Congratulations, you’re ready to hire a financial advisor! Hiring a financial advisor is an important milestone in one’s financial life. It symbolizes an inflection point of sorts, whereby you have accumulated enough money to justify seeking help in managing it effectively. But hiring a financial advisor can be confusing. Advisors are to money what doctors are to your health – they have years of training and experience, and come in many different varieties, specialties and levels of skill. Their compatibility with you and your goals can vary wildly depending on many different variables.
Even though they may carry the same title, “financial advisor”, the fact is that in today’s regulatory environment that can mean many different things. A psychiatrist and a rheumatologist may both have earned the right to be called “doctor”, but if you have Lupus, there’s only one you’d want to visit. Many advisors offer different services or products, get compensated in various manners, have multiple licenses or designations, work with a diverse range of clients. . . and the list goes on and on. This is not helpful when someone is looking to work with an advisor, in fact it can be discouraging. It’s important that you spend a little bit of time up front to see if they’re the right advisor for you.
Here’s a list of questions to ask a financial advisor when you first meet with them.
What Services Do You Specialize In?
Some financial advisors are more investment management focused and others are more focused on financial planning. Some do both. If you’re not looking for a comprehensive financial plan, and are more interested in having your assets managed, then you can narrow your search and look for an advisor that primarily sets up investment accounts.
But if you’re looking for an advisor that understands your whole financial picture, then work with someone who not only understands your investing goals, but also offers retirement planning, tax planning, estate planning, protection planning, cash flow analysis, help with major purchases as well as other goals.
Are You a Fiduciary?
This is a crucial question to ask a financial advisor. Fiduciaries must put their clients’ best interests before their own. Because of this obligation, financial advisors who are bound by the fiduciary duty tend to have fewer, and ideally, no conflicts of interest. Non-fiduciaries need only to recommend products that are “suitable” — even if they’re not the lowest-cost or most ideal for you.
It’s important that you ask the advisor this question to determine whether they may have any potential conflicts of interest. Some advisors may also act as insurance agents or representatives of a broker-dealer. They may earn commissions from selling or trading products, which may incentivize them to sell these products to their clients when they may not be in the best interest of the client.
What Professional Credentials Do You Have?
Financial professionals can have a confusing list of initials behind their names. You should find out what licenses the advisor has as well as how long they have held those licenses. It’s also recommended that you check their record for any disclosures (past regulatory, criminal or disciplinary actions). If you’re looking for someone to manage your assets, make sure you work with an advisor who has weathered more than one storm, because tough markets are when you will need them the most.
If you’re more interested in financial planning, you should look for an advisor with some sort of financial planning credentials. One of the most popular is the Certified Financial Planner (CFP) designation. This designation requires its people to complete coursework, a certification exam, and have sufficient experience before using the title. It also requires its practitioners to adhere to a set of ethical standards, including the fiduciary standard that requires them to put your interests ahead of theirs.
How Are You Compensated?
Financial advisors can get paid in various ways. Advisors acting as fiduciaries typically only accept fees paid by clients. Advisors working for banks, brokerage firms and insurance companies can receive commissions from the sale of stocks, bonds, mutual funds, annuities or other insurance products. It may be hard to determine how these advisors are paid, as some of these commissions are embedded within the products. But keep in mind that advisors who are paid on commission may have an agenda to push and, as a result, are conflicted. Unfortunately, many of them are merely financial salespeople rather than true financial advisors.
To make things easier and avoid conflicts of interest, focus on fee-only advisors. They don’t get commissions for selling products and as we reviewed above, must put your best interests first when working with you. Depending on the service, a fee-only advisor may charge a flat fee, an hourly fee, an asset-based fee or a combination. Typically, advisors charge a flat fee or hourly fee for financial planning services and an asset-based fee for portfolio management. Always get a quote and find out what is included for that amount and what constitutes an extra charge. You might be responsible for trading costs, as well as other account fees. These additional costs can add up, so make sure you’re aware of them before you hire a financial advisor.
Where Are My Assets Held?
Your financial advisor should work with a brokerage, bank, insurance company, or other financial business that will act as an independent custodian for your money. That relationship should be clear and transparent, and you should always have the ability to connect with the custodian directly to see the value of your account instead of relying on the advisor.
Beware of any advisor that won’t share that custodian’s information, that insists on being the only go-between with the custodian, or acts as his or her own custodian. You should be able to go online and check your accounts at any time.
What Is Your Investment Philosophy?
A financial advisor should be able to describe their investment philosophy. Some advisors customize portfolios according to clients’ needs, while others offer a selection of model portfolios that they assign to clients based on their risk tolerance, goals and time frame. It’s important to ensure you have the same investment philosophy. Knowing whether or not their investment style aligns with your personal investing philosophy beforehand can save you a lot of headaches in the long run. A good financial advisor will want to learn about you, your overall financial situation, your risk tolerance and your goals before they make any recommendations.
Do You Have Account Minimums?
Some financial advisors require clients to invest a certain level of assets in order to start or maintain a relationship with them. For example, one financial advisor might work with clients who have at least $100,000 in investable assets, while another advisor might require a minimum of $10 million in assets. On the other hand, there are also advisors that don’t have any account or asset minimums as they typically charge financial planning fees. These account minimum differences is a good indication of the types of clients an advisor typically works with and if they would be a good fit for you.
How Often Will We Meet And Communicate?
In the beginning of your relationship with your financial advisor, it’s important that you have an open line of communication. Once you’ve established a solid plan, communication can be less frequent, but you’ll still want to be keep in touch and have regular checkups. How often is the advisor in touch with his or her typical client? How often should you plan to meet face to face or via conference call? Can you call or email whenever a question arises, or do you have to stick to a scheduled time? The answers to these questions will help you find an advisor that has a communication style that better suits your needs.
What’s Your Succession Plan?
Before starting a relationship with a financial advisor, it is very important to know what would happen to their clients if something unexpected happened to them. Advisors are in the business of helping others plan for their goals as well as a worst-case scenario. You would hope that your financial planner has also planned for unexpected scenarios. Advisors understand that their career won’t last forever, yet many of them don’t have a succession plan in place in case they exit the business by choice or for some unforeseen reason. Ask to see a Business Continuity Plan as well as a Succession Plan from your advisor. Whether your advisor is young or old, they should be ready to make sure that their clients are taken care of, if they are not around.
There are many types of financial professionals out there. So it’s important that you interview a few of them and find one who aligns with your goals, needs and wants in this relationship. Like any other type of relationship, trust is the most important factor. At the end of the day, you are hiring a financial advisor to help you plan for the precious years of your life and handle your money. Hopefully asking these questions will help you identify an advisor that you would like to work with and help start the relationship out on the right foot.