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For over a decade I worked in securities regulation. No, I was not a bouncer nor was I part of a security detail for a famous person. I audited and investigated individuals who sold investments. It was my job to understand the ins-and-outs of their businesses. This makes me a specialist in knowing what questions to ask a financial advisor. 

In my decade of investigating and auditing firms, I likely reviewed the businesses of over 100 firms. Ten exams a year would not have been a-typical. Not one of these firms’ businesses was like the next; however, there were a lot of similarities and key features set them apart.

So, I put together this list of 8 questions to ask a financial advisor or investment sales-person to get to the root of their business. I’ll also give you some detail on what answers you can expect and how to interpret them. By asking these questions you will have more confidence that you are working with an investment professional that you can trust. 

8 Questions to Ask a Financial Advisor

What registration do you have? 

The first place to start when working with someone who is selling you an investment product is how they are registered. It is actually illegal for someone to sell you an investment without being registered to sell investments in the United States and the state in which you reside. 

It is important to know that someone’s title with their firm is not the same as their registration. An investment firm can use any titling conventions they choose. However, investment professionals can only be registered adequately in one of three ways: 

  1. Broker-Dealer Representatives

Broker-dealer representatives are registered with a firm called a broker-dealer. These individuals usually are paid on a commission basis.

  1. Investment Advisor

Investment Advisors are registered with a firm called an Investment Advisor (I don’t know why they are called the same thing even though one is a company and one is a person, but they are). Investment Advisors are usually paid a fee based on the amount of money they manage (i.e. assets under management).  

  1. Both a Broker-Dealer Representative and an Investment Advisor

Some companies have both a Broker-dealer and an Investment Advisor, and individuals can choose to be registered with both. This makes the individual a dually registered broker-dealer representative and an investment advisor. If a person is registered both ways, it is extremely critical to know in which capacity they are working with you. 

You can check a person’s registration status through the Financial Industry Regulatory Authority (FINRA). They have a service called BrokerCheck. You can also contact your state securities division to verify adequate registration. 

What products are you able to sell? 

Investment professionals can be captive agents or independent contractors. Captive agents sell a very specific set of products approved by a firm, whereas independent contractors have the ability to source investment products from a significant number of sponsors that they can request that their firm review. 

Also, knowing an individual’s ability to sell insurance might be important to you as well. A pro of an individual being an insurance agent is perhaps you can bundle your investment and insurance services within one place. However, you may find that someone that is an insurance agent first is more conservative when it comes to investment recommendations. 

Do you work with wholesalers? 

You have likely heard about drug reps going into doctors offices to educate and promote certain medicines to doctors. Just like this, in the investment world called wholesalers that do practically the exact same thing. Companies who create investments hire wholesalers to go into the field, talk with financial professionals. They are responsible for educating the representatives on the products with the goal that the investment professional will then turn around a favor selling their product. It is completely legal for representatives to work with wholesalers, and there are certain regulations around what a wholesaler can do to entice sales; however, it’s still an important question to ask a financial advisor because this relationship may skew a financial professional’s objectivity in recommending products.  

How will you evaluate how well my portfolio is performing?

Determining if an investment professional is adding true value to your investment portfolio is a very nebulous concept. Technically speaking we can all open a brokerage account and invest our funds on our own; however, if we choose to work with someone we don’t have that to compare. 

So, it’s important from the start of your working relationship with your investment professional to ask how they will quantify their success. They likely will have a benchmark that they are working to outperform. Most importantly through their answer to this question, you will learn their understanding of investing and their strategic nature with respect to investing. If they guarantee they will beat the market, that is a red flag because no one can guarantee they will with certainty outperform whatever it is they compare themselves to. 

What written and verbal customer complaints have you had?

Investment professionals are required to report written customer complaints to their firms, and firms are required to report certain customer complaints to FINRA. When you check your investment professionals registration on BrokerCheck, you can also see if any customer complaints reach this threshold. 

However, do not limit yourself to the question of what reported customer complaints does an agent have. If they say they have no customer complaints, written or verbal, a great follow-up question to ask a financial advisor is: Can you explain the circumstances surrounding why the last two people moved their money elsewhere and closed their accounts? 

Just because a financial professional has customer complaints doesn’t mean you can’t work with them. However, I will say just like a car with a long carfax report would give you pause to buy the car, customer complaints are a major red flag to work with that investment professional. 

How do you get paid and how much? 

These last three questions are more related to once an investment professional has recommended a product to you, but can certainly be part of an opening interview as well. Learn whether the person makes a commission or fee, if they are paid up-front (front-end load) or if they get paid when you sell the investment (back-end load). 

Also, asking what the fee or commission amount is may seem intrusive, but it absolutely important. The research show that the more you pay in fees to invest, the less your account will return for you over time. This makes complete sense, because the more you pay in fees/commissions, the less you have invested to grow. Anything over 10% is considered an excessive amount from a regulatory perspective; however, I would argue anything near that is not worth your time when you can invest in products that have fees lower than 1%. 

It’s also important to note that if someone is dually registered they are not getting both a commission and fee on what you invest. This is called double-dipping, and is an example of excessive compensation which is generally against the law. 

It’s not just cash compensation that matters, non-cash compensation matters, too!

Are there any sales incentives or sales competitions for this product? 

“Sell ten annuities in June and get a cruise for two.” I once audited a firm and looking at their sales data I saw a huge spike in annuity sales in one month. I asked compliance personnel about this and they indicated that there was a sales incentive for selling annuities that month. That line was the head of the sales incentive campaign.

On top of getting a commission or fee, some firms incentivize certain products. It is illegal for firms to incentivize one product, but if they generalize to all annuities or all mutual funds, or all exchange-traded funds, it is generally permissible. While it is permissible, it raises red flags that representatives are not doing what is in your best interest if they are simply looking for a free trip. Knowing about these incentives or sales competitions can help you keep perspective about the financial professional’s motivations for recommending a product. 

How will my money be handled? 

The last question to ask a financial advisor is how your money will be moved to be invested. This is critical, because it’s a way to protect yourself from fraud. In the investment world there are very strict rules on how money can be handled. The straighter route your money makes to the financial intermediary the better. 

If your financial professional asks for cash or a check written to them directly, simply walk away and I would encourage you to report what you know to FINRA or another securities regulator (the Securities and Exchange Commission or your state securities division). A significant number of firms will do direct transfers from your checking or accept a check written to the investment company or a product sponsor. Where to write the check to should be clearly identified in offering documents. If you aren’t comfortable with how money is being handled, you can talk to the investment professional’s supervisor, their firm’s compliance department, or again call a securities regulator. 

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