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Want a great financial advisor, but don’t know how to choose one? Start by asking the right questions. Use them to identify which practitioners specialize in the tasks you need done, as well as to separate out those whose professional ethics require them to put your best interests first from the ones who can factor in their own compensation in making investment choices for you.
The types of questions you’ll want to ask cover:
- How they’re paid.
- Which kinds of services they offer.
- Their professional qualifications.
- Which ethical standards they’re required to follow.
- How you would work together.
Make a grid with these questions and compare your candidates.
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10 questions to ask a financial advisor
When interviewing prospective financial advisors, there is much to discuss. Let’s dig right into the hard questions.
1. How are you compensated for the advice you give me?
When it comes to making money, you want to know how your advisor is being compensated and how transparent they’re being about it. “There is no such thing as free advice in financial services,” says Shavon Roman, financial advisor and founder of Heal Plan Invest. “Financial advisors are compensated in one of three ways: a flat fee for the advice, a percentage of the assets they manage, or commissions from the products they sell. You want to be clear on how you are paying for the advice.
An hourly rate is also possible. Most important, of course, is exactly how much they would charge you, whatever the method they use to arrive at it.
2. Which types of financial planning and services do you offer?
The term “financial advisor” is a broad one and can include financial planners, insurance agents, brokers, and other types of money managers. Some financial advisors may offer a broad spectrum of services, such as:
- Comprehensive financial plans.
- Portfolio management.
- Retirement planning.
- Estate planning.
- Insurance.
- Tax planning.
- Risk management.
Others may offer only a few of the above, such as specializing in investments or retirement planning. Make sure your advisor offers the services you need.
3. What are your credentials?
Financial advisors come from a variety of backgrounds. You can find many who hold multiple certifications, such as:
- Certified Financial Planner (CFP). A CFP specializes in personal finance. It’s one of the most common credentials you’ll see. Their education and experience are extensive, allowing them to advise on a wide range of financial planning tactics. A CFP may or may not be a financial advisor.
- Chartered Financial Analyst (CFA). A CFA is an individual who has completed rigorous education and exam requirements that qualify them to advise on valuing assets, wealth management, portfolio management, and investment tools. They typically come from business, economics, accounting, or finance backgrounds.
- Chartered Financial Consultant (ChFC). A ChFC is an alternative to a CFP with similar courses, experience, and exam requirements. Earning this credential gives advisors advanced study in topics such as estate planning, tax planning, financial planning, retirement planning, and more.
- Certified Public Accountant (CPA): A CPA has education and experience in accounting and has passed an exam to obtain their CPA license. They’re experienced in advising on taxation and may have additional certifications in wealth management.
Financial advisors may need additional licensing from FINRA if they sell securities, such as passing a Series 65 exam, though these requirements may be waived by holding advanced credentials, including some of those discussed above.
These credentials often require rigorous study, experience, and examination. If you’re not familiar with a particular professional credential, ask them what it means, how they earned it, and how it makes them qualified to handle your investments.
4. Are you a fiduciary?
Financial advisors who are fiduciaries are legally required to make decisions in their client’s best interests. They must put your interests ahead of their own. If an investment will earn a healthy commission for the advisor but isn’t as optimum as an alternative for the client, it’s off the table.
Financial advisors who work under brokerages aren’t required to be fiduciaries. They only need to meet FINRA’s suitability standard, which means that an investment they recommend doesn’t have to be the best option, just a “suitable” one. Unfortunately, suitable is rarely best.
5. How long have you been in business?
While longevity is not always a predictor of successful outcomes, it is helpful to hire a financial advisor who is experienced and established. After all, this is a relationship you’ll want to benefit from in the long term.
6. Do you have E & O insurance?
If you want to ensure that you’re protected in accepting the advisor’s recommendations, ask if the advisor has errors and omissions (E & O) insurance. “[It] protects the client if the financial advisor makes a professional error or fails to provide a specific service,” says Roman. It’s common for a financial advisor to have this type of insurance, because it’s usually required for investments they sell.
7. Are you an independent or a ‘captive’ advisor?
Financial advisors can be considered independent or captive, which can affect the options they provide you.. “An independent advisor works with multiple companies and can recommend different financial products,” said Roman. “A captive advisor only works for one company and can only sell the financial products of that company.”
An example of a captive advisor is one who works for an insurance conglomerate. They can only recommend services provided by their company. As such, they may be limited in the types of services or financial products provided.
8. How would you invest my money?
It’s important to know your financial advisor’s investing strategy. Look for someone who is transparent and clear, write down their answers, and then research their plan for your investments. In which funds would you be investing? Wh at is the recommended asset allocation for your stock portfolio? Does your financial advisor plan to have the power to buy and sell investments without your permission? Do they recommend efficient tax strategies?
9. How often do you review performance and rebalance investments?
You can also ask to see the firm’s track record. Make sure that your investments are performing at least on par with its other investments.
You’ll also want to know how often your financial advisor will rebalance your portfolio. Would your account be actively managed? Will your advisor earn a commission every time you trade out funds?
10. How are we going to work together?
How much time can you expect to get from your advisor? How will they communicate with you and how often?
Make sure you’re both clear ahead of time about how much involvement you want. If you’re not on the same page from the get-go, you’d be better off with another candidate.
Also review any contract you are asked to sign. Look closely at the terms, how the advisor will be paid, and your options for terminating the agreement..
One important question to ask yourself: Do I feel comfortable with this person?
With luck you’ll be working with your financial advisor for a long time, through many changes in your life and maybe a crisis or two. Even if someone ticks all the right boxes, pay attention to your gut feelings about what it would be like to work with them. Do you feel trust? Do you feel respected? Do you think you will get the level of attention you need, both on an annual basis and in an emergency?
As you continue to work together, evaluate the relationship. Is it going smoothly? Are you getting the results you want? Note, however, that sticking to a long-term strategy means that you may not always beat the benchmark for how investments are doing in a particular year, especially if you’ve chosen a more conservative portfolio.
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Financial advisor red flags
Here are a few things to watch out for as you interview potential candidates. It’s best to avoid any financial advisor who:
- Isn’t transparent with you about their philosophy and how they are funded.
- Recommends a single investment.
- Goes with what feels like a one-size-fits-all approach.
- Lacks appropriate credentials.
- Promises guaranteed returns (unusually consistent returns were a tipoff to Bernie Madoff’s scam, expert investors noted).
- Pushes investments that are not registered securities.
- Only sells insurance or annuity products from their parent corporation.
There are plenty of good financial advisors who will help you meet your financial goals. Toss aside the ones who won’t or can’t.
TIME Stamp: Make sure that your financial advisor knows their stuff and will put you first
Vetting your financial advisor is essential, and you should always shop around before deciding on one. Compare their services, fees, styles, and returns. Do a quick check on each finalist on your list to see if there have been any issues in anyone’s background. The SEC has good tips for researching financial professionals.
You may end up with the first one you like, but check out the alternatives before you decide. Doing your homework will pay dividends for years to come.
Frequently asked questions (FAQs)
What fees does my financial advisor charge?
The fees charged by your financial advisor can vary, so be sure to ask about their fee structure. If they are paid a fee (as opposed to a commission on sales or an hourly rate), is it a set amount or a percentage of your assets under management?
Can I trust my financial advisor?
Trustworthy financial advisors are up front about pricing, investments, credentials, specialties, and experience. Still, take care to check them out. (For example, you can check CFP credentials with the CFP Board online.) If you don’t feel completely comfortable, go elsewhere.
Is there a minimum investment required to work with a financial advisor?
Depending on whom you choose as your financial advisor, some firms may have a minimum investment requirement, which is the amount of money you need to invest for them to work with you. Fidelity, for example, has a $50,000 minimum to enroll in Fidelity Wealth Services. However, don’t be discouraged by some of the higher minimum investments. There are options to hire financial advisors even when you’re just starting out.
Can I terminate my relationship with a financial advisor if I'm not satisfied?
Yes, you can. To end a relationship with a financial advisor, review the termination clause in your contract to see if there are any fees, deadlines, and other issues you may run into. It’s common to end the agreement mutually and without a termination fee, though some advisors do charge one.. You may also need to provide 30-days notice.
Either you or your new advisor can send a letter to formally end the relationship. You can expect your accounts with your former advisor to be transferred over to your new advisor in 7 to 10 business days.
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