Is Your Broker Honest?

December 16, 2009

A good way to find out whether the financial advisor you're thinking about hiring is on the up-and-up, say consumer advocates, is to realize that you are hiring the advisor. You need to ask some hard questions, just as you would with any prospective employee.

Bernie Madoff may be serving a long-term sentence in the slammer, but there are still plenty of dishonest or unethical financial advisors out there trying to make a devious dollar from not-so-diligent investors. A good way to find out whether the financial advisor you’re thinking about hiring is on the up-and-up, say consumer advocates, is to realize that you are hiring the advisor. You need to ask some hard questions, just as you would with any prospective employee.

Perhaps the most important question to ask is how the financial advisor gets paid. One way or another, an advisor gets a cut of the money you’re investing, whether you’re putting it into mutual funds, stocks, annuities, or anything else. Brokers usually get a commission based on the size of your investment; a fee-based advisor gets a percentage of the assets he/she is managing for you. Knowing how your advisor gets paid can help you pinpoint any possible conflicts of interest, like suggesting a mutual fund that’s managed by the firm the advisor works for. You should also ask whether your assets will be held by a third party. If the advisor plans to hold the assets, look for someone else. Your money and your financial guru should be kept separate, with the advisor allowed access to the assets only with your permission.

Perhaps as important as the answers to your questions is the way your prospective advisor answers them. Just as you would think twice about hiring an employee whose answers are evasive or overly complicated, you should be cautious about an advisor who won’t give you direct and clear-cut responses to your questions.