It was one year ago today, that Bernie Madoff was arrested, and his Ponzi scheme exposed. Although most investors were not directly affected by his crimes, the size of his fraud has caused many to question if something similar could happen to them. An article in yesterday’s Wall Street Journal suggested investors should ask several questions to determine if an advisor has their best interests at heart. In light of this “anniversary”, here are a few questions to ask of your current advisor, or before deciding to work with one:
Are you a fiduciary?
A fiduciary is legally required to put your interests first. Not all advisors are required to adhere to this standard. Brokers operate under a suitability standard, which means they must recommend products suitable for a client, based on their goals and circumstances. Although knowing this answer is a good starting point, the article points out that there are many brokers who operate in a fiduciary manner, and some registered investment advisors who fall woefully short.
How are you paid?
Is your advisor paid a commission for the products you buy, or do they earn fees unrelated to the investments you own? The question here relates to any bias the advisor may have in recommending certain investments. Giving advice that leads to product sales might be suitable, but perhaps not in your best interest. You are looking for a straight answer to this question.
Where is my money kept?
This one question potentially could have prevented many victims from investing with Bernie Madoff in the first place. Funds held at an independent third party custodian, separate the advisor from the money. By reviewing independent brokerage statements, you can determine if withdrawals are consistent with agreed upon advisory fees, and not something else. Additionally, the advisor can’t manipulate performance like Madoff did.
What relevant degrees or certifications do you hold?
Advisors in the financial industry may go by a wide variety of titles. Unfortunately, it can be difficult and confusing for consumers to decipher what each title means. Thankfully, there are a number of online tools, such as this one from FINRA, to help. Asking about level of education attained, continuing education requirements, and exam requirements can help you gain more insight into your advisors ability to handle your situation.
Are you a Money Manager or an Advisor
A money manager is responsible for managing the securities portfolio of an individual or institutional investor. An advisor may manage your investments, as well as provide advice on a variety of financial issues. If your needs include investment advice that is coordinated with a retirement and estate plan, a money manager will not be sufficient.
Ultimately, these and other questions are designed to help you find an advisor whose interests are aligned with yours. Asking straight forward questions, and being comfortable with the answers, can go a long way in finding the right advisor for your family.
