategy.
How does he control draw-downs — through market timing or security selection? How often does he trade? Does he typically raise cash after some weakness?
Do taxes factor into his analysis? If an adviser doesn't have a clear strategy then that is a red flag.
Fees are also very important. When evaluating an adviser you should know how he is compensated. If the answer is more than a sentence and is confusing then that is another red flag.
Does he receive compensation based on what he buys? If so, there may be a conflict of interest.
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The total fee you pay will be more than the fee the adviser charges, too. If he buys a mutual fund that charges a 1.5 percent fee then you'll be paying that on top of the adviser's fee, which is likely about one percent annually.
The same is true if the adviser uses sub-advisers. Also, what are the commission rates? Discount brokerage firms charge less than $10 per trade.
Finally, there should be a discussion about performance. This is tricky for the adviser because, unless all accounts have the same holdings and are traded at the same time, he can't advertise performance.
Nor can an adviser offer client testimonials. Those are against the rules. He should be able to offer some sample client accounts, however, and show how he'd invest your portfolio.
Choosing the right adviser is an important decision. Make sure you are comfortable with him and his investment philosophy, and keep a close eye on fees.
Over the long run fees make a big difference. For the record, I trade through one of the largest discount brokerage firms and never receive a commission. Never.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.