Here are some good questions to ask a financial advisor before hiring, according to experts.
Jeffrey T. Dobyns, CFP, ChFC, CLU
President, Southwestern Investment Group | Financial Advisor, RJFS
Whether you are just starting to save or have hit mid-retirement, hiring a financial advisor is a wise choice. But, where do you begin? Do all advisors provide the same levels of expertise and services? Not exactly.
Several factors set financial advisors apart from one another. If you have spent time looking for financial help or are reading this article before you begin your search, you may already be overwhelmed by the options.
Numerous advisors will pine for your business, but this process is about you.
The key to finding the right advisor is knowing which ones will keep your best interests in mind. To help you determine who is right for you, we have put together these crucial questions to ask.
“How are you paid?”
The answer to this question should be straightforward and clear. Your financial advisor is the person you will trust with your assets and look to for sound advice, so it is important that he or she is as transparent as possible about their process.
Financial advisors are usually paid in one of three ways:
- Commission—They receive a commission on your investment choices. Their pay is based on the products they sell or certain funds they suggest.
- Fee-Only—They don’t sell products or accept commissions. They are paid by the hour, a fixed annual retainer, or a percentage of your investment assets.
- Fee-Based—They mix commission and fee-only. They are paid by commission or by charging clients, whichever they choose, or both.
“Are you a fiduciary?”
A fiduciary financial advisor is under a legal obligation to act solely in the best interests of their clients. Choosing an advisor who operates as a fiduciary ensures that he or she will be taking care of you and making unbiased recommendations. Your financial goals should always come first.
“Does the advisor do holistic planning or simply focus on selling a product?”
We believe that picking the correct product that works for you is the easy part. The hard part is the planning. We believe that every good plan should keep an eye on taxes, estate planning, investment planning, insurance planning, and retirement planning.
We believe all these parts of your plan should work together and be addressed at every meeting. Too many times, advisors get in a hurry to sell a product instead of first determining how all the pieces of your plan fit together.
“What is your process like?”
Hiring a financial advisor looks different from firm to firm. Asking about an advisor’s process will give you insight into whether their approach works with what you had in mind.
Robert R. Johnson, PhD, CFA, CAIA
Professor of Finance, Heider College of Business, Creighton University | Author, “The Tools & Techniques of Investment Planning”
“Are You a Fiduciary?”
When hiring a financial advisor, the most important question to ask is “Are you a fiduciary?”
Advisers versus brokers
Investment advisers advise clients on securities and/or manage portfolios. They are generally paid a flat fee or a percentage of assets under management to perform that service. Brokers are paid commissions to execute trades or buy and sell assets for clients.
Make sure they are fiduciaries
Unfortunately, some financial professionals aren’t fiduciaries and that is confusing to the public. Currently, those who provide financial advice adhere to two standards of conduct:
- A fiduciary standard for “advisers” who are registered with the SEC under the Investment Advisers Act of 1940;
- A suitability standard for brokers and others that refer to themselves as “advisory” in nature.
The suitability standard of care is lower than a fiduciary duty and requires only that the broker has a reasonable basis to recommend a course of action is suitable for the customer based upon a reasonable inquiry into the customer’s investment profile. This dual structure of care creates a number of serious problems, including:
Brokers are able to take advantage of the goodwill and trust implied by the higher, fiduciary standard of care without making the interests of clients first preeminent;
Those not subject to the fiduciary standard create confusion among investors, not least by calling themselves “advisors” even while not being registered as advisers;
Self-interested actions by those not subject to the fiduciary standard of care undermine the goodwill and trust associated with many prudent and client-oriented advisers.
To truly get the best client service, the individual must be a fiduciary – that is, put their clients’ interests first.
If a potential financial advisor is not a fiduciary, look elsewhere. In fact, if a financial advisor isn’t a fiduciary, run away! Chartered Financial Analysts (CFA charterholders) are required to act as fiduciaries. Who is held to the fiduciary standard can get confusing.
For instance, when they are providing financial planning or are engaged in the elements of financial planning, Certified Financial Planners (CFPs) are held to the fiduciary standard. However, a CFP who is not providing or engaged in financial planning is not required to act as a fiduciary.
Standard III.A of the CFA Institute Code of Ethics and Standards of Professional Conduct requires that “Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.” They are bound by the ethical Code to serve as fiduciaries.
Perform a background check
You should perform a regulatory background check on individuals. FINRA offers a free tool called Broker Check to research the background and experience of financial brokers, advisers, and firms.
BrokerCheck gives you a snapshot of a broker’s employment history, regulatory actions, investment-related licensing information, arbitration’s and complaints. Some unscrupulous individuals also represent that they have earned one or more designations and they may not have actually done so.
To verify that an individual has actually earned the CFP credential, one can go to the CFP Board and find out. To verify that someone is currently a CFA charterholder in good standing, one can go to CFA Institute Directory. To verify that someone has earned a credential from The American College of Financial Services, one can go to Designation Check.
Brandon Steele, CFP, ChFC
Certified Financial Planner | Chartered Financial Consultant | Founder and President, Mainsail Financial Group
“What is your process?”
A hugely important question to understand when working with a financial advisor is their process. One of the most important questions to have answered before engaging with them further is to ask them to share their process with you, from investments to financial planning.
By asking an advisor what their process is in these different aspects, you can get a clear picture of the work that a particular advisor or team takes to develop the strategies they bring to the table.
You can also get a glimpse into the scope of the work they may be doing for you, whether that is just investment advice or a complete financial planning approach.
“What level of service and advice will you provide?”
Ask the advisor to share what level of service and advice they will be providing you in the areas most important to you.
Many financial planners will help with tax planning and estate planning, but the level of advice provided in these different areas will vary dramatically between advisors. Some advisors may focus entirely on investment advice and do not structure their practice in these areas, while others may take a planning approach and dig in.
If you are looking for and expecting advice in these particular areas, it is crucial to understand how in-depth that advisor will be working with you in the respective categories. At some point, often, an accountant and or an attorney is needed, but up until that level, you may experience a tabletop version of tax and estate planning.
On the other hand, you may be working with an advisor that is more strategic in these areas and will provide strategies to implement up until the point of official legal advice or drafting legal documents. There is no wrong answer, but this can give you a better insight into what services you will receive and the value of their advice.
“Can you share an example of a client in my position that you helped?
“What was the impact on that family or individual?”
Asking for an example from an advisor can give you a good glimpse into some of the strategies that may be implemented as you work with an advisor. Although everyone’s situation is different, often, folks in a similar position may run into the same general themes.
This question can help an advisor demonstrate what would be looked at and give you an idea of the value of the services you may be taking on.
Darren L. Colananni, CFP, ChFC, CIMA, CPWA
Certified Financial Planner | Wealth Management Advisor, Centurion Wealth Management
- “Are you a broker or a fiduciary?” The answer must be Fiduciary. If it isn’t, then run the other way. This leads to the next question.
- “What are your credentials and experience?” CFP is a must! This requires the advisor to act as a Fiduciary. There are plenty of other advanced credentials they could have, but they MUST have the CFP.
- “Can you describe your average client?” This is important because there are intracencies based upon age, career, net worth, needs, etc. that advisors need to have in-depth knowledge about. Would you see a foot doctor when you have a cavity?
- “How much do you charge for your services?” A lot of people don’t know how much they currently pay their advisor. These people are shocked when I show them their current cost vs. what they would pay with us.
- “Could you provide a sample Financial Plan?“ This is something I know a lot of people don’t ask and a lot of advisors don’t provide. The client is making a “blind leap-of-faith” when they choose an advisor. They should see a sample Financial Plan to get a sense of how detailed and customized their plan will be compared to a “cookie-cutter” portfolio and analysis.
