During meetings with a financial advisor, it’s common for the advisor to ask most of the questions: “Has anything changed since we last met? Are you comfortable with our investing process?” But you may have some questions of your own that might not relate to your investments, but you’re curious about nonetheless.
Here are five questions you’ve always wanted to ask your financial advisor – and probably should.
1. How many clients do you have?
The typical financial advisor served 156 households last year, according to a December 2013 report by PriceMetrix, which provides software and services for wealth management firms. That seems like a lot, doesn’t it? But financial advisors are actually reducing the number of clients they serve. In fact, the numbers prove it: The average advisor had 165 household clients in 2011.
Part of the trend in reducing a financial advisor’s book of business comes at the expense of less-affluent accounts. In 2011, about 44 percent of clients in an advisor’s book held less than $100,000 in investable assets. That number decreased to 35 percent in 2013. As advisors trim clients, accounts under $100,000 are frequently transferred to a rookie advisor or to a firm’s call center.
2. How much money do you make?
The Bureau of Labor Statistics reports the median annual wage for financial advisors was $67,520 in May 2012. The BLS says the lowest 10 percent earned less than $32,280, and the top 10 percent earned more than $187,199. (The report excludes wage information for self-employed advisors.)
Another pay factor is omitted from the BLS report: Many financial consultants work for financial services firms that pay a salary and sometimes give hefty annual bonuses. Those bonuses were also excluded from the totals.
3. How do you get new clients?
Advisors will say most of their new clients are obtained through referrals. And, in a perfect world, that would be the case. But those invitations you receive in the mail offering you a free dinner and an “informational meeting” aren’t being sent out to broaden an advisor’s social circle. The same goes for the emails, tweets and Facebook friending advisors are utilizing.
The primary revenue growth for an advisor, accounting for only a 6 percent increase from 2012 to 2013, comes from existing clients – a trend especially apparent in a rising market. But in 2013, PriceMetrix says the number of new clients gained (5 percent) matched the number of clients lost (-5 percent).
4. How do you make money off my account?
This is perhaps the hardest question to get an answer to. Advisors can say they are "fee-based" or “fee-only,” which sound similar but are miles apart. There are many ways financial advisors can be paid: commissions, sales charges, commissions plus fees, salary plus bonus – it’s all quite complicated. But we have the answer.
Years ago, financial advisors were simply brokers: They sold you something – usually a stock – and were paid a commission. Those days are fading, but aren’t completely gone. The average advisor made 357 stock trades in 2013, down from 386 in 2011, according to PriceMetrix. That’s still a significant number of trades. As a client, you’ll want to know how much you’re paying for those transactions.
However, nearly one-third of accounts (31 percent) are charged a fee for “assets under management” and will generate nearly half (47 percent) of the advisor’s revenue. With an average of 101 fee accounts, an advisor made about $3,000 off each account last year. That doesn’t mean all the profit goes into the pocket of your advisor, though. It depends on how revenues are distributed by the firm he or she works for or owns.
Regardless how you are charged: by the transaction – by commissions or through an account management charge – the average client paid $3,670 in fees last year, PriceMetrix reports.
5. Do you invest the same way you tell me to?
While every client’s needs and goals are different, and there is no one investment solution that is suitable for all, the answer to this question should be, “Yes.” An advisor serving in your best interest should recommend a solution that she would buy herself – or sell to her mother.
Now that doesn’t mean every recommendation an advisor makes is perfect. Advisors can make mistakes with their own money too, after all. But their actions might indicate if they really understands what they’re selling and whether they truly stand by their convictions. Of course, there is no way to know if that is the case.
But this one question, whether answered directly or by a nervous laugh, may help you determine the level of trust you’re willing to grant.