Tough questions to ask a 401(k) investment adviser

8 tough questions to ask your 401(k) investment adviser

Employers, are you working with the right 401(k) investment adviser? Do you want to find out? Ask your adviser the following eight questions and then see how the answers compare with the generally desired responses outlined below.

These questions are listed in order of importance. Please note, there is a difference between an investment adviser and advisor — it’s not that I can’t figure out which spelling to use.

1. Are you a fiduciary for the recommendations you make?

This is the most important question — by far. The answer will provide you with an indication of the quality of the advice you will receive. The difference is between getting investment advice that is in your best interest, or getting advice that is in your advisor’s best interest.

Investment advisers who work for Registered Investment Advisory (RIA) firms are required to act as fiduciaries and provide advice that is in their clients’ best interest. Investment advisors who work for banks, brokerage firms, and insurance companies are only required to provide advice that is suitable. Big difference. Always work with an investment adviser who is required to act as a fiduciary.

2. How are you paid?

Investment advisers acting as fiduciaries working for RIAs are more likely to only accept fees paid by clients. Investment advisors working for banks, brokerage firms and insurance companies generally receive soft dollar payments from mutual fund companies, commissions and fees from clients. It can be hard to determine how much these advisors are being paid. And remember, you are paying them regardless of where their compensation comes from.

In addition, advisors paid on commission or who receive soft dollar payments from mutual fund families have an agenda to push and, as a result, are conflicted. They are salespeople rather than advisers. They would much rather see you invest in something that pays them a high commission than offer you a low-cost option that might be more appropriate. They have families to feed and can't make money working with you unless you buy something that pays them.

Work with investment advisers who receive 100% of their compensation from invoices they send to their clients. It is much easier to determine what you are paying for their services and it eliminates all conflicts of interest.

3. Does the company you work for sell investment funds/products?

There is nothing wrong with investing in a proprietary investment fund/product your advisor is selling if it is the best option available. However, advisors who work for banks, brokerage firms, and insurance companies are required to attempt to sell you their firm’s funds/products first, whether they are a good solution or not.

Generally, investment advisers working for RIAs do not have firm-branded investment funds/products to push. As a result, you have a better chance of getting a lower-cost, higher-quality recommendation from them.

4. What professional credentials do you have?

Retirement plan sponsors should work with investment advisers who have some sort of retirement plan-related credentials (AIF, CRPS, QPFC or CPC). Nearly all credentialing programs I am aware of have a professional experience requirement as well, so you can be assured that if you hire credentialed individuals, they will have met a minimum experience requirement.

5. What is your educational background?

There are a lot of individuals without an appropriate educational background working as investment advisors. Why? Because the advisor jobs they are working in for banks, brokerage firms, and insurance companies are primarily sales positions. You want to work with an investment adviser, not a salesperson. Make sure your adviser has a degree in finance, economics or investments.

Yes, there are a number of individuals with other types of degrees who changed careers and are good advisors and really fun to talk with. However, for the retirement plan balances you are responsible for, it might be better to hire the boring individual with the economics undergrad and MBA who really understands this stuff.

6. How many years have you been an investment adviser?

We are at the end of a nine-year bull market in U.S. stocks. That means there are a lot of advisors who have entered this business over the past nine years who have never experienced sustained down markets. As someone who has worked with retirement plans for more than 30 years, I can tell you that bear markets aren’t much fun — for anyone.

Many advisors will step away from this business during the next bear market (unfortunately coming soon). Make sure you work with an adviser who has weathered more than one storm, since tough markets are when you need an investment adviser the most.

7. What does your ideal client look like?

Just like you, right? That’s the answer you are likely to get. You should find out what your adviser’s book of business looks like. How many clients does your adviser have with your number of plan participants out of their total book of business?

If you aren’t the dominant client size, you will likely be inadequately served. And by that I mean you won’t get exactly what you need, but something that might be close. With the large number of investment advisers out there, you don’t need to settle for someone who doesn’t specialize in plans your size. Generally, it is not hard to find the right adviser.

8. What happens to my business if you are gone?

Advisers change firms every now and then. Some exit the business, one way or another. If you tend to be loyal to your business partners, understand what might happen if your point of contact leaves.

All of these questions are easy for your adviser to answer. If you don’t receive prompt, complete responses, think about putting your business out to bid.

Also, make sure you check out your adviser using BrokerCheck. It is a free service provided by FINRA, the Financial Industry Regulatory Agency, under the direction of the Securities and Exchange Commission. BrokerCheck will tell you whether your adviser has committed any infractions or broke any regulations.

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC.