Do you really know how your financial advisor makes his or her money?
Even if the answer is yes, you may want to double check that those services — and what you're paying for them — fit your needs.
There are many ways to pay for advice, typically through fees or commissions. And financial advisors may earn their compensation in different ways — whether you pay them hourly, or an annual retainer or as a percentage of assets under management.
While the Securities and Exchange Commission wrestles with how advisors and broker-dealers should be required to operate in the best interests of their clients, consumers are largely on their own.
"You need to be very clear on what services you're buying," whether it be financial planning advice, money management or tax preparation, said Ted Jenkin, CEO of Oxygen Financial.
Then, you need to make sure you understand how you're paying for those services.
"The overarching thing for every consumer is to get complete and full transparency, but it can be hard sometimes because you don't always know what questions to ask," Jenkin said.
Here are some points to keep in mind for the next time you talk to your advisor.
Ideally, the person you work with will use a compensation model that fits the services you're seeking.
But there's still room for clashes to occur, said Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance.
For example, if your advisor charges you based on assets under management, and they advise you to move your retirement savings from your employer's 401(k) plan to an individual retirement account that they will manage, that is a conflict.
Commissions can also create incentives that get in the way. If an advisor gets paid based on the transactions they make, that could motivate them to buy and sell your assets more frequently.
But that does not mean paying by commissions is never right for you.
"If you're going to buy a municipal bond and hold on to it for 30 years, you don't need to pay somebody even a small fee to sit on it," Levine said.
A better idea would be to pay a commission through a broker and amortize that over those 30 years, Levine said.
One question you want to ask, according to Jenkin, is: "Do I have full transparency about how you're going to make money?"
Watch to see if your advisor has incentives to sell a certain product, Jenkin said, such as the prospect of winning a trip or becoming part of a club at their firm.
Ask if they earn more in their pension or deferred compensation plans for selling certain products or services or making a certain amount of revenue.
Also be sure to inquire if they have wholesalers, or product companies, who pay for their events in return for the sale of their products.
"There's so much murkiness in the world of compensation," Jenkin said.
In the world of retailers, there are stores like Tiffany & Co. and there are others like Kay Jewelers.
"Both are very good companies, but they serve a different part of the marketplace," Jenkin said.
Likewise, you may pay more to work with a certain financial advisor based on their education, experience, expertise and various designations.
While one may charge $800 per hour, another may set their rate at $200 per hour.
"The reality is you need to determine the results and the value that they bring you," Jenkin said.
The most important question to keep in mind, Levine said, is "How can you help me solve my problem?"
"At the end of the day, I will gladly pay someone more if I'm going to get a good answer," Levine said.
When working with an advisor, ideally you will work with someone who follows the fiduciary standard.
That means that they are obligated to act with your best interest in mind.
But calling yourself a fiduciary does not necessarily make you one, Levine said.
In order to really be a fiduciary, your advisor has to want to act in your best interest, have the education to be able to identify what is right for you and work in an environment that allows him or her to follow through.
"You have to have the desire, the knowledge and the capacity," Levine said. "Otherwise, you can say you're a fiduciary, but you're not really a fiduciary."
Of note, infamous former investment advisor Bernie Madoff — who is serving a 150-year jail sentence for running a Ponzi scheme — was a fiduciary, but clearly did not act in his clients' best interests.
The lesson: The title you call yourself doesn't change the kind of person you are, Levine said.