Greg Klingler, CFP, ChFEBC
Director of Wealth Management, Government Employees’ Benefit Association (GEBA)
Ask if he or she is a CFP
While you’ve very likely seen the words “CFP” in email signatures or on business cards, it’s important to know what the term means and why hiring a financial planner who’s a CFP can make a big difference.
Most simply, all financial planners will work with you to define and prioritize your financial needs and long-term goals, assess your financial situation including potential risks to your plan, and create a plan to get you there. He/she will serve as a general practitioner for your finances.
However, a Certified Financial Planner, or CFP, has met a professional board’s standards for education, training, and ethics, and has committed to serving each client’s best interests. So yes, it’s worth seeking out a CFP.
Ask for the services that he or she offer
A CFP should cover the following in answering what he or she will be able to do for you:
- Assess your current assets, including positioning your investments in the most appropriate way to reach your short- and long-term goals.
- Assess your debts and how to prioritize paying them off
- Assess and reshuffle how your current budget is allocated to meeting your ever-changing needs, saving and debt payments, and wants.
- Assess what financial risks you and your family are or are not prepared for (emergency fund, life insurance, long-term care insurance, etc.) and determining the most efficient way to protect your family from the most substantial risks.
- Help you establish and regularly update a systematic plan to meet your financial goals.
If he or she doesn’t list each of these services, you might want to find someone who does.
Ask what won’t he or she do for you
Just like a general practitioner is not a cardiologist or a dermatologist, a CFP may not be an expert in a niche financial field – he or she will most likely not be able to do your taxes or write up your will, or at least do these things sufficiently, so it’s a good idea to find a CFP who will admit what he or she can’t do.
However, he or she should be able to tell you whether or not you should consult a niche expert for additional needs.
Ask when should someone like you consult a CFP
It’s safe to say that virtually any adult who has bills to pay, loved ones to protect, or financial goals they aspire to would benefit from one, and a good CFP will tell you this.
However, he or she should also stress how important it is to recognize that financial planning becomes more and more important as one’s financial situation becomes more complicated and one’s assets increase.
So even if you don’t need his or her services yet, he or she should recommend that you get back in touch if/when you have a child or buy a home; become a member of the “sandwich generation” and start needing to balance priorities such as kids’ college costs, parents’ needs, and saving for retirement; approach your retirement and begin thinking about how to leave your assets to your heirs.
Again, a good CFP should be honest about when and how he or she can – or can’t – help you.
Frank Iozzo, CPWA
President, Private Wealth Advisor
“Do you always act as a fiduciary for your clients?”
A fiduciary is legally required to put your interests first, while a broker is held to a suitability standard where the recommendation is suitable, but not what is best. It’s important to emphasize always in your question because an advisor can be registered as both a fiduciary and a broker and play the role that’s most convenient.
Research shows that only 2% to 5% of over 300,000 financial advisors in the U.S. always act as fiduciary.
“Are you a fee-only advisor?”
You want a fee-only advisor because the fee that you pay for services is the only way that the advisor or their firm gets paid. They may charge based on the assets managed, an annual retainer, or an hourly rate, but they will never sell any product for a commission; there are no conflicts of interest.
Fee-based sounds the same but is very different because the advisor can also earn a commission for selling products.
“What services do you offer?”
Too many advisory firms offer only one service, typically labeled something along the lines of Private Wealth Management. It sounds fancy and worthy of the 1.5% fee that the average advisor will charge, but what are you really getting? What if that service makes sense for a period of time, but then your needs change?
Make sure that your advisor offers flexible services and will be able to give you the attention your relationship deserves as your life and needs evolve.
“What fees will I pay and what do they amount to?”
If a client is paying for a managed portfolio, there are two fees that come into play. One is the fee for the portfolio management service, let’s say 1%. The other is the cost of the strategy being implemented. This can range anywhere from 0.10% and more than 1% per year, depending on the strategy.
If exchange-traded funds (ETFs) and/or mutual funds are being used in your strategy, then those fund companies charge an annual fee, called an expense ratio, and your advisor should be able to tell you what those fees are. Now, if you’re working with a fiduciary, the advisor doesn’t receive any of the fund fees, but you should still know what they are.
While it’s important to understand fees, a less expensive portfolio doesn’t necessarily translate to a better strategy.
“Do you invest in mutual funds? If so, which share class?”
This is very important because it will shine a light on potential hidden fees. Mutual funds come in many different share classes – the same exact strategy, but with very different layers of fees.
If the advisor uses A, B, or C Class mutual funds, you don’t want to work with them.
You will be paying as much as 5.5% in sales commissions each time you invest or 2% per year just to own the mutual funds. What you’re looking for is the Institutional Class – no sales commissions of any kind and the lowest annual expense for that mutual fund strategy.
“What is your investment philosophy?”
While there are thousands of firms that offer portfolio management as a service, each firm and potentially each advisor within a firm has a unique approach to constructing a portfolio.
Some firms will trade frequently, while others take a long-term investment approach. Some believe in picking individual stocks and bonds, while others use funds. One firm may use only exchange-traded funds (ETFs), while another may use mutual funds and ETFs.
If their philosophy isn’t aligned with yours or they don’t specialize in the areas that are important to you, then it’s not the right fit.
Clinical Psychologist | Financial Therapist
Finding the right financial advisor is a serious endeavor and it can be one of your most important relationships. A central ingredient is to be able to connect with an advisor with whom you feel comfortable. His style, his availability, and his way of relating to you are crucial features for you to evaluate.
It’s your money that’s at stake, so don’t be hesitant about asking relevant questions that will help you to make an informed decision.
Here are some of the key things to ask before making a selection:
- Does he invest his own money in the stocks or funds he is recommending? His level of risk tolerance may be different than yours, so ask how is his children’s or parent’s portfolio invested.
- Ask him what stocks or funds he owns personally. What is his rationale for these picks? Too many advisors don’t personally acquire what they are promoting.
- Does he get paid to select a particular investment product? Some mutual funds provide commissions to financial advisors for promoting their products. This arrangement can reflect a possible conflict of interest regarding whether the advisor will be best serving your investment needs.
- How long do his clients typically stay with him? Most financial advisors have about 200 clients and this question tells you something about his level of client satisfaction over time.
- What are the fees, transaction costs, and hidden expenses that will be charged to my account? Most average investors are unaware of hidden fee charges like 12 b-1 fees from mutual funds which reduce the overall value of your portfolio. Evaluate how open or defensive the advisor is in describing this.
- Ask for three references. This is always a good thing to do before signing on. Most financial advisors underperform the overall benchmarks, so ask him to elaborate about additional value-added services he intends to provide.
- Ask if there is any history of client complaints or regulatory actions. You can also determine this by going to brokercheck.finra.com– a site that tracks this information.
- What are his qualifications, professional education, background, and years of experience? This will give you a more complete profile of him as a financial advisor.
- What is his average account size? Ask if you are a good fit for him? Will he provide the level of service you deserve, if your investment amount is substantially below his average. I have had financial advisors who declined to take me on because they thought my investment amount was too small.
- What is his investment philosophy and strategy for success? This will enable you to determine how comfortable you are with his style and approach to investing. Will he include your input in making buy and sell decisions for your portfolio? Does he inform you about things like asset allocation, diversification, and rebalancing as important variables for achieving success?
Financial Advisor | Founder, Iseler Financial, LLC
It has been suggested that there are only about six different personal finance stories, with newspaper columns, finance blogs, and radio programs repeating them over and over.
Nearly every financial advisor will be able to help with those topics, as well as other frequent client concerns or issues. In short – the type of knowledge that an advisor possesses will be pretty similar from one firm to the next.
Financial advisors set themselves apart not by what they do, but through how and why they offer their services.
