Deciding to work with a financial advisor can be monumental for your family’s financial future. Here are 7 questions to ask a financial advisor before you hire them.
Selecting a financial advisor is one of the most important decisions your family will make. But it’s also something you (hopefully) only have to do very rarely. As a result, it’s very challenging to know how to find the right one.
Financial advisors are also highly varied. Different services, fee models, expertise, credentials, and more.
Below are seven questions to ask a financial advisor and what to look for in their responses.
1. Are you a Fiduciary 100% of the time?
A Fiduciary is obligated to put your interests before their own. Their compensation must come directly from you and that dollar amount must be a transparent line item.
Believe it or not, this is not an industry standard. Some advisors may not be fiduciaries, or they could be "dually registered" and only act as a fiduciary part of the time. At other times they are held to a lesser, "suitability" standard.
A suitability standard means they can recommend an investment or strategy that is suitable, but not optimal. For example, recommending a suitable investment that also earns the advisor a commission, instead of recommending the investment that prioritizes your best interest.
2. Who is your ideal client?
You want an advisor that works with clients like you. Your advisor has experience with your situation, works with many clients in your situation, and therefore can best leverage their expertise for you.
You don’t want to be the one-off in your advisor’s business.
3. What is your investment philosophy?
Although I have strong opinions on the optimal investment strategy, what is most important is you believe in the strategy your advisor employs. If not, you’re liable to sell or change investment strategies at the first sign of trouble.
Your advisor should be able to clearly articulate their strategy. And you should feel confident that it is right for you.
You should understand your advisor’s philosophy and implementation regarding:
- Asset allocation
- Active vs. Passive management
- Investment fund fees
- Trading frequency
- Tax management
4. How are you paid?
Fee structures vary widely among advisors and it’s important to know how your advisor is paid, and what conflicts of interest may arise from the fee structure. Also, ask to get the fee translated into dollars instead of percentages.
Common fee structures include commissions, assets under management (AUM), flat fee, retainers, or some combination of these fee structures.
- Commissions include sales loads on certain products (like mutual funds, insurance products, or annuities). “Trails” can also be embedded within products. For example, depending on the funds your advisor selects on your behalf, a portion of the mutual fund fee could be paid to your advisor.
- Assets under management fees are based on the assets your advisor manages on your behalf. Fees are typically a percentage of your total invested assets and may include “breakpoints” above certain asset levels.
- Flat-fee arrangements are just that, a flat dollar fee. Flat fees often include financial planning and may also include investment management, although it is common for investment management services to be offered at an additional cost or AUM fee.
- Retainer fees are often a fixed annual amount based on net worth, income, assets, or complexity. These structures offer a specific set of services as well as an ongoing relationship in partnering with clients.
5. What does our relationship look like?
You should have clear expectations of how you will work with your advisor. And you should be sure the person you're talking to is who you will be working with.
Who will you work with? How often will you meet? How will you communicate (in-person, phone, email, video-call)? What software or deliverables can you expect? What services are included in the relationship?
6. What are your qualifications? Experience, credentials, organizational affiliations?
Unfortunately, there is no agreed-upon licensing standard for financial advisors (as opposed to professions like doctors and lawyers). As a result, the credentials and experience of “financial advisors” vary widely. Understanding the combination of your advisor's experience (length and type), credentials, and organizational affiliations will help you differentiate among advisors.
Understand both years of experience in the industry and type of experience.
Years of experience alone can be misleading. For example, a mutual fund salesperson who recently transitioned to financial advice may have 15 years in the industry, but very little experience in financial planning.
How many years of experience does your advisor have working directly with clients like you?
Education and Credentials
Education and credentials are an alphabet soup in financial services. Each credential speaks to different aptitudes and areas of specialty, as well as time and commitment to earn the designations.
What is most important is to understand the area of specialty signified by each designation (general planning, investments, tax, etc.), what it takes to obtain the designation (experience, exams), and what is required to maintain the designation (continuing education, ethical standards).
Credentials you are likely to encounter include:
- Certified Financial Planner (CFP®) - The CFP® designation requires completing advanced education courses in insurance and risk management, investment planning, income tax planning, retirement planning, and estate planning, as well as passing a comprehensive exam on these subjects and more. Candidates must also have three years of full-time financial planning experience. After earning the designation, CFP® professionals are bound by a Code of Ethics and Standards of Conduct and must complete 30 hours of continuing education every two years.
- Chartered Financial Analyst (CFA) - The CFA Program is a graduate-level self-study program that combines a broad-based curriculum of investment principles with professional conduct requirements. It is designed to prepare charterholders for a wide range of investment specialties that apply in every market all over the world. To earn the CFA charter, applicants must pass three exams and meet professional and ethical requirements.
- Certified Public Accountant (CPA) - CPAs must complete 150 hours of post-secondary education from an accredited institution with at least 30 hours in accounting classes, complete a four-part examination, and have at least two years of accounting experience.
Organization affiliations may also help to distinguish among advisors. Similar to credentials, these organizations have different requirements of their members in terms of experience, services provided to clients, and continuing education.
For example, the National Association of Personal Financial Advisors (NAPFA) requires members to be fee-only, fiduciary advisors, obtain the CFP® designation, abide by a Code of Ethics, and complete 60 hours of continuing education every two-year cycle.
7. Why did you become a financial advisor?
Your financial advisor will be an intimate confidant in your life. You will be sharing details about your personal finances and aspirations that you share with very few people. It's a deeply personal relationship.
Understanding your advisor’s personal story and journey to this profession will give you insight into who they are too.
Final Thoughts on Questions to Ask a Financial Advisor
Hiring a financial advisor can feel like an overwhelming experience. But with these questions and your own personal expectations for how you want to work with your advisor, you can be well-equipped to navigate this process.