Submitted by Leamnson Capital Advisory, LLC on November 12th, 2013

There is an ongoing battle in the financial services industry over what constitutes advice and what standard of care should be used in giving that advice. I wrote about this in my article, Broker or Advisor? Fiduciary or Suitability Standard? Does It Really Matter?

In this post, I want to offer three questions to ask your advisor to see if he or she is committed to acting in your best interest. Let me say at the outset that I believe you can get good investment advice from both brokerage and registered investment advisory firms. Having spent many years in the brokerage industry, my experience was that conflicts of interest were much greater there.

Is Brokerage Advice Unbiased?

Advisors at brokerage firms are aggressively courted by wholesalers representing mutual funds and money managers. This courting is usually accompanied by offers of complementary lunches, dinners, or happy hours. Most of these fund companies have paid significant fees to the brokerage firms for the privilege of gaining access to their brokers. Its one of the industrys best kept secrets. These fees are perfectly legal and are often only disclosed in the fine print of the brokerage account applications or fund prospectuses.

If an advisor places a large enough amount of clients money with one of these companies, he or she will often be rewarded with a trip to the headquarters of the fund company. This is a very attractive perk in which fund companies fly advisors to their headquarters, introducing them to fund managers, research people, and the like.

Evenings include lavish dinners at some of the finest restaurants in town. The visit may also include tickets to a professional sporting event with the citys favorite team. All of this is designed to keep their funds in the forefront of the brokers minds when recommending investments to their clients. Calling these due diligence trips allows fund companies to reward brokers for selling their funds without getting in the cross hairs of regulators.

Many advisors do the right thing and avoid accepting these offers. But the lure is very strong. My experience was that the brokerage culture encourages these kinds of perks.

Three Questions to Ask Your Advisor

So how do you know if youre getting unbiased advice? Ask these three questions to find out.

1. Will you acknowledge, in writing, that you will always act in my best interest

If the answer is no, find another advisor. There are plenty us out there who will.

2. How are you paid for the advice you give me?

Investment advisors are paid in a variety of ways commissions, fees, or a combination of both. I personally believe that fees, either hourly, flat rate, or as a percentage of assets managed, are the best ways to pay for advice. Commission compensation introduces too much conflict for the advisor. It can put the advisor in a position of choosing a higher payout for themselves or a lower cost product for you.

3. How will you resolve any conflicts of interest that may arise?

Finding the right advisor can be a daunting task. Asking these three simple questions will help you separate those committed to acting in your best interest from those who are not. For a more detailed analysis read Choosing a Trusted Advisor .