The 21 Critical Questions to Ask Your Broker Today

Is your advisor taking advantage of you?

Austin Smith
Austin Smith and Tom Gardner
Jul 23, 2014 at 10:11AM
Investment Planning

How do you know if your broker or financial advisor is ripping you off? Simple: Just ask.

OK, so maybe it's not as easy as leaving a "Hey, quick question: Are you taking advantage of our relationship? Call me back when you get a sec!" voice mail. But if you're paying for financial advice, there is only one way to know that the person you have entrusted with your hard-earned money is acting as a true steward of your financial future and not using your relationship to subsidize a new luxury car: You have to ask. 

Card with question mark on it on a wooden background

Image source: Getty Images.

My co-author for this article, Austin Smith, has heard financial advisors' sales pitches before.

"We are a hands-on, active management team. We beat markets. Last year, our core account earned 29%.”

It's helpful to put these figures in perspective. What benchmark do they compare against? While the 29% return seems really good, the S&P 500 rocketed up more than 26% in 2013 -- 29%, if you reinvested dividends. So much for that edge.

"We check in with you once a month to make sure you’re on track and will tell you how much you will earn each year with dividends and equity appreciation.”

Let's be clear here. No one knows what the market will do tomorrow -- let alone in the coming year. Promises of performance are frequently broken, and at the very least, they should raise a red flag.

"It's not you ..."
We're not saying your broker is a bad person. (There are plenty of financial professionals giving their customers good advice and legitimate value for the services they provide.) It's just that most of them are in a bad position.

The system they operate in probably pits their financial interests against yours -- precisely the opposite of what you'd expect from someone advertising financial stewardship. 

  • Your broker works in an industry that rewards salesmanship over client satisfaction.
  • Your broker works in an industry that pays him or her (or the branch for which the broker works) more when you get sold certain products (e.g., mutual funds or insurance coverage) from companies with which the broker's firm receives additional compensationm regardless of whether there is a cheaper or better alternative for you.
  • Your broker works in an industry where the amount that you pay for advice and services is not the same as what the broker has earned managing your money -- and that creates a conflict of interest. 

It's that last point you need to discuss with your broker -- specifically, the figure that's commonly disclosed as the AUM fee, which stands for "assets under management." This fee is based on a percentage of the amount of money your broker is managing for you, typically 1% to 2%. 

You may think these fees or disclosed fund loads (already of dubious value, given low-cost indexing) are all your broker earns from your business, but the litany of extra commissions, fees, and other payments quietly trading hands not only creates conflicts of interest but also severely cuts into your long-term investment returns. (Here's just one shocking example, but this dynamic plays out time, and time, and time again.)

Ask the right questions 
To find out the real price you're paying for financial advice, we're arming you with 21 critical questions to ask your broker or financial advisor today. The answers will reveal the true cost of the services you receive and show where your broker's true motives lie.

A few notes:

  • Once you've gotten the answers to all of these questions, add up the total cost of your broker's service, and divide that amount by the total dollar value you have invested with that professional. Then you'll get your true AUM fee. 
  • The average stated AUM fee for a financial advisor is 1% to 2%. 
  • Tweet the final number to @TheMotleyFool and compare your #RealFees with those of other individual investors and see whether your broker is optimizing your returns ... or his or her own. 

21 questions to ask now
1. What are your or your firm's potential conflicts of interest regarding incentives to sell particular funds or products? No sense in beating around the bush here. Just ask your broker or advisor point blank where he or she stands. If you get a thorough, well-thought-out response, then the answer will cover many of the following questions. (Still, you can use this list to specifically address types of commissions, fees, bonuses, and other monetary or non-monetary payments, if memories need to be jogged.)

2. What percentage of your total income comes from commissions versus fees? Remember, incentives drive behavior.

3. What is the total compensation you have received from our relationship since first working together? This one could get scary. 

4. What balance is the AUM fee charged on? "Beginning of quarter," "end of quarter," and "highest value in quarter" are all possible responses. The third one ensures the greatest cut for your broker, but the previous two can influence how much you're paying as well, based on market movement. 

