Go in with good questions.
1. What are your fees?
1b: if it sounds super complicated ask why it is so complicated and have him actually spell it out for you. If there are loaded mutual funds(A shares, C shares) make him explain the load, the 12b-1 fees, and the expense ratio. If they have a managed account, ask about the AUM fee, AND the underlying expense ratios, and ask the advisor to add those together. Make them put it into an annual number, and then try to relate that to something in real life. 5-10k= oh that's a really nice vacation my parents could be taking each year.
1c: if he tries to say A shares are cheaper if you hold onto them longer ask how long your parents have been in their different A shares. Anything under 5 years and the A shares normally end up being even more expensive than the C shares(which is really bad). Again, all of them are more expensive than Vanguard index funds. If he is trading A shares on a regular basis(every year or so) to generate more and more commissions this is called churning and can get an advisor in a lot of trouble with FINRA.
2. How do you justify that you are improving my parents returns by more than that fee?
2b: if he had a hard time explaining the fee to begin with ask him to explain how he can be so sure he is adding value when he wasn't sure what the fee was.
3. Are you a CFP? Why not? Most high net worth investors will only work with a CFP because they see anyone else as being unqualified. If he says he has a series 7, answer so do the phone reps at the 1-800 numbers for Fidelity and Vanguard... What makes you more qualified than them?
4. why aren't you using low cost index funds like many fee-only fiduciary CFPs recommend? Your ammo: over time index funds normally outperform active funds thanks to lower costs, less turnover(which helps tax efficiency). I've heard a counter argument lately where some brokers will try to explain that index outperformance is thanks to the Feds easy monetary policy. Or they will say index funds don't provide downside protection. Nip that in the bud. Index funds as a group outperformed active funds as a group going back decades, they just became more popular after 2008 because active stock funds fell just like stock index funds AND you can build a conservative portfolio of index funds by mixing stock and bond index funds. Active doesn't provide anymore downside protection than a similar index portfolio would provide. ACTUALLY, the active portfolio is likely less diversified so you could argue it is actually riskier.
5. If there are individual stocks in the portfolio. Great question for the advisor, "Fund managers get paid millions and they have armies of analysts helping them pick the best stocks. They still have a hard time beating the market. What expertise did you employ when you picked these individual stocks, and why do you believe this strategy will work better than those mutual fund managers' strategies?"
5b. Isn't investing in an individual company far riskier than investing in a diversified mutual fund? Would you consider my parents to be risky investors?
6. Are you a fiduciary? What conflicts of interest are present in this relationship?
If you get to actually see the portfolio:
1. look for A, B, and C shares. Those are EXPENSIVE. Within those American funds are on the low end(cost) and Oppenhiemer/Putnam are on the high end.
2. look for funds of several different companies where the combined for each company is under a certain threshold, lets say 100k. If you see 90k of American funds, 90k of Franklin, 90k of Oppenhiemer, etc. then the advisor is avoiding breakpoints so HE can get even bigger commissions. This is lawsuit worthy. Most commission based fund companies give discounts if you invest a certain amount in their funds and this number can combine several funds. If you invest over 100k with American funds your fee as a % goes down, again normally around 250k or 500k, and again at 1 million. If an advisor purposely spreads the money across fund companies to avoid these discounts you have grounds to report them to FINRA. Keep in mind you want to look at what was invested, maybe not the same amount they have today.
3. tax efficiency. Edward Jones is terrible about missing this. If you see stocks in the IRA and bonds in the taxable, why didn't they just switch the two to make the account more tax efficient?
Oh, and PS, I worked at EJ in the past. Their brokers were paid commissions. Sell an A share, EJ gets a cut, FA gets a cut. In addition, their FAs, my peers at the time, were clueless. They didn't understand tax efficiency in the slightest. Most people struggled with understanding how a back door Roth worked... and in many cases made the wrong recommendation anyway. Seriously, most of them have a Series 7 license, it's not easy, but it's not hard either. It is what you need to do 'trades,' so anyone at Vanguard/Fidelity/Schwab/etc. who can take a brokerage order over the phone has a Series 7. The EJ advisors would just follow the EJ advice. Knock on doors, sell A shares, and EJ would tell them they were helping people. I left when I realized I wouldn't buy the investments we were selling with my own money or recommend them to family/friends... I wasn't there very long.
