Truth or dare for your financial adviser

Put your prospective planner's frankness to the test with these four tough questions.


By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Conventional wisdom says you should pick a financial adviser you connect with, and one who has good references and no problems with regulators. Sure, that's a good way to start, but it won't tell you if he or she is likely to chase market trends or put a desire for fees ahead of your best interests. The questions below will give you insight into any planner's style and candor.

1. What was your largest mistake over the past 10 years?

Be wary of self-serving or trivial examples, such as "I'm too dedicated to my clients." I'd rather hear my adviser say that she used to underweight international stocks or even tried to time the market and failed. The key is that she's willing to admit to real errors and can tell you what she learned from them. After all, nobody's perfect. If Warren Buffett can own up to past mistakes, so can your adviser.

2. Do your financial incentives always line up with my best interests?

Knowing what you'll pay for a planner's services isn't enough. All payment models - yes, even hourly fees - create inherent conflicts between advisers and clients, and your adviser should be up front about that too. For example, a planner who charges based on a percentage of assets should let you know that he has an economic incentive to capture all of the money you have to invest.

3. How have your clients' portfolios performed over the past 10 years?

Your adviser will likely tell you she outperformed the market, and she may even be willing to provide performance data as proof. But that only tells you she's trying to time the markets, which will add to your fees and lower returns over the long haul. A much better answer: Your adviser's explanation of how she provided focus and discipline to allow clients to earn market returns.

4. If I wanted to buy a couple of broad index funds or ETFs, which would you recommend?

This is a particularly important question, as it will give you a glimpse into the adviser's priorities and show where your interests fit in. An expensive index fund has no chance of outperforming the lower-cost equivalent index fund. So if he suggests an S&P 500 or total index fund that has an expense ratio of 0.5% or more, you know your interests aren't coming first.

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