5. Do you have me invested in any mutual funds with 12b-1 fees?  The 12b-1 fee is a kickback a traditional mutual fund pays to your broker. If the answer is "yes," ask why your broker is still using these mutual funds instead of lower-cost ETFs , and whether the performance is compensating for this unnecessary fee.  

6. Do you receive soft-dollar money from financial-services companies you do business with? While not as infamous as the 12b-1 fees, they're equally dubious. These are payments made by mutual funds to service providers, but instead of paying in actual dollars, they kick back "in-kind" by passing along valuable business to the brokerage. Sneaky, sneaky. 

7. How much do you receive in revenue-sharing payments from your preferred mutual fund partners? As a follow-up, you can ask whether this is completely disclosed on the broker's website or promotional material. 

8. Do you, or other advisors at the same firm, get rewarded with trips and other perks for selling certain investment products? As if 12b-1 fees and soft-dollars weren't enough.

9. Why do you recommend an in-service distribution? If you're ever asked to do an in-service distribution -- or a rollover to an IRA made while you continue to work for your employer -- make sure you understand why. If the answer is "better fund choices," ask for a side-by-side comparison of the funds the broker wants to move you into and your current positions. Pay close attention to the expense ratios and comparative performance. Often the motivation here is to just get more assets under management and collect 1% on the new money.

10. Do you or your firm receive commission rebates from exchanges you use to route stock and ETF orders? If the answer is "yes," you'll want to know whether those rebates are passed on to clients like you. 

11. Do you discount your AUM fee to reflect my cash balance? Parking cash doesn't require any active management decisions, but it can pad the AUM upon which your bill is based. 

12. Do you reduce your AUM fee when you use high-fee active mutual funds? Some advisors may want to target a specific strategy in your account with a targeted vehicle like a specialty mutual fund. This is fine, except that since you're footing the bill, your broker may not have taken the time to shop around for a low-cost alternative that does the same thing, like a targeted ETF, or bothered to reduce his or her own AUM fee on your funds, either. 

13. How much interest do I receive on cash balances held in my account? 

14. Do you charge an extra hourly rate if I take up more than a certain amount of your time? If the answer is "yes," ask how much, and whether it's withdrawn from your account or billed separately. 

15. Can I please see your broker compensation page? If you're an Ameriprise client and receive a recommendation to purchase an insurance contract (term/permanent or annuity), this is a must-ask. This page is printed with almost all insurance policy illustrations and displays the commission amount to the broker you're working with. This is often not shown to clients. If you're not being shown this page, ask why your broker doesn't think it's important for you to know that information.

16. What are the various loads on the funds you sell? These are silent killers of your long-term returns, especially for more modest portfolios. 

17. What percentage of the load fees go to you, and what percentage goes to your company? This is a follow-up to the previous question and can reveal the precise commission your advisor personally earns, versus how much goes to the parent company.  

18. Does the advisor get a different rate of commission for selling class A shares? A financial advisor typically receives a greater percentage of the sales charge the firm obtains for A shares than for B or C shares.

19. How much does an advisor receive for opening a new account? As a current client, this may not affect you, but it can still reveal where your advisor's effort is likely to be spent. Is the broker focused on your returns, or on growing his or her assets under management?

20. How do the total fees and sales charges for your most popular funds compare with the Vanguard S&P 500 index fund? This is an opportunity cost no-brainer for you to know. 

21. And lastly: Will you fully disclose these conflicts of interest, as well as any others we may have missed, including upfront compensation, in writing for me? 

Compare notes
Beating the market is already hard enough without having your broker add weights to your portfolio. We urge you to ask these questions today. If your financial professional is truly serving you well and with your best interest at heart, he or she should have no problem answering them.

To get started on your broker research, use our handy broker comparison tool.

Tell us what you discover, and let's compare notes. Remember to Tweet your findings to @TheMotleyFool using the hashtag #RealFees.