Investment Advisor Representative

Investors are often faced with making a decision regarding if and who they should hire to help them invest and manage their money.  Some individual investors are prepared to handle the task themselves, while others are seeking the guidance of a professional.

Before making a selection I believe it is important to ask a lot of questions.  I also find it very useful when comparing one advisor to another to have all competitors answer these same questions in writing to help the client compare apples to apples the different options.  This list is not all inclusive of course, but at least this will help consumers be more educated before making a decision.  I have also included some information regarding historical rates of return at the end of the article.

10 questions every investor should ask prior to hiring an advisor:

1. Are you, the advisor, a fiduciary?
2. What process is used to determine which investments are in my portfolio, specifically, how are certain funds      picked over other funds?
3. What fees am I paying for each of my investments? Each investment should provide an amount for each or indicate zero fee.
   • Mortality and Expense Fee:
   • Administrative Fee:
   • Management Fee (advisor):
   • Management Fee (fund):
   • Planning Fee:
   • Maintenance Fee:
   • Annual Contract Fee:
   • Subaccount Fee:
   • 12-b(1) Fee:
   • Death Benefit Rider Fee:
   • Optional Death Benefit Fee:
   • Optional Living Benefit Fee:
   • Fund Operating Expense Fee:
   • Other Fund Expense Fee:
   • Surrender Charges if surrendered:
   • Front Load:
   • Back End Load:
   • Per transaction Fee (ticket charges):
   • Account closure Fee:
   • Distribution or check writing Fee (fee for taking money out):
   • Fee if changing fund families:
   • Any other fees not on this list:

1. For each investment, is my money guaranteed, and if so by who is it guaranteed, and what happens if the company that guarantees the account fails?
2. What is an optimal Social Security Election Strategy for me?
3. How is the advisor being compensated, up front and ongoing?
4. Can the advisor provide a list of at least 20 happy clients?
5. Is the advisor subject to any sales quotas, and is the advisor able to sell any and all financial products or only specific products as dictated by the company they work for?
6. What is the specific distribution plan? Exactly how do I get my money out of each investment?  Specifically, do I need to annuitize my money to receive a particular benefit, and what does that entail?
7. What conflicts of Interest does the advisor have?

Another important factor to examine is historical returns on a particular investment opportunity.  Last month some of my readers questioned my statement regarding not using historical rates of return when evaluating performance, but rather looking at your starting balance and ending balance.  I hope to clear the air regarding that statement.

I’m going to provide to you 5 fictitious investment returns over a five year period.  These are not real investments, rather, simple mathematical examples of how historical rates of return can be misleading to the consumer.  Keep in mind, the value in the column labeled Average Return is what will show up on your statement, in your prospectus, and on many other reports such as Morningstar™.

This is undisputable proof that an investment with an average rate of return of 6% over a 5 year period can outperform an investment with an average return of 12% over the same time period.  This is also proof that an investment with a positive average rate of return can result in a negative portfolio balance.

Historical average rates of return are not relevant; as the number does not give the investor an accurate figure to determine what would have happened with their money.  So why do so many companies use the average return number?  I’m not sure.  However, what is important is how much money you start with, and how much you end up with. Ask the right questions, do your homework, and you will be a much happier investor.

This article was written by Jason Glisczynski and is not to be treated as investment advice.  Investment Advisory Services offered through Brookstone Capital Management, an SEC Registered Investment Advisor.