Ask about compensation
Financial advisors are compensated in a number of different ways, and how they receive compensation may affect recommendations.
An advisor that receives sales commissions, for example, maybe motivated to buy and sell more frequently than your situation requires. Another advisor may receive a bonus for outperforming a benchmark, which may encourage increased risk exposure in pursuit of growth.
Fee-only advisors, on the other hand, are compensated directly by their clients for advice, plan implementation, and for the ongoing management of assets. This model minimizes conflicts of interest and ensures that your advisor acts only in your best interests.
Ask about type and frequency of communication
Some advisors may prefer to communicate through face-to-face meetings or phone calls, while others may prefer email and video calls. There is no right or wrong option, but it is important that the method and frequency of communication resonate with your own preferences.
A tech-savvy individual may prefer receiving all correspondence through a mobile device, while other clients may feel most comfortable with phone calls, in-person meetings, and good old snail mail.
Ask why that advisor chose to be an advisor
People choose vocations for all sorts of reasons. Some people are passionate about the work, some want to help their community, and some choose jobs simply because it pays the bills.
I would encourage anyone searching for a financial advisor to ask what was the original spark that made the profession stand out, as well as what parts of the job bring happiness and satisfaction.
You want your advisor to be excited to help you, and that message should come through during initial conversations.
Ask about other clients
Some advisors cast a wide net and aim to serve everyone, while others specialize in certain demographics or niches. You may be most comfortable with an advisor that serves mainly people like you or with similar questions and concerns.
A financial advisor that primarily serves retirees will not be a great match for a young couple, while another advisor focused on employees of a certain industry may have a specialized approach that resonates with a specific type of client.
Aviva Pinto CDFA, CDS
Managing Director, Wealthspire Advisors
“Are you a Fiduciary?”
A financial advisor who is a fiduciary has pledged to act in their client’s best interest at all times. This may seem like an obvious arrangement; however many advisors still abide by a looser “suitability” standard, meaning they are permitted to recommend products or services to a consumer from which they (the advisor) collect financial benefits, so long as the recommendation can be defended as “suitable.”
The industry rules on the fiduciary standard are indeed tightening, but if you seek out a planner who adheres to the fiduciary rule, you can rest assured that their interests will be most closely aligned with yours.
Are they trustworthy and what are their personal philosophies?
In your search for a financial advisor, you want to make sure that you are hiring someone you can trust with some of the most intimate details of your life.
Before you hand the details of your financial life off to a new advisor, putting them through some qualifying steps is the best thing you can do for the safety of your financial future.
Ask prospective advisors what are their personal philosophies, do some due diligence on your own, and educate yourself on various service and fee structures. In the end, time spent on this process will prove to be yet another wise investment.
“What is your pay structure?”
Commission-based financial advisors charge clients a fee whenever they buy or sell stocks (or other investments).
Given that this type of advisor receives a commission for every financial action they perform on your behalf, they may be motivated by the purchase or sale of assets that may not be congruent with your goals. However, if you are looking for advice on a single transaction, this might be a good option.
For example, if you are interested in buying and holding (i.e., not selling) a single mutual fund for the long-term and do not require ongoing advice, a commission-based advisor may be the cheapest option.
Flat-fee financial advisors charge their clients for services on a per-use basis.
They may charge you a one-time fee to create a financial plan, but may also try to sell you products for a commission or may try to recruit you as a fee-based client.
Nonetheless, if you are simply looking for a one-time plan to answer some of your questions about your financial future, and do not require ongoing advice, a flat-fee advisor may be a good option.
Fee-only financial planners are best for those seeking ongoing comprehensive financial planning and asset management.
These advisors charge clients through hourly rates or based on a percentage of the assets they manage. While these advisors offer financial planning services, they are typically looking for long-term partnerships with their clients.
The advantage of fee-only financial advisors is that they do their best to coordinate your assets to create a comprehensive plan for you, which is reviewed regularly and revised as changes in your life come up.
Steve Schleupner, ChFC, CDC, MBA
Chartered Financial Consultant | Divorce Recovery Coach, You Tree Coaching
Cracking open the “I’m a Fiduciary” claim
Financial Advisors are notorious for hiding behind claims that make them seem like they have a greater level of integrity. The hot claim today is stating one is “a fiduciary that is required to look out for clients’ best interest”. When you hear this, it’s important to peel back the onion.
“Does your license only permit you to act in a fiduciary capacity, or do you also have a license that permits you to sell products?”
Many financial advisors carry both licenses and can act as a fiduciary on a larger investment account, but would revert to a sales role on smaller accounts that do not meet the minimum account level requirements stipulated by their employers.
“Has your employer required you to sign a contract, and does that contract have a non-solicitation or non-compete clause?”
Many firms try to covet client assets and want to retain assets if an advisor transitions from the firm. These clauses not only are not in the best interest of clients, but they also tend to preclude the advisor from wanting to leave the firm to grow his knowledge base in a different capacity, or in a capacity that brings better solutions to clients.
They also enable the employer to apply leverage to the advisor to pressure the advisor to execute profit initiatives and motives, even if the advisor does not fully agree with the company’s charge.
“While working in your fiduciary role, how do you transfer your knowledge to the client so the client can be less dependent on the advisor and more self-reliant?”
Most of the investment advisory world is motivated to acquire assets under management. They spend their free time finding new clients, not empowering clients to become more self-reliant. However, a fiduciary that is really looking out for a client’s best interest will teach that client “how to fish”.
“Can I work with you on an hourly-fee basis?”
The common fee structure is a fee based on the level of assets in the account – also known as a WRAP fee or Asset Under Management fee. This fee is often charged against the account, and, specifically, against the cash residing within the account.
This cash can contain dividends earned, and dividend is a key vehicle for compounding. When they are diminished, or completely eaten away, investors, by default, permit the financial firm to secure part of the key investment return for its own coffers.
Ray Prospero, JD, ChFC
Chartered Financial Consultant, The American College of Financial Services | Partner Advisor, AdvicePeriod
Working with a financial advisor can be a stressful decision. It requires sharing intimate financial details and implies a deep level of trust that takes time to build.
A reasonable assumption would be that the advisor on the other side of the table is required to act in your best interest, however, that is not always the case.
Here are some questions to ask before deciding to work with a financial advisor:
Ask if the advisor is a fiduciary
It might be surprising to know that not all advisors are held to a fiduciary standard. Registered investment advisors are regulated by the SEC and are held to the fiduciary standard, which requires that they make recommendations based on their clients’ best interests.
Ask the mode of payment
Are they paid a fee-only directly from their client or are they paid by commissions and/or mutual fund trails? If they are paid other than a fee from their client, this can be problematic, because it presents potential conflicts of interest.
For example, that advisor may be tempted to make recommendations to earn commissions, rather than what’s best for their client. You should also ask what kind of investment products they offer. If the advisor is primarily recommending proprietary products, or products from their company, this may also present potential conflicts of interest.
In my opinion, it’s always best to avoid conflicts presented by compensation. Financial advisors should be paid by their clients and not product providers.
Ask for any advanced professional designations
Lastly, I recommend asking if the financial advisor holds any advanced professional designations, such as the CFP® (Certified Financial Planner) or ChFC®
By putting in the time, effort, and money to earn these designations, these advisors have demonstrated their commitment to their clients and life-long learning. The American College of Financial Planning provides a free designation check through their website. One can also search the website for financial advisors with designations available in their area.
Brian Fry, CFP
Certified Financial Planner | Founder, Safe Landing Financial, LLC
“Are you a fiduciary at all times?”
A fiduciary advisor is required to put their client’s best interests ahead of their own, provide transparency, and disclose conflicts of interest. You can ask a financial advisor to sign a fiduciary oath.
I provided examples below:
Signed copy of fiduciary oath.
