Key Questions to Ask When Choosing an Advisor

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. As we await what the final fiduciary rule will look like, Morningstar's director of personal finance, Christine Benz, thinks that investors can be their own best advocates today.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: So, we're in the midst of this 60-day delay in the fiduciary rule. Aron Szapiro, who is our director of policy research, I know, thinks that it will be implemented even if the enforcement mechanism changes a little bit. But there's still some confusion among investors about what this will mean for them. But you think that they really should be focused on their own best interest and less on what the government rule will eventually look like.

Benz: That's right. So, I think, in the meantime until we have the final parameters around this fiduciary rule, I do think that it's up to investors looking for advice to be defensive drivers, to ask a lot of questions about how the advisor works, how they are compensated and so forth in order to end up with an advisor who is in fact looking out for their best interests.

Glaser: And the first step of that is making sure your advisor is a fiduciary?

Benz: Yeah. It's important to know that there are a lot of advisors who are already required to act as fiduciaries. So, simply ask that question. If you have an advisor or if you're interviewing an advisor, ask, "Are you a fiduciary?" And if there's any hemming and hawing in the response or maybe you get put on hold or they say they will call you back, it's probably a pretty good indication that that person is not required to act as a fiduciary, so you're better off moving on to an advisor who, in fact, is.

Glaser: If that's the first question you want to ask, it's not the last. What else should you keep in mind when selecting an advisor?

Benz: Well, I think that compensation is key, so, how the advisor is compensated. I also think it's perfectly reasonable to ask for an estimate of your annual expenses if you work with a given advisor. It's also important to understand the different frameworks for compensation.

So, there are advisors who work on an assets-under-management basis, meaning that you pay them a percentage of your assets year-in and year-out. One percent per year is a typical fee for advisors who work in this manner. And this structure can make sense for people who do need a lot of ongoing hand-holding if you're the type of person when the market drops 5% in a given week, if you want to get someone on the phone to counsel you about the best course of action, decide whether you need to make any changes to your plan, this setup can make sense. It can also make sense for individuals or families who have complicated financial situations. So, a common situation where such a manner of compensation would make sense would be someone who has a small business within their family and they need a lot of tax advice, they need investment advice, they need a lot of ongoing hand-holding.

But it is important to know that you can get good fiduciary advice not just through this assets-under-management model. You can also pay advisors an hourly fee or a per-engagement fee. And that setup can make a lot of sense if you think you just need some help getting your plan up and running but after that you should be good to go for another five or 10 years or until your situation changes. Over time, if you are someone who doesn't need a lot of ongoing hand-holding, that structure can be more cost-effective for you than paying an advisor a percentage of your assets under management.

Another structure that is picking up steam is this idea of some sort of a subscription-based service for financial advice. And the idea is that you're paying like you would for your gym membership or you would for your cable TV services--you're paying on a monthly or quarterly basis for advisory services. The advantage of this setup is that if you do need to check in with the advisor, maybe you're worried about that market drop, your subscription covers those fees, you won't be on the clock with the advisor. So, understand how your advisor charges or a prospective advisor charges and make sure that it syncs up with your particular situation.

Glaser: This can seem somewhat complex, but you think it is important that you do have someone who can give you this holistic financial planning advice?

Benz: I do, and we're really seeing the world of financial advice move in this direction where advisors are saying, it's not enough to add value with the investment piece, with the portfolio piece; I need to give my clients advice on their whole situations. And that's really what you want, I think, in most cases. You want someone who is going to be able to help you make good decisions about your household capital allocation. So, help you decide, well, am I better off putting more money into my retirement accounts or am I better off paying down my student loans or perhaps even prepaying my mortgage? Is my savings rate on track with where it should be? Do I have the right insurance products given where I am in my life, given my dependents and so forth? You want an advisor who is going to think holistically about your situation and not just consult with you on your portfolio. The portfolio piece is certainly important. You want someone who is qualified to help you make good decisions there, but you also want that holistic advice that looks at really every piece of your total financial situation.

Glaser: Christine, thanks for sharing your thoughts today.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.