6 Questions To Make An Advisor Squirm

I recently joined Peter Lazaroff on our friend Ally Jane Ayers' podcast: The Liquidity Event. We discussed optimizing cash in your life, tax-loss harvesting, and the tradeoffs of trendy products like direct indexes and separately-managed accounts...give it a listen HERE.

At one point we were discussing the prospecting process — when people reach out to explore hiring our firms, and often ask as series of questions (e.g. are you a fiduciary?, do you invest in the same funds that you will invest in for me, etc.).

These are thoughtful questions, and they're often the same ones other people have asked before. Of course that's because prospective clients Google or ask ChatGPT, "What should I ask a financial advisor?" before the meeting...and get similar responses. Makes sense. It's a great way to prepare for interviewing an advisor.

Ally Jane joked that in an effort to help the public in that process, "Every advisor has written a what to ask an advisor blog post." And it's true, there's a lot of quality stuff out there by financial experts on how to effectively interview an advisor:

• Peter Lazaroff

• Mary Beth Storjohann & Neela Hummel

• Jason Zweig

• Ron Lieber

• Christine Benz

• Ally Jane Ayers

• Jesse Cramer

• Taylor Schulte

• Carl Richards

If you're stretched for time, I suggest reading Ron's and Jason's — both renowned financial journalists — which are intended to be exhaustive and are what the New York Times and Wall Start Journal were willing to ink on their pages, respectively.

But turns out Ally Jane wasn't quite right. Not every advisor has written this post.

I haven't. Until now.

Though this is a slightly different take...

This is not intended to be exhaustive. This is intended to complement the canon.

These questions are not easy to answer, and are intended to make an advisor squirm. There are about 300,000 advisors in the United States. My guess is there are, at most, maybe a thousand truly great advisors. How is an everyday person supposed to know how to separate an advisor that sounds great from an advisor who is great?

Ask unexpected questions. Make them squirm.

Advisors have already memorized how to answer common questions.

Do not send these ahead of time. Ask them in real time.

You will get just as much information by the advisor's reaction and tone, as you do the response itself.

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6 QUESTIONS TO MAKE AN ADVISOR SQUIRM

1. Can you describe your investment philosophy in 5 words or less?

   
   

   • Avoid advisors with multiple investment philosophies (e.g. sometimes they like low-cost index funds b/c it's hard for investors to beat the market, but other times they like expensive stock-picking funds b/c it's not hard for investors to beat the market).

   • Avoid advisors that can't distill their approach succinctly and confidently.

     
     

2. Generally speaking, how many years would you want to see a fund manager outperform her benchmark to be confident that she is skilled as opposed to lucky?

   
   

   • Avoid advisors without at least an intermediate understanding of financial statistics, and delineating luck versus skill in portfolio management.

   • The question needs more details to actually answer (i.e. how much outperformance, and the volatility of that outperformance — bonus points if they point this out!), but without knowing that — admitting to some gray areas here, any advisor who answers this question with less than 15 years is completely incorrect. A more reasonable answer is probably ~ 50+ years, but in my experience many investors think it's ~ 3 years.

     
     

3. What happens if you sell the firm, retire, or die unexpectedly?

   
   

   • You being comfortable with the continuity plan is crucial.

   • Many (especially older) advisors frequently shop their firm around to large buyers without clients knowing it — leading to an "unexpected" sale or early retirement, and clients have no control over any of these events.

   
   

4. Why aren't your fees higher?

   
   

   • Most advisors hope you won't ask about fees at all, but if you do they expect you to ask why their fees seem high.

   • In reality you'll get more useful information if you ask them why they don't charge more, because they'll be forced to describe to you the limitations of their service rather than a canned speech about their value proposition.

     
     

5. Do you have any conflicts of interest with clients?

   
   

   • The correct answer is yes. This is a great litmus test because any advisor who answers no is lying, but it feels like the "fiduciary" answer you want to hear because advisors love marketing anything related to fiduciary responsibility.

   • All advisors — like any business — have conflicts of interest. The critical thing to understand is how they manage those conflicts to the best interest of the client, rather than the firm. That is the fiduciary responsibility.

     
     

6. What's the weakest part of your firm's capabilities?

   
   

   • Avoid an advisor who isn't aware and willing to discuss competitive weaknesses.

   
   
   
   

   End.