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You may have lost money in your investment portfolio,
due to mismanagement and not even know it.

Hiring a financial advisor? Ask these 6 questions

If you are like most families these days, saving money is a primary goal. Not only do you want to plan for emergencies, but you want to be able to have fun even when money is tight. So, you put away a little bit each month. You might even reach the point when you feel ready to invest and make your money grow faster.

If you don't feel you have the competence needed to get the best return on your investment, the obvious option is to hire a financial advisor to handle your money for you. When each penny matters, the thought of handing over control to another is quite frightening. How do you protect yourself against mismanagement of your funds or worse, fraud?

How to pick a qualified financial advisor

Fraud committed by a financial advisor is rare, but when it happens, you could find your life's savings wiped out in an instant. No one can guarantee against being victimized by fraud 100 percent.

However, if you ask a potential financial advisor the following questions, you can be more confident that an ethical, honest professional is handling your money.

  1. Are you managing my money? An ethical financial advisor will control your money from an account from which he or she will make trades without your prior approval. Beware of a so-called "money manager" who acts just as a conduit between you and someone else doing the actual work. You need to know whom the person making the decisions is, so you can ask questions.
  2. May I see your track record? You will need a copy of their Form ADV that discloses possible conflicts of interest, among other things, a performance report going back five years and a list of references. Be sure to call the references.
  3. Will you tell me about your education and career? A good money manager has advanced degrees in finance and years of experience. Be careful of anyone without much experience aside making trades in an investment firm.
  4. How are you being paid? A financial advisor is paid directly by his or her clients. A broker is generally paid on commission for the trades they make (something that you need to be aware of and careful with if you hire a broker). For your adviosor, any other income has to be insignificant, disclosed and not fraught with any particular conflicts.
  5. Could I pay you hourly fees? Generally, a financial advisor gets paid about one percent of the funds he or she manages. However, you might be able to hammer out a reduction if your money is in a number of index funds and similar investments that run automatically without a lot of attention. See if you can pay the advisor by the hour.
  6. Do you have a legal obligation to act in my best interests? The answer to this question has to be "yes" at all times and under all circumstances. Get it in writing so that you will have legal recourse if things go sideways. 
You may be asking yourself at this point, "How do I know they are being honest?" They might use financial jargon and describe concepts that are unfamiliar to you. That's ok.

You might not have training economics or securities, but you are around people every day. You be the judge. Ask these questions and many more. If the person shies away from providing complete and clear answers, maybe you shy away from hiring them.

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