The Best Questions to Ask When Hiring a Financial Advisor
You’ve made the decision to work with an Advisor … Now what?
Asking the right questions will help save you time, energy, and money.
Making the decision to hire Financial Advisor is a really IMPORTANT thing.
This is going to be the person you turn to, to advise you on crucial financial decisions throughout your lifetime.
This is also going to be the same person that is going to be with you hopefully throughout the next several decades and included in on some of your life’s biggest conversations, events, and moments.
Think about it …. your next major life event, who do you call after your friends and family?
Your financial advisor.
Pretty significant, right?
And given the importance of the role this person is going to play in your life, you’ll want to make sure and do your homework because one wrong recommendation could end up derailing your retirement plan.
TOP QUESTIONS TO ASK A FINANCIAL ADVISOR
Surprisingly, almost anyone can refer to themselves as a financial advisor, regardless of:
Experience
Credentials
Education
Compensation structure (Commission vs. Fee-Only)
Unfortunately, unlike the law and medical profession, there’s still not any regulatory oversight or consistency when it comes to the titles Advisors can refer to themselves.
This means that the insurance agent or rookie advisor, with only a high school diploma or limited experience, can call themselves a Financial Advisor. Not only that, they can now share that same title with someone like a CERTIFIED FINANCIAL PLANNER™ who has undergone years of studying post-college, has years of client experience, and has received formal recognition for their expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement.
Putting your money in the hands of someone who isn't qualified can have serious consequences for you down the road.
Knowing what questions to ask a financial advisor will help you hire the right expert…and avoid hiring the next former used car salesman.
WHAT EXPERIENCE AND QUALIFICATIONS DO YOU HAVE?
It’s important to know how long this individual you plan on hiring has been practicing, the type of clients they work with (more on this later), and what formal training and background they have.
By asking about their experience and qualifications, you’ll be able to better understand their background and what it means for you and your financial plan.
Today there are over 200+ financial designations, some are more difficult to obtain than others. Knowing a few of the major industry designations is a great place to start.
Major industry designations include:
CFP® - Certified Financial Planner
Requirements include a four-year bachelor’s degree, 18-24 months of coursework on various Planning topics such as (Insurance, Investment, Income Tax, Retirement, and Estate), 6,000 hours of industry experience, and a six-hour, 170-question exam.
CFA - Chartered Financial Analyst
Designed for Portfolio Managers and Investment Analysts with deep investment knowledge, the CFA is a globally recognized professional designation that requires a bachelor’s degree, 4,000 hours of industry experience, and expert rigor in passing a 3-part exam series; often taking multiple years to accomplish.
CPA - Certified Public Accountant
Designed for accountants, tax preparers, and financial analysts, obtaining a CPA requires a bachelor’s degree, college semester units related to business and accounting principles, and a four-part extensive exam. Having this designation signifies an individual’s deep understanding of accounting and tax concepts. Though different from managing your finances and selecting appropriate investments, this designation provides an in-depth view of the books and records of a business.
MBA - Masters in Business Administration
The length of programs can range from 18-24 months, covering a wide spectrum of the various aspects involved in running and scaling a business. Regardless of the emphasis, making it through this program takes drive, self-discipline, and time management and creates well-rounded business leaders.
ARE YOU ACTING AS A FIDUCIARY … ALL OF THE TIME?
Pst… Not all CFP’s areA fiduciary financial advisor is legally required to act in your best interest.
Let me say that again.
A fiduciary is someone who is legally required to put your interests ahead of their own.
This means:
They are prohibited from selling you any financial products in exchange for earning a commission
Their advice must be 100% objective, unbiased, and in your best interest
Their compensation must solely come from you, and you only
Why is it important to work with a Fiduciary Advisor?
Because their advice is aligned with you and only you. Legally, they are bound to operate in your best interests.By paying them directly, you are hiring them to advocate for you, watch out for you, and to provide advice and guidance that is in your best financial interest, not theirs.
INSIDER TIP: Know the difference between someone who is “dually registered” vs. 100% fiduciary
Many advisors, who are fiduciaries, are dually registered, which means one second they can be acting in your best interest, and the next they can be trying to meet a sales quota and sell you an insurance policy with commissions.
Asking if the advisor is fiduciary 100% of the time will assure that the advisor will always be acting in your best interest.
HOW ARE YOU COMPENSATED? AND HOW MUCH WILL IT COST TO WORK TOGETHER?
This is a great question to ask because it’s a real litmus test to see whether or not the professional you’re choosing to work with is hiding anything and can clearly articulate their compensation structure.
Compensation is not a bad thing and Advisors too, have a family to feed.
Knowing how an Advisor is compensated makes a huge impact on your accounts and is something you deserve to know.
Generally speaking, there are 4 main ways an advisor is compensated:
Assets under Management (AUM)
Advisors who are compensated this way charge a percentage of the assets they manage for you. This percentage can range from 0.50% to 1.50% depending on the firm, asset size of the portfolio, and the complexity of the plan.
Example: Tom and Sally have a $1,000,000 portfolio they would like managed
At 1.00%, their annual fees would be $10,000 {$1,000,000 x. 0.01}
Typically, this annual fee would be broken down into Quarterly installments
Each Quarter, $2,500 ($10,000/4) would be debited from their Investment account
Commission
This structure is perhaps the most confusing and most common form of compensation today within the Financial Planning industry.
Inside of the Commission fee structure lays various types of compensation:
Front Load - charges investors a sales commission at the time of purchasing the investment. Fees can range from 3.75% to 5.75% depending on the fund company.
Back Load - known as a deferred sales charge, this is a fee assessed when the investor decides to cash out the mutual fund. Fees can range from 3-6% of the fund’s value.
Trail or 12b-1 - is an ongoing fee paid by the mutual fund company to the Advisor for ongoing services and advice. These additional fees can range from 0.25% -1.00%.
Note: Expense Ratios apply to both the fee-only and the commission world and are designed to cover the operational costs of the fund itself. Fees range from 0.00% to as high as over 2.00%. It is a fiduciary’s job to ensure these costs remain low and that the fund(s) selected is appropriate and in your best interest.
Hourly or Project-Based
Designed for clients seeking “One Time” financial advice and looking to implement the recommendations on their own. Hourly fees can range from $100-500/hour depending on the firm and the length of projects vary in size and complexity, ranging from 10-50 hours worth of planning work.
Subscription Fees
Designed as an alternative approach to the AUM model and taking the best from the Hourly model, subscription fees are charged (most times) directly from the client’s bank account or credit card rather than from their investment portfolio and provide nearly similar levels of advice and planning as the AUM model.
HOW MANY CLIENTS DO YOU SERVE & HOW OFTEN WILL WE MEET?
Plain and simple, it’s important ahead of time to know where you rank and how much time this new advisor plans to provide you. By asking this question, you’ll also be able to better understand the level of detail and customization their services will include.
Knowing how many clients an advisor has could inform you, if:
Your Advisor will be available to speak with you or return an email promptly
Whether or not you’ll be passed off to a Junior, less experienced advisor after signing the paperwork
How frequently you can expect to meet and the breadth of topics you’ll cover
More frequent meetings will assure that you are making any necessary changes to your plan so you can reach your goals.
According to Industry Expert, Michael Kites, “The average experienced Lead Advisor has 96 clients.”
WHAT EXPERIENCE DO YOU HAVE WORKING WITH CLIENTS LIKE ME AND MY SITUATION?
Knowing what type of clients an advisor specializes in working with can help you figure out how successful they’ll be at solving your unique set of financial planning challenges. Complex areas of planning include:
Lowering your taxes in retirement
Evaluating your risk and assessing various insurance policies
Reviewing your portfolio to decrease investment risk and maximize returns
Structuring your small business correctly and maximizing your retirement benefits
Optimizing your stock options and employer benefits
Regardless of their expertise, it’s important to know who they work with, how they plan to help you, and whether or not this is their area of expertise. Advisors come in all shapes and sizes and specialize in working with different types of clients or niches.
After all, you wouldn’t hire an optometrist to help you with your knee injury, right? Make sure your future advisor is qualified to handle your unique set of needs and circumstances.
WHAT WILL YOUR FINANCIAL PLANNING PROCESS COVER?
Can they provide you with a list of all the services they’ll provide? More importantly, do they have a service calendar of when they plan to implement all of the advice they mentioned in the first few meetings?
Is their list truly comprehensive in nature?
Knowing all of the areas, listed out, that they