3 Questions for Your Financial Advisor

Some advice on asking the right questions of your financial professional.

By + More
Rob Russell
Rob Russell

Have you retired or are thinking about retiring? Maybe you’re evaluating a pension buyout from a company like NCR or FedEx, or an early retirement package from your employer? If you’re facing some heavy decisions like these, how do you evaluate your options? This is an arduous task for anyone, and having a specialist to bounce ideas off of is invaluable. So how do you find the right advisor or even evaluate the one you have? In other words, in this Madoff-fueled untrusting era, who’s going to look after your money as you enter your next phase of life?

The Basics

When evaluating advisors there are the usual questions that everyone asks:

  • What credentials/education/experience do you have?
  • How much money do you manage?
  • Do you work with people of all ages and wealth?
  • What happen to my money if something happens to you?
  • How are you paid? Fees, commissions, or some hybrid?
  • Many people will also do the usual online background check at SEC.gov, FINRA.org, or EthicsCheck.com, which only provides a limited amount of useful information. Others will ask for references, which is obviously a loaded question. Why would any advisor let you talk to clients that are unhappy?

    While these questions and background checks are a good jumping off point, they really don’t empower you to make you a wise decision.

    The Only Questions That Matter

    When evaluating a money manager, advisor, I’ve discovered that there are only three questions that really matter:

    1. Who do you manage money for? Clients? Institutions? Or both? I’ve found that the best advice givers manage money for both clients and institutions. While you may not have all the right questions to ask, do you think an institution like a police and fire pension or endowment fund would? Many times some of the biggest money management firms don’t even manage money themselves. They hire institutional managers, repackage their product, and tack on a hefty fee. Wouldn’t it be better to cut out the middleman, and his no value-added fee?
    2. Are you GIPS compliant? Have you ever walked into a bank or broker’s office and you see one of those charts on the wall showing a $10,000 investment going straight up for decades, but somehow similar returns never worked out for you quite that way? Chances are they aren’t GIPS compliant, so their fancy chart is misleading. GIPS stands for Global Investment Performance Standards and is the most respected standard in the world requiring outside auditors to verify performance standards and claims. Very few asset managers are GIPS compliant, so whom would you trust more? A management team with unaudited, unverified performance or one that is held to a much higher, rigorous standard?
    3. How well did you do in 2008? From an insiders perspective people like me look good when the market goes up, but the real test is during markets like 2008. So, don’t be shy, ask about their performance in 2008 and then demand proof (those examples should be GIPS-compliant as well). Many advisors and managers consider themselves heroes if they lost less than the market did in 2008. As Vince Lombardi once said, “Show me a good loser, and I’ll show you a loser.”
    4. Robert Russell is the author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts Retirement Rescue Radio, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.