Marcelo Taboada


Check under the hood:

What you need to know before hiring an advisor

I recently went through the process of buying a new car. I spent roughly 30 to 40 hours researching various makes and models, visiting dealerships, and questioning sales reps before deciding on the car that was right for me. A new car is an important purchase and merits careful scrutiny. Even though cars are fairly straightforward, we still ask all kinds of common questions about their performance and capabilities in order to find the one that suits us best.

In many ways, retirement plans are similar to cars; both need to take you from Point A to Point B safely and on time. While you should remain in the proverbial driver’s seat of your retirement plan, a good advisor will help keep you on track, guide you through trouble spots, and protect you from taking an unsafe detour.

Due Diligence

If we can spend 30-40 hours researching a new car, how much time should we spend doing due diligence on the person we will trust with our retirement? I polled people in my network to discover how much time they had set aside to do just that. The results were surprising. 70% of respondents reported spending less than two hours researching their options. It’s high time we got serious about kicking the tires and checking under the hoods of potential advisors as if they were cars. This article won’t help you find your next car, but it will shed some light on what you should know before trusting your money and your financial security to a financial advisor.

Below is a list of ten questions that you should ask of a potential advisor or institution. The answers you should hear are in bold italics.

  1. Do you have a fiduciary responsibility (legal requirement to act in my best interest) towards me? Yes
  2. How do you get compensated? Directly from the client, no third-party commissions
  3. Do you have a defined investment philosophy, and if so can you provide that in writing? Yes, and yes
  4. Do you participate in any sales contests within your firm? No
  5. Will you itemize all fees and expenses? Yes
  6. Will you put any conflicts of interest in writing? Yes
  7. Do you integrate financial planning, taxes and estate planning to the investment strategy? Yes
  8. Do you believe in market timing? No
  9. Do you believe you can consistently beat the market? No
  10. How often do you trade? As little as possible. We systematically rebalance quarterly and/or when necessary

The answers to these questions should give you an indication of whether or not the advisor has any conflict that will prevent them from always acting in your best interest. Their answers will also reveal their means of compensation and what kind of investment philosophy they follow.

The winning retirement planning formula is a process whereby your investments follow a defined, evidence-based investment philosophy that operates in sync with your financial, tax, and estate planning.

A due diligence process to find the best advisor for you takes time and effort, but asking the right questions now can lead to a better result down the road. That is something every investor should strive to benefit from.

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