Blank fiduciary oath.
“How do you earn compensation?”
A complicated fee structure is a red flag. Keep in mind, an advisor earning money from commissions may have additional conflicts of interest to sell products.
“What education and certification qualifications do you have?”
Anyone can call themselves a financial advisor because it’s a general term. If working with a qualified and credentialed financial advisor is important, then consider working with a Certified Financial Planner™ (CFP® professional).
CFP® professionals are required to meet stringent requirements for education, exam, experience, and ethics. Only about 28% of financial advisors have earned the CFP® designation. You can verify a financial advisor’s CFP® designation by going to the CFP Board’s verification page.
Here are more good questions to ask when seeking a financial advisor:
- Which licenses do you have?
- Are you an investment adviser or a broker?
- Do you have a clean regulatory background?
- Is financial advice provided for investments only, financial planning only, or both investments and financial planning?
- How comprehensive is your financial advice and what areas will we focus on?
- What is your approach to financial planning and/or investments?
- How do you determine my investment and rebalancing strategy?
- Will you help to implement your provided financial advice?
- Will I work directly with you?
- How do we get started and how often will we meet?
Certified Financial Planner
The following questions should be asked when you are interviewing a financial advisor to work with.
“How do you get paid?”
Always ask a financial advisor how they get paid. Make sure you completely understand their fees and how they are being compensated. The industry can be very complicated with a lack of transparency on fees depending on who you are working with.
“Is your financial advisor a fiduciary?”
If you are held to a fiduciary standard, you are legally bound to act in the best interest of your clients. This is opposed to the suitability standard which allows advice or products to be sold that may be okay for someone but not necessarily the best for the clients themselves.
This can be an issue if you are working with an advisor who is selling only insurance, or a particular investment product, and they are compensated by these sales. It can skew the advice significantly.
“What is your investment philosophy?”
It is a good idea to fully understand your advisor’s investment philosophy. This will dictate how they will be investing your money and what their process involves. This may or may not be a good fit for you and your financial goals.
Make sure you have a good understanding of how they view the markets and what kind of investments they use when building client portfolios since there can be a big discrepancy between advisors.
“What is your financial planning process?”
Asking an advisor about their financial planning process will help manage expectations of the advisor. Some advisors only do investment management while some only do financial planning or insurance.
It’s important to understand what services you will be receiving and how often you will be able to meet with your advisor. Financial advisors can cover a broad range of topics.
“What financial designations and licenses do you have?”
Financial advisors can have various designations. Do your due diligence on their designations to understand what was involved in getting them. Some take a much bigger commitment than others and are better respected due to the time and resources needed to successfully complete the program.
It’s usually a good sign if an advisor has a solid designation so you know they’re knowledgeable and committed to the industry. Lastly, make sure they’re licensed to give investment advice.
“How long have you been in the business?”
This will help you gauge if this person is new to the industry or not. This is important because turnover can be very high like 80% or 90% depending on what type of role you look at.
You will also get a good understanding of someone’s background and how they will be able to help you throughout your financial journey.
“Who is your ideal client?”
Advisors can have different specialties or niches. This means they may work with one specific type of client or industry but may come up short for others. Be sure it’s a good fit by understanding the services provided to their clients.
Samuel Rockwell, MBA, AAMS
Financial Advisor, Raymond James & Associates
“Why should I work with a young advisor?”
Many people out there look for the advisor with 35 years of experience and believe this is the best option for them solely on that advisor’s time in the business.
While it is certainly fair that this advisor has more experience than some others, just as is the case in our business, there are pros and cons to all decisions in you make in the world of financial services!
Here are a few reasons why you may want to visit a younger advisor during your interview process:
Working with a younger advisor has its benefits, this advisor has more recently gone through his or her training and therefore may be more familiar with new ways of doing things. While CE keeps old and young advisors up to date regardless, the world of investing and more importantly the world of client relationships has changed in 35 years.
A younger advisor may offer more attractive compensation options to clients, such as fee-based or retainer models that have become more popular in recent years. A younger advisor also has the time to be around much longer than an advisor who has 35 years of experience, much like his or her client, that advisor probably wants to retire.
As a client, your relationship may outlast that advisor’s remaining years in their career! If you are a prospective client with children, all the more reason to consider interviewing advisors of all ages.
You most likely want the best for your children and you don’t want to leave them exposed to someone who may take advantage of them. The new advisor who has years left in their career has the ability to work not only with you but also with your children.
As a prospective client, you have the ability to vet that advisor and introduce your children to someone you trust. This helps avoid the scenario where your children are left to find a new advisor when you pass.
Lastly, you should also consider the level of service you are looking for in your advisor relationship. The older advisor may have higher account minimums in place and most likely a more mature book of business. Younger advisors may be more likely to take on clients with fewer assets and may even provide a higher level of services simply due to the fact they work with fewer individuals.
“Are you a fiduciary?”
Work with a fiduciary. This is key because they are going to operate within the client advisor relationship with your best interest at heart. How do you know if the advisor is a fiduciary?
One way is to ask about their credentials. This will be key because certain licenses and designations will require them to operate under a fiduciary capacity. Practicing in a fee-based relationship (Series 66 license required) or under the CFP designation will require that advisor to operate with your best interest leading the relationship.
There are lots of fiduciaries out there. To help you boil down the options a bit, ask them to share about the types of clients they like to work with.
- Is there a specific niche they service?
- Does that advisor have experience servicing clients similar to you?
- Are you a pharmacist who just got out of their PGY2 training and are trying to decide between buying a house, investing, and paying off debt?
- How would it benefit you to refinance student debt?
- Does it make sense to work for a non-profit hospital and take a lower salary in order to qualify for student loan forgiveness?
If the advisor has experience working with healthcare professionals, chances are they have had these conversations that are meaningful to you a time or two before!
As a follow-up, learn more about how this fiduciary likes to meet with clients.
With the rise in virtual meetings, hybrid or virtual-only advisors are becoming more popular. Find out how they would communicate with you and meet with you, phone, email, Zoom, in-person?
This may be a make or break for some people but it’s important to set proper expectations upfront to make sure the advisor-client relationship you may be entering is the best experience for you!
Brian Carney, CFP, AIF, ChFC, CDFA
Certified Financial Planner™ | Accredited investment Fiduciary | Co-Founder, RiversEdge Advisors
“What is the “all-in” cost to manage my investment portfolio?”
One question that someone looking to hire a financial planner should be asking is “What is the “all-in” cost to have the advisor manage my investment portfolio?” The total cost that an investor pays for their investment management can be extraordinarily difficult to determine by looking at their statement. The “all-in” cost of an investment portfolio is calculated by adding up:
- The advisor’s investment management fee
- The internal expense of the investments
- Costs for Trading
- Platform Fee/Brokerage Fee
Advisor’s Investment management fees are typically a percentage of the overall portfolio—a typical industry average on the first $1 million of investable assets is roughly 1%. That number will tier down as the value of the account increases.
These fees should be very easy to see as any paperwork to open the account will require the client to agree to the fees and should be clearly displayed on a quarterly statement—the December statement is usually the most informative since it will have the total year to date in fees paid.
Unfortunately, there are additional fees that are very difficult for a client to figure out on their own. There are internal expenses, also called the expense ratio, that exist in nearly every type of investment except for an individual stock.
A mutual fund, for example, can have additional expenses from .08% up to 1.75% built-in that would be in addition to what the advisor is already charging.
These fees are not shown on an account statement if the advisor doesn’t provide a breakdown of the internal expenses, the only way to find them is by looking up the ticker symbol and clicking on the fees section.
Trading fees—these are transactional based fees that occur when an investment, like a stock, is purchased. In the last two years most custodians (Charles Schwab, TD, Robinhood) have eliminated these trading costs but some custodians may still charge these fees.
