If you’ve read through our website, you’ll know that MarketStrats is an independent, fee-only, fiduciary. Prior to this firm, I worked at a traditional brokerage. I learned a lot from some good people but the old-fashioned wealth management model is broken.
Even if you don’t become our client, it’s important that you have a financial advisor that is obliged to look out for your best interests. Here are some questions that you can ask to help ensure that they do:
“Are you a fiduciary?”
A fiduciary is legally obligated to act in your best interest (think your primary care doctor or a lawyer that you hire to represent you). This has been a hot topic in finance the past few years as some lawmakers have attempted to introduce a “fiduciary rule” for advisors too. As of right now, it has failed. There has been significant pushback from Wall Street. You can draw your own conclusions as to why.
Regardless, today, most financial advisors are still not fiduciaries. They are not required to put your interests before their own. How is this problematic? Look no further than your advisor’s compensation structure.
“How do you get paid?”
Financial advisors are generally either paid by fees or commissions. They sound similar but they have glaring differences.
An advisory fee can be calculated in a number of ways: a % of assets under management, an hourly rate, or a fixed amount charged periodically. We offer two different fee-only pricing methodologies. Regardless of which type of fee-only methodology is utilized, the key thing to note here is that the fee itself is not tied to any particular investment or insurance product selection.
Commissions are another story. They are directly linked to the product sold. Non-fiduciary advisors can be paid per transaction with commissions. This creates a conflict of interest because the advisor is incentivized—and sometimes even pressured—by management to sell higher-cost investments, insurance policies, or annuities. It’s particularly scary because you see this most often from big brokerages and banks with brands that people trust.
“What are my all-in costs?”
Beyond any fee or commission paid to your advisor, the underlying investments cost money too. Everyone has to get a cut to stay in business, after all. Most commonly, you will see them referred to as expense ratios.
Nowadays, you can buy a diversified portfolio of index funds for a weighted amount under 0.10%. To be clear, that is 10 percent of 1 percent—a very small amount. If you are paying more than that, there should really be a great reason as to why.
In addition to charges from the underlying investments, the brokerage or custodian that you use will have fees. Some things to look out for are a trading commission to buy or sell positions and annual account maintenance fees. These are often avoidable.
“Can you explain your investment philosophy?”
Ask this and then just stop to listen. Your advisor should have a clear answer, and more importantly, you should have a clear understanding. It’s your money, after all.
Be on the lookout for unnecessary and complicated methods meant to impress. Outperformance is very hard to achieve and risk management with a financial plan is often a wiser choice. Morningstar completed a study and determined that the number one indicator of success is a funds’ expense ratio.
We make a point to use low-cost and diversified asset allocation models. They are half strategic (rebalanced with tolerance bands) and half tactical (