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5 Point-blank questions to ask before hiring a financial advisor

Senior couple meeting with agentDespite what you might read in magazines about managing your finances on your own, it’s often a good idea to get some professional and expert help. It’s roughly for the same reason that you hire an attorney while filing bankruptcy or going through a personal injury lawsuit. Do you have enough legal skills to handle a divorce or a property dispute? Firstly, you need to understand if not all, a little bit of the mind-bending terminology and secondly you need to have a clear sense of what it right and what is wrong. A financial advisor is someone whom you hire to pick stocks, real estate investment trusts, bonds and other investments for you.

Financial advisors are fiduciaries and hence they are legally obliged to act with your best interests in mind. They usually charge you a flat salary or fee or they even sometimes receive a cut of the assets under management. Due to their compensation structure, advisors are seen as having lesser conflicts of interest than the brokers. If you’re about to hire a financial advisor who can look after your finance, here are some point blank questions that you need to ask him. The Department of Labor has published this pretty good list to start off with.

  1. Who is actually handling my investments? If you’re working with a genuine advisor, you will see that he keeps your funds in a discretionary account and conducts transactions involving bonds, ETFs, individual stocks, mutual funds so on without your trade-by-trade approval. Always be aware of the investment pro who claims himself to be a “money manager” and says that he keeps assets under management, but is nothing but a mere middleman between you and some other investment advisor.
  2. What is your background? There are many registered investment advisors who have advanced degrees in finance and business and long years of experience as investment analysts or traders at major financial firms. Always be cautious about a financial advisor who has little or no previous experience apart from his or her years in insurance or brokerage sales.
  3. What is your track record? Why don’t you ask for a copy of the Form ADV that discloses some of the possible conflicts rising from securities trades and answers a lot of other questions? Always look forward for a risk-adjusted performance record that goes back to at least 5 years in writing. You may also get a clear list of his client references and call each one of them in order to know about their experiences.
  4. Who pays you your remuneration? Virtually, all the fees and compensation that an investment advisor gets should come directly from his clients. Any other sources of income should be fully disclosed and insignificant. Financial brokers, on the other hand, can earn commissions on trades, trailer fees for annuities and mutual funds. Such other sources of income can create some lots of conflicts.
  5. Can I pay you on an hourly basis? The prevalent rate for a trustworthy and genuine advisor usually hovers around 1% of the assets that are under management. But due to the benefit of the internet, there has been a dramatic reduction in the transaction costs. If you and your advisor agrees to put your money in a mix of index funds, mutual funds and set them on auto-pilot, ask him to charge less from you.

Finally, stay away from an advisor who swears that you will always remain the boss. From a legal standpoint, brokers can carry out orders, even when they know that they are unwise. But as a part of his fiduciary duty, a true advisor will decline making an investment that he believes could threaten your financial health. So, instead of seeking help of debt consolidation companies to relieve yourself of high interest debt, get help of a financial advisor to keep debts at bay.

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