A platform fee or brokerage fee is charged by the custodian that holds your account. For example, you may need to pay a company $50/year to have an IRA. By adding all of those fees together an investor can determine their “all-in cost” of their investment portfolio.
U.S. Army Reservist | COO, AAFMAA
“Are you held to a fiduciary standard?”
It’s important to ensure that any advisor you work with will hold your interests ahead of their own. Trusted advisors take these obligations very seriously and will make sure to assert that in early conversations with prospective clients.
Many advisors use a variety of words or other explanations about this standard, especially if they are not truly “Fiduciary” to you and your family. Those that are will easily, and proudly, be able to confirm this for you.
“What is your company investment philosophy and how will this apply to my portfolio?”
Again, your advisor works for you and should have your goals and interests at the top of their mind when making decisions on your behalf.
That said, you may find that different firms you consider have different approaches to investing, ranging from conservative to more risk-tolerant, and use different tools to manage portfolios. Understanding if and how your goals fit into their practices is crucial to a successful long-term advisor/client relationship.
“Are you familiar with the nuances of my financial circumstances and needs?”
This question is incredibly important if you have unique income streams, entitlements or tax benefits. You want to make sure any advisor you work with is aware of these things and has experience building financial plans that account for similar factors.
For instance, we encourage our active-duty military and veteran members to seek out advisors who are well-versed in military pay and retirement structures and have experience working with these circumstances, to ensure a positive and productive relationship from the get-go.
“How do you typically interact with clients?”
This one might seem simple, but today’s financial advisors can offer hands-on management, Robo-assistance, face-to-face (or virtual!) meetings, and everything in between.
It’s all about finding what your ideal relationship looks like — maybe you want access to a dashboard to monitor and make adjustments on your own, with the option to reach out to your advisor for help. Or maybe you’d rather let your advisor take the lead and guide decision-making.
No matter what style of interaction you’re looking for, you want to ensure that the advisor you chose is comfortable working that way and has experience doing so.
Director of Advisor Marketing, SmartAsset
“Are you a fiduciary?”
Your goal with this question is to determine whether or not an advisor is required to make decisions in your best interest. This means that they’ll make decisions based on your bottom line, and won’t try to sell you expensive investments just because they result in a higher commission for them.
Fiduciary financial advisors also have to disclose conflicts of interest that they might have when making recommendations (such as investments that they’re compensated more highly for).
“How are you compensated?”
As many as 30 percent of investors don’t know how much they’re paying their advisors – or know whether they’re paying any fees at all. This is because many advisory agreements can be a confusing tangle of terms and opaque fees, with some fees also hidden in the costs of your investments.
Make sure you understand not only how much an advisor is being paid to provide you with advice, as well as how much your underlying investments cost.
Fees for financial advisors are split into two categories: fee-based and commission-based. Fee-based advisors charge you a set fee, either as a percentage of your total assets or a flat rate, for their services.
Some advisors may instead charge a la carte fees for specific services, like putting together a financial plan.
Commission-based advisors, on the other hand, are paid when you open a new account or buy one of the products that they sell, such as specific mutual funds. This doesn’t necessarily mean that they won’t look out for your best interests, but it’s helpful to know when and where a conflict might exist.
“How frequently you charge fees, and how they’re charged?”
Some advisors automatically deduct their compensation from your account at the end of the month, quarter or year. Others, especially those who charge for specific services, will send you a bill based on hours worked, which you pay just like any other service.
The rule of thumb is that high-net-worth investors should expect to pay advisory fees of between 0.5 to 1% of their total portfolio. But the underlying fees of their individual investments may push costs higher. If you’re concerned about fees, have an upfront conversation with your advisor about how much your fees will affect your investment performance over time.
“How do you like to work with your clients? Do you have other clients like me?”
Lost in a lot of the conversations around fees and licensing is the fact that you’re still looking to build a relationship with a professional whom you will trust to give you advice on deeply personal topics.
Just like a doctor, you should make sure that any advisor you hire is someone whose advice you’ll follow, even if it’s unpleasant. Financial advice is only good if you listen to it.
For investors with a unique financial situation that may require specialized advice, it may make sense to find an advisor who works with similar clients. Examples include small business owners who are looking to sell their firms, or startup employees who have stock options to exercise, or even dentists and doctors who are high earners, but also have substantial student debt.
Some advisors even specialize in helping individuals through specific life events, like divorce, planning for dependents with special needs, or the loss of a spouse.
Finally, don’t underestimate the importance of simple things, like seeing eye-to-eye with your advisor about how you want to meet (in-person vs. video conference) or having easy access to your accounts and reports online. If it’s a hassle to manage your part of the advisory relationship, you’re less likely to be satisfied with the advisor you choose.
CEO, MoneyNerd, Ltd
There are a few ways to go about finding a new financial advisor. They advertise in many places, and more commonly, you will always find a recommendation from a friend or family member.
Once you think you have found someone you are comfortable with, the final step before hiring them is to meet with them face to face, the worst case, zoom face to face in the current pandemic. The need for this is to get a measure of their honesty, affordability and communication skills.
There are also some questions you should ask before hiring. After asking the following questions, you will have a better feel for whether this is an advisor you want to work with long term.
Ask for their credentials
It is essential to ask any potential financial advisor about their credentials. If you trust someone with your money, it is only natural that you would check their qualifications.
Ask how they get paid
Some financial advisors are paid an hourly wage; some take a percentage of all the assets they manage. Some get paid a commission on selling specific products, and some work off a particular fee for a particular service.
Look for a fee-only financial advisor. Always look for one who gets a flat fee from you for their services, a percentage of your assets, or a pre-agreed hourly rate. A fee-only financial advisor is working exclusively for you.
Determine what services will be provided before entering into any agreement with them
Some advisors specialize in investment advice, whereas others, for example, focus on other aspects of your finances such as retirement or taxes. Set out clearly from the very start what services are included, what costs extra, and what fees you will pay.
Ask what they do with their money
This will give you an indication of their investment philosophy. If they invest in a similar way to you, you will have some confidence that they will provide you with the same advice they are giving themselves.
Ask who their typical clients are
Try and find an advisor who is experienced when it comes to dealing with clients with your needs. Suppose you are looking for an advisor to guide you in your business tax deductions, for example. In that case, you don’t want an advisor who specializes in saving plans for children’s education or refinancing student loans.
It’s often suggested finding a financial advisor within ten years of age as yourself; they will possibly have a better understanding of your issues.
Ask and clarify how often you’ll communicate with each other moving forward
Some advisors will look to meet up with you every few months, while others prefer to limit it to an annual visit. If you are the kind of person who always likes to know what is going on with your money, then an advisor who wants to keep contact to a minimum may not be the best relationship for you moving forward.
Ask if they work as part of a team or if they will deal with you directly
In some cases, advisors who work as part of a group may be the ones to meet with you regularly, but you may talk to other members of the team from time to time who will be up to speed with your file. Neither approach is wrong, but it is a question that is best asked right at the start.
Ask if you can see a sample of a financial plan
You want to know from the word go whether they an advisor who will provide you with a three-page summary of your finances or whether they will want to run you through a fifty-page financial plan filled with detail, charts, and graphs.
Again, neither is wrong; some clients prefer to know absolutely everything. Others get easily overwhelmed with too much information and want the advisor to break things down to essential information only.
The final question I would want to ask would be, ‘Why should I choose you to be my financial advisor?’
You want an indication of how much thought they have put into the work they could do for you and the kind of relationship they envisage having with you.
Chloe Wohlforth, CFP
Managing Director, Angeles Wealth Management
“What is your investment process?”
