Questions to Ask When Picking a Financial Adviser: Readers Weigh In

When it comes to picking a financial adviser, people often don’t know what questions to ask in order to find a good fit. Too many clients end up contracting for services that don’t match their needs—and end up paying far more than they have to.

An article in the March Wealth Management Report looked at six key questions to ask a financial adviser to avoid those costly pitfalls. Many readers responded via email and online with insightful comments about their own experiences. And some added their own questions to our list.

Here is a look at some of those questions—and how investors should broach them with a prospective adviser.

1. If we are considering changing advisers, how can we directly compare the services and fees of the current and potential new advisers?

People switch advisers all the time. But it’s often hard to know whether they’re getting a better deal, because advisers offer different services and charge different kinds of fees. As a result, it’s important to meet with at least two prospective advisers and ask each for a breakdown of fees for the same services being provided by the current adviser.

To get a clearer picture of what kind of service you can expect, find out how many other clients the adviser has and how often the adviser meets with each to review an investment portfolio or discuss other needs.

If possible, speak with another client and ask about that person’s quibbles with the adviser. While it can’t be quantified, personal chemistry is a key factor in the benefit of a relationship with an adviser.

2. Are there cheaper alternatives to your investment choices for me that would give me similar risk-reward trade-offs?

Hundreds of billions of dollars have flowed into exchange-traded funds just in the past couple of years as investors seek to boost their returns by lowering the cost of their investments. So it’s reasonable to ask if an adviser is doing everything he or she can to cut your costs. Just don’t expect the answer to be simple.

As money-management fees have faced growing competitive pressure in recent years, more advisers have switched to low-expense ETFs from costlier actively managed mutual funds. But an adviser may not have expertise in markets outside the U.S., or in other, more complex securities that may suit a client’s portfolio. In such cases, it’s common for the adviser to use an active mutual fund or a specialized sub-manager.

Active mutual funds commonly charge expenses of around 1% of assets annually, and that fee can be significantly higher for non-U.S. and other specialized funds. When advisers use such funds, they face a choice between swallowing the added cost or passing it along to the client. And they should be willing to disclose which approach they take.

If it’s not clear why an adviser has employed a certain active strategy, it might be worth asking whether the adviser gets additional compensation from using it, says J.C. Abusaid, chief operating officer of Halbert Hargrove, an advisory firm in Long Beach, Calif.

3. What impact has the Labor Department’s fiduciary standard had on your fee structure?

In 2015, the Labor Department unveiled a fiduciary standard for financial professionals handing investment accounts, requiring them to put the interests of investors first and discouraging the use of certain higher-fee products. The Trump administration isn’t expected to implement that rule, but another fiduciary standard now is being considered by the Securities and Exchange Commission. Expectations that some kind of new standard will be adopted have affected advisory practices, says Jamie Cox, managing partner at Harris Financial Group, based in Richmond, Va.

For example, he says, certain annuity products no longer have embedded commissions. Instead, their fees now can be broken out clearly for consumers to see. So, anyone considering buying an annuity should ask about those fees and what portion of them would go to the adviser.

Advisers also generally no longer get commissions on many of the transactions they make on behalf of clients, such as selling mutual funds or stocks, but it may be good to check on whether an adviser gets a commission on each particular transaction. It’s another step toward understanding how—and how much—to pay for advice.

“Clients become smarter by asking more questions” about fees and what they cover, says Mr. Cox.

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For more information or questions, please contact Halbert Hargrove at hhteam@halberthargrove.com.