16 Questions You Must Ask Your Financial Adviser

When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.

– Thomas Sowell

It’s a tough gig for regulators – to try and have all financials advisers acting in the best interests of their clients. As we have all seen the exposé from the Royal Commission into Financial Services, they haven’t done a great job. So as consumers, we need to take it into our our hands and arm ourselves with the right questions (and know what to listen out for) when engaging a financial adviser – an adviser that will put your interests first!

Here are 16 questions to ask your financial adviser – I’ve provided some commentary and/or answers to each question. In fact, you should print these off and don’t be afraid to go down the list, one by one. You’re interviewing them as much as they’re interviewing you.

1. How are you licensed to provide advice?

Some like the comfort of a large institution or institution licensed firm, and others prefer to stay away from them. The key to being licensed by an group that is unaligned, is that their approved product list (APL) is far wider. If you’re meeting with a bank licensed firm, ask what percentage of their clients’ investments, insurance policies, and platforms are placed with related parties. This should tell you what you need to know.

2. How do you charge for your services?

There are many ways advisory firms charge for their service. Hourly, which is not very common. This is good for project based work. Most of the industry charges via a percentage of assets under management (% of AUM). This can be around 1% pa. The incentive for the adviser is to hoard as much of your investments under their management as they can, in turn, maximising fees.

For an ongoing engagement, fixed annual retainer is best and probably far more reflective of the work completed for you throughout the year (no surprises too).

3. Do you have any targets whatsoever set for you and/or your team?

A confident and convincing No.

4. Do you earn a commission/placement fee for placing me into certain products or investments?

A confident and convincing No.

5. Do you pay referral fees to generate new clients, and will you put this in writing?

Some advisers pay their referrers a fee, which needs to be disclosed to you both verbally and in writing. You probably want your adviser be recommended to you on the basis that they are professional, trust worthy, competent, and that you’re going to get along with them, not because someone is receiving a payment from them.

6. Do you earn a referral fee for referring us to other professionals, such as mortgage brokers, solicitors, etc?

You probably want to be introduced to other professionals because they are professional, trust worthy, competent, and you’re going to get along with them, not because your adviser is going to receive a payment.

Ask your adviser if they’ve personally used the services of the people they’re recommending.

7. Do you earn more money by recommending certain products or services?

A confident and convincing No.

8. In what ways are you remunerated?

The only way your adviser should be remunerated is by the fees you pay them.

9. Does anyone else at all, within your firm and/or your licensee, benefit from the advice you provide and/or the products you recommend?

A confident and convincing No.

10. Do you recommend more of certain products than others, and if so, why?

Yes – there should be very good reason for this. Primarily it should be about bringing you the ‘best-in-breed’ solutions. Whether it’s a particular investment, investment/portfolio manager, or custodian/platform, it needs to be because it’s good for you. Secondly, the more efficient your adviser’s firm, the quicker the turn around of your needs, and fees remain competitive.

11. What is your investment philosophy?

There are so many ways to invest. The most important thing is to find someone that has a philosophy (you’d be surprised how many don’t!). Then it’s a matter of ensuring your personal beliefs around investing align with your advisers. Ideally, you’re looking for a philosophy that is evidenced based, and not based on a gut-feel or hunches.

12. Do you believe your investment philosophy can beat the market?

There are roughly 60 billion shares traded each day around the world. It’s a tough ask to expect any one individual to outsmart millions of traders and investors around the world, over long-periods of time, and to do it consistently.

The answer should be No. If it’s a yes, you’re probably taking on more risk than you think.

13. How different do your client’s portfolio’s look to each other?

You probably expect your adviser to tell you that all their clients are unique and each portfolio is hand crafted to reflect their clients’ goals. And this is true. Although most client portfolio’s won’t look identical, a large portion of it should look and feel similar. By that I mean the underlying investments should largely be the same or similar, and that the allocations to those investments will vary.

14. Do you invest in the products you recommend me?

I’m a huge believer in ‘eating your own cooking’. The answer here should be Yes.

15. How often do you change investments or trade my portfolio?

Your adviser should be trading as seldom as possible. Maybe a couple of times a year. High turnover means high transactions fees, which in turn means lower returns. And we all know stockpicking is largely discredited.

16. What is a reasonable estimated return on my portfolio over the long term, after inflation and fees?

Your adviser should be able to provide you with these figures for past returns for a given level of risk (conservative all the way through to aggressive portfolios). You should expect a return of inflation plus 3-7% pa over the long-term. Anyone promising you double digit-returns is either a fool or a crook.