Many individuals seek an advisor to manage their investment portfolio. Since this is a critical role each advisor plays, it is important to understand how the firm invests. Are investment portfolios created entirely with in-house products? Or does the investment team have the liberty to invest with any manager?
It is important to hire a firm whose investment “advantage” is dictated by unfiltered and unlimited access to quality investment solutions across the globe.
We seek to build portfolios designed to generate maximum return for a given level of risk through diversification across asset classes, investment style, and geography while adding value through superior manager selection and portfolio construction.
We work with clients to develop strategic asset allocation targets and ranges that consider the client’s unique circumstances, tax sensitivities, and risk tolerances and build durable and lasting portfolios to meet objectives over long time periods.
All decisions should be fully transparent to clients, detailed in regular reports, and reviewed at meetings.
“Who will be my advisor?”
It is good to know whether the person you are speaking with in the initial stage of getting to know a firm will be your advisor or if roles are divided between business development and advisory services.
When hiring an advisor, you want to make sure you are speaking with the person who will be giving you advice.
“How do I measure a successful client/advisor relationship?”
A successful client/advisor relationship is about setting expectations and then meeting them. Each client has their own financial goals which ultimately support their life goals. It’s an advisor’s job to understand these goals because only then can they guide you to make the best financial decision every step of the way.
Kevin Patrick Jordan
Investment Adviser Representative | Director of Operations and Planning, Macke Financial Advisory Group
“Are you a finance-only advisor?”
Most advisors expect to field questions about their compensation and Fee-Only vs Fee-Based (because those questions are absolutely necessary!), but they are startled to hear the term “Finance-Only”.
People are searching for the person who will guide them through retirement and into advanced age. This is an intimate relationship that requires communication and trust. If your advisor is a “Finance-Only” advisor, meaning you come in 4 times a year and talk about numbers on a screen, the relationship may not last when times get tough.
When you are comfortable sharing your personal goals, dreams, challenges, and fears with your advisor, they will slowly become part of your family. People don’t care how much you know until they know how much you care.
“How do you get paid for your services?”
Prospective clients should fully understand how their potential advisor receives compensation before starting the relationship. For example, some broker/dealer or hybrid advisors get paid by ABC Mutual Fund to recommend their investments to clients (revenue sharing); therefore the advisor has more personal incentive to recommend ABC over XYZ.
“Fee-Only” advisors can only be paid through the client’s transparent Advisory Fee. Any services provided by the Fee-Only advisor (investment recommendations, execution of trades, insurance advice, tax planning, and estate planning advice) are all included in the Advisory Fee.
“Fee-Based” advisors also charge a comprehensive Advisory Fee, but they can also receive compensation from revenue sharing or commissions from trades or the sale of insurance products. A “Fee-Based” advisor could run an analysis to tell you that you need $2M in life insurance, and then sell you that policy for a commission.
This leaves you wondering if you really only needed $1M and if the advisor just wanted a bigger commission.
Fee-Only advisors cannot sell you any product, so a recommendation for a $2M life insurance policy does not earn them any additional benefit whatsoever (except for a happy and protected client!).
“Are you 100% fiduciary all the time?”
This confirms that the advisor is legally required to put the client first and cannot receive compensation beyond the Advisory Fee. It also means that the same advisor cannot change hats and act as a broker to sell insurance products/annuities or charge you commissions on trades.
Unfortunately, many advisors advertise that they are independent advisors, yet are fully partnered with a broker/dealer who is free to sell you products or charge commissions. While there are suitability requirements for brokers/dealers, most of those are satisfied by asking you to fill out their paperwork.
Steffa Mantilla, CFEI
Certified Financial Education Instructor | Founder, Money Tamer
Make sure they have the same views on debt as you
When you’re trying to find a financial planner, it’s important to make sure they have the same views on debt as you. Some financial planners strongly encourage that their clients keep their mortgages rather than paying them off early since the stock market potentially earns more than the interest rate of the loan.
While this is good in theory, you may feel better with less risk and more stability in your life by paying your home off early. You don’t want to be in a tug of war with your financial planner about the best course of action.
Ask them what their fees are
Some planners charge an annual percentage of the total amount of money they’re helping manage (~1%), some earn money on commissions from products they recommend, while others are fee-only.
I recommend looking for a fee-only financial planner because you won’t have to worry about being recommended products based on the payout the planner is getting vs what’s the best for your financial situation. To find a fee-only financial advisor, check out NAPFA.org.
While a fee-only financial planner will cost more upfront, you’re more likely to feel comfortable with the advice they’re giving you since their pay doesn’t depend on what they can get you to sign up for.
Their personality, ideally, should match with yours
A financial planner is someone you’ll work closely with and meet with on at least an annual basis so their personality should work well with yours. Even if a financial planner has all the credentials you’re looking for, sometimes their personality won’t mesh well with yours.
That’s completely fine and is why I recommend meeting with at least 2-3 financial planners for a consultation. Most planners offer the initial consultation or phone interview for free so you can ask them questions before committing to working with them.
Craig Childress, CFP
Owner and Wealth Manager, Oswego Wealth Advisors
“What is your plan for continuity/succession?”
When looking to hire a financial advisor, a lot of the focus rightfully falls to the prospective client’s current financial situation and life goals, as well as the potential advisor’s expertise and approach.
This is important to help ensure the advisor and client are a match, but there’s an important question missing from the equation.
What happens to the account if the advisor decides to retire or needs to step down due to an unforeseen reason? How will the client be impacted? Who can they go to for answers?
If the past year has taught us anything, it is the importance of planning for the unexpected. Put your mind at ease by knowing from the outset that the advisor you choose has a plan in place and will ensure you know who is available to help you in the future.
And, if possible, try to meet with both the person who will serve as your primary advisor and the person on deck to help you with your accounts to ensure you feel good about both before making your decision.
Edison Byzyka, CFA
Partner and Chief Investment Officer, Credent Wealth Management
Ask for third-party performance verification
Many financial advisors will often display their unique approach to investment management and will showcase hypothetical investment results on a back-tested basis.
This should be an immediate red flag and investors should be aware that no one will ever generate a backtest that is not stellar, or at least comparable to market returns. This may occur even in the event that their clients did not actually realize such returns. That’s the inherent issue with backtests.
If you come across such an all too common scenario, ask to see verified actual client results. One of the pillars of such verification stems from GIPS® composite reports (Global Investment Performance Standards). Such reports will provide a true and accurate snapshot that can help you hire the appropriate financial advisor for your goals.
Ryan C. Phillips, CFP
Certified Financial Planner | Founder, GuidePoint Financial Planning
Ask their professional credentials and how they obtained them
Before hiring a financial advisor it is important to have a really good understanding of their experience and qualifications. One way to better understand this is to ask about their professional credentials and what went into obtaining them.
There are hundreds of credentials out there with some taking years to earn while others can be completed on a weekend. This information can also give you insights into determining if what they really do for clients is a match for what you are seeking.
President, SEMBA | Author, “Activate Your Money: Invest to Grow Your Wealth and Build a Better World”
“Will you help me invest my money in a socially responsible manner?”
According to research by Morgan-Stanley, 85% of U.S individual investors and 95% of millennials are interested in sustainable investing, yet many financial advisors do not offer this type of analysis as part of their services.
In some cases, advisors know about how to align money with values but choose not to bring the subject up with their clients because they do not want to be presumptuous. Instead, they wait for their clients to initiate the conversation. Therefore, if socially responsible and environmentally sustainable investing is important to you – ask about it!
Make this question a key part of your financial advisory interview and due diligence process. If an advisor tells you that values-aligned investing is not profitable in most asset classes or just too hard to achieve, keep looking.
As sustainable investing becomes more commonplace, you’ll find a growing number of financial advisors who will claim expertise. But when you dig a little, you find that sustainable investing is not central to their business.
While these firms may suggest investments in ESG stock funds, their ability to help you with a broad range of investments that have a positive impact is often limited, as is their deeper knowledge of the field.
An advisor for whom values-aligned investing is essential to their business should be able to speak to you about it in detail — across asset classes.
To make your process easier, you may just want to look for financial advisors that are also certified B Corporations. To be a member of this elite group, companies have to prove that their business balances both purpose and profit.
One of the most important things to look for when hiring a financial advisor is for them to be fiduciary.
As a noun, “fiduciary,” should describe a professional who acts in their client’s best interest, and as an adjective, “fiduciary,” actually means “in the client’s best interest.”
People who want financial advice rightly want to work with a fiduciary advisor, but unfortunately, in the real world of financial services, “fiduciary” is too often used in a deceptive and manipulative manner. Many advisors claim to be fiduciary when they clearly are not, and people often get taken advantage of by them.
“How much, in total fees and investment costs, will I pay every year?”
To avoid falling into that trap, ask two questions of your potential advisor: “How are you paid?” and, “How much, in total fees and investment costs, will I pay every year?” If you receive good answers to each of those questions, you have made great progress in ensuring that your best interest will be served.
Why are those questions so important? Of course, things like investment philosophy, planning procedures, tax expertise, and personality also matter and should be understood, but if the advisor is paid by commission or sales load for selling you products or investments, that advisor cannot act in your best interest, because commissions and sales loads are in the advisor’s best interest, and no one can serve two masters.
If it’s in the advisor’s best interest, it cannot be in yours. If the advisor is paid some percentage of a client’s assets, that advisor cannot truly act in the client’s best interest.
This is because of two primary reasons: first, the advisor’s clear incentive is to keep the client from doing anything to liquidate the portfolio, which would reduce the advisor’s fee income (based as it is on a percentage of the assets managed by that advisor), and second, percentage-based fees quickly rise to exorbitant levels, and paying ever-rising, exorbitant fees for the same work is obviously not in any client’s best interest.
To ensure the integrity of any advisor with whom you work, heed the old proverb: “trust, but verify”. Perhaps the advisor you are speaking with truly is a fiduciary, but don’t rely on any regulatory or government entity to protect you, because they won’t.
If you want your best interest met, protect yourself, ask questions, and remember, if an advisor is paid based on what they sell you, or if an advisor is paid as a function of how much money you have, that advisor cannot act only in your best interest.
CEO & Founder, Sure Dividend
Ask about their fiduciary status
Ask them if they’re a fiduciary advisor because you will know how much trust you can put in them with their answer.
A fiduciary can only advise you on investment strategies, how you can save your money and other financial recommendations that will benefit you. If they’re not fiduciary, you can risk getting poor advice since the commission non-fiduciary advisors earn can steer them away from putting your interests first.
You can also feel more secure by having them write down their fiduciary status.
Ask about their investment philosophy
You’ll want to align your long-term investment goals with their investment philosophy and how they will advise you when the market is up and down.
For instance, they could tell you a complicated version of how they will invest your money, but that could have you panicking later on, which could lead you to make impulsive investing decisions.
You also wouldn’t want to hire someone whose investment philosophy is to put all your money in a few stocks but one who will wisely diversify your portfolio. By knowing their investment philosophy before hiring them, you can feel more secure and confident with their plans.
Ask if it is possible to review a financial plan sample
This can help you understand how they will operate with you later since some will provide a summary or a more detailed report that is more complex. Therefore, it’s a good indicator of how you will get along in the future.
Having an advisor who will provide an easy-to-read and short financial plan might be preferable to one who makes it overly complicated than you want it to be.
Certified Personal Finance Counselor | Managing Editor, Super Money
“What percentage of your revenue comes from client fees versus commissions?”
The real question you are getting at here is, “Are you a fee-only or commission-based advisor?” But if you ask that directly you don’t always get an honest answer. Any answer that isn’t “100% of my revenue is from client fees” will let you know that you are dealing with a commission-based salesperson whose interests may not always be aligned with yours.
Of course, asking questions is only half the job. As the Russian proverb goes, Doveryai, no proveryai, or “trust, but verify.” You can often confirm whether the advisor is truthful by checking them out on SEC’s (Securities and Exchange Commission) Investment Adviser Public Disclosure website.
Advisors who register with the SEC have to file Form ADV which provides detailed information on their income sources, relationships with other companies, education, employment history, and advisor’s fee schedule. This search will also let you know about past infractions and disciplinary events.
Education and Training Coordinator, Lowes Financial Academy
“What certifications do you have?”
If you’re trusting someone with your money, you’d naturally like them to have the relevant qualifications to back up their experience.
Which type of financial advisor you choose depends on your needs and will come with differing credentials; the Level 4 diploma in Regulated Financial Planning from the Chartered Insurance Institute is one of the most important for becoming a successful Financial Advisor.
This sets you on the path to gaining Chartered status, which is a symbol of technical competence. It demonstrates that you are at the forefront of your profession and serves as a mark of trust with consumers, employers, and business connections. This is an esteemed status to hold.
At our financial academy, our graduates have been able to easily pass their Level 4 exams and gain their diploma. They found this has supported them in gaining employment as they have been able to back up their knowledge, which reflects just how crucial it is to have the right support to gain certifications for this specialized role.
Founder, Just Start Investing
“How have you invested in your money?”
Personally, I would ask this question after you hear their initial recommendations for you. If they are pitching ideas that they don’t implement themselves, it might be a red flag.
Some advisors make hefty commissions for selling products that are not always in your best interest, and this question is one way to help understand if they are truly acting in your best interest.
Keep in mind that sometimes, there is good reason to be recommending something different for you compared to what the advisor does.
For example, if you are in your 50s and nearing retirement and the advisor is in their 30s, they might be heavily invested in equity index funds, but also be recommending a heavier mix of bonds in your portfolio. This deviation between your plans makes sense given your difference in age and stage of life.
However, if the advisor is recommending whole life insurance or annuities, and is not invested in those products themselves, you should start to further question why those strategies are a good fit for you but not them.
Of course, you can always bypass this potential conflict of interest altogether by working with a fee-based advisor. Though either way, I think it’s a good question to ask to get an understanding of how the advisor puts their own money to use before letting them tell you what to do with yours.
Forbes Finance Contributor | Owner, Quest Education
“What kind of fees will you be charging me?”
Financial advisers make fees a couple of different ways. One way is through what’s called a wrap fee. The wrap fee is a percentage-based fee on the total asset value of the account. For example, a $100,000 account may pay the financial adviser 1% a year to manage the account.
Another way a financial adviser may charge their fee is through a sales commission on a mutual fund. Each time a specific mutual fund is purchased, it may trigger an upfront commission to the financial adviser. For example, if a $25,000 mutual fund is purchased, that could pay a 5% upfront commission paid to the financial adviser.
“Where will my money be invested?”
The answer to this question will also play a part in the total fees you may pay with your investment account. If you invest in stocks like Tesla or Facebook, there typically isn’t going to be a fee tied to this transaction.
If you invest in mutual funds or index funds, there is a fee linked to these investments, which is called an expense ratio. The expense ratio is an annual percentage-based fee.
“How much are the total fees going to be?”
You won’t know this answer until you know exactly where the financial adviser is making their money.. The second part of the fee structure will depend on whether you invest in stocks, mutual funds, index funds, or ETF’s. Make sure you ask what kind of expense ratios you will be paying if you invest in mutual funds, index funds, or ETF’s.
“What kind of annual investment return are we shooting for?”
It’s always good to know what the target is and have something to measure should you decide to work with this particular financial adviser.
“What kind of risk factors and liquidity is associated with my investments?”
All investments carry risk so make sure to know what kind of risks are associated with your investments. You also want to know how liquid your assets are. Should you need to access your funds immediately, make sure you understand the process.
“How often will the meeting be?”
Once you invest with your financial adviser, how often will you be meeting with them to talk strategy and make adjustments if necessary?
Founder, Profitable Venture
Ask whether or not their fees are all-inclusive
Sometimes a financial advisor will sell you on great compound interest earnings but then will deduct commission fees each month. They won’t tell you this outright, but it will be in the fine print of your contract.
If a financial advisor’s fees are all-inclusive, then you’ll either be paying a flat fee or an hourly fee.
But, if their fees are not all-inclusive, then they’re adding in a commission charge – which is a portion of your earnings. It might not seem like a lot on the outset – only about 1-2% – but it’s going to cost you a lot of money in the long run.
For example, if you’re investing an average amount with a financial advisor that charges you that 1% commission fee over a period of 30 years, it could cost you up to $50,000 depending on your initial investment. And it could cost you even more if you decide to invest larger amounts of money.
This happened to me when I hired my first financial advisor. I didn’t think to ask if their fees were all-inclusive, and they slapped me with a 2% commission fee on all of my earnings. When I realized this, it had already cost me thousands.
Founder, Card Payment Guru
“Do you prefer to use data or your knowledge to advise?”
The beauty of this question is that it easily separates the pros from the crowd. In order to advise, a financial advisor should use true inputs in the form of real-time data to provide the most lucrative outcome for a client.
The financial world is changing at a fast pace and so it is so important that your advisor is constantly absorbing all this new information (interest, lending, bank rates etc) and feeding you what is relevant and helpful.
“How accurate are your financial models? Please provide examples between your model and what actually occurred”
Within the realm of business, financial models are the purest form of business performance but also growth trajectories. If we consider the business to be a system with set boundaries having cost inputs and projected revenue outputs, it is this financial model which will project the future.
An expert financial advisor should know how to build flexible systems for you to have visibility over your cash flow at any point in time. Better yet, the simulation should line up closely with reality with a defined offset.
If it doesn’t it means business isn’t going to plan, or the model is shaky. Hopefully, it’s the former.
Founder, Avidon Marketing Group
You wouldn’t trust just anyone with your family, your health, or even your hair, so you should just be as picky when it comes to the person who manages your money. Due to the abundance of financial advisers out there, it can be difficult to know if you’ve chosen the right person for the job.
Here are four essential questions to ask your advisor before you hire them, in order to find out if they have your best interest at heart.
“How do you get paid?”
Knowing how a financial adviser is paid will give you a clear understanding of whether they are working in your best interest or not. Advisers who earn by selling certain products or investments are more likely to give you biased advice that benefits them more than you. Whereas, fee-only advisors don’t have any conflict of interest when it comes to managing your portfolio.
“How do you invest your money?”
This is a subtle way of finding out if your potential financial adviser practices what they preach. You probably wouldn’t want to visit a doctor who smokes 2 packs a day or a nutritionist who eats only 1 meal a day. The same is the case for advisers and if they aren’t willing to tell you about their own investments then maybe they don’t believe in what they’re telling you.
“What is your investment philosophy?”
An investment philosophy is a set of guiding principles that helps advisors make proper financial decisions and choose appropriate investments for a given situation of their clients. It is important to ensure your advisor’s philosophy aligns with your values and goals.
“Are you a fiduciary 100% of the time?”
A fiduciary is someone who is legally and ethically required to act solely in your best interest. Not all financial advisors can call themselves fiduciaries and if they answer affirmatively to the aforementioned question, be sure to get it in writing.
Frequently Asked Questions
Can a financial advisor help me manage debt?
Yes, a financial advisor can help you with debt management. They can assess your current financial situation and develop a plan to help you pay off your debt while minimizing interest costs.
They can also help you prioritize your debt payments, negotiate with creditors on your behalf, and create a budget plan to ensure you are living within your means.
In addition, financial advisors can help you avoid taking on too much debt in the future and ensure you have a solid plan for unexpected expenses.
They can also help you understand your credit score and take steps to improve it, which can help you qualify for better interest rates and save money over time.
Are there risks in working with a financial advisor?
Like any professional relationship, there is some risk in working with a financial advisor. It is crucial to choose an advisor who is reputable and trustworthy.
Some of the potential risks include the following:
Conflicts of interest: Financial advisors may receive commissions or other incentives for recommending certain investments, which can create a conflict of interest if those recommendations are not aligned with your interests.
Misaligned goals: If your advisor is more concerned with short-term gains than long-term financial planning, this could lead to risky investment strategies that do not meet your needs.
Inexperienced advisors: Be cautious when working with advisors who lack experience or credentials. They may not have the knowledge and expertise to provide sound financial advice.
Hidden fees: Financial advisors must disclose their fees, but some hide them in fine print or use complex fee structures that make it difficult for clients to understand the amount of their fees.
Lack of transparency: Your financial advisor should be clear and upfront about their investment strategies and the reasons behind their recommendations. If they are hesitant to explain their approach or dodge questions, it could be a red flag.
How often should I review my financial plan with my advisor?
The frequency you review your financial plan with your advisor depends on your individual needs and goals. In general, it’s recommended that you check your financial plan with your advisor at least once a year to ensure you’re meeting your goals.
This will allow you to assess your progress, make necessary adjustments, and ensure that your financial plan is consistent with your current circumstances.
However, there may be times when you need to review your plan more frequently, such as during periods of market volatility or significant life changes, such as a job loss or the birth of a child.
It’s important to communicate openly with your advisor and let them know if your financial or personal circumstances change significantly, which could impact your plan. Your financial advisor can help you determine the appropriate frequency of reviews based on your individual situation.
What happens when my financial advisor retires or leaves the company?
If your advisor has a succession plan in place: Some advisors have a plan for what happens to their clients when they retire or pass away. This may mean that another advisor within the firm will take over your account or refer you to another advisor outside the firm.
If your advisor is part of a team: In some cases, financial advisors work as part of a larger team. If a team member leaves, another member may be able to take over your account.
If your advisor was an independent contractor: If your advisor was not employed by a larger financial services firm but worked as an independent contractor, they may have made arrangements with another advisor to take over their clients’ accounts upon retirement or departure.
If none of these options are available: In some cases, you may need to find a new financial advisor yourself. You can start by asking friends and family members for recommendations or searching the Internet for advisors specializing in your needs.
Regardless of what happens, staying informed and communicating with your current and new advisor throughout the transition process is important.
You should also review any paperwork or agreements you signed when you began working with your initial advisor to understand how potential changes might affect you financially.
What qualities must a good advisor have?
A good financial advisor should have several important characteristics to provide quality advice and service to their clients.
Here are some important qualities to look for when choosing a financial advisor:
Professionalism: Good advisors should conduct themselves professionally and adhere to ethical standards.
Communication skills: A good advisor should be able to communicate complex financial concepts in a way that clients can understand. They should also be responsive to clients’ questions and concerns.
Analytical skills: A good advisor should have strong analytical skills and be able to assess clients’ financial situations and develop appropriate solutions.
Expertise: A good advisor should have the qualifications and experience to advise and guide clients. They should also stay up-to-date with changes in the financial industry and be able to provide timely advice.
Trustworthiness: A good advisor should be honest and transparent and act in the best interest of their clients. They should also be able to build trust with their clients over time.
Empathy: They should be able to understand clients’ unique circumstances and develop individual solutions that are consistent with their goals and values.
Patience: A good advisor should be patient and take the time to explain complex financial concepts and answer their clients’ questions.
By choosing an advisor who possesses these qualities, you can ensure that you receive quality advice and guidance that meets your needs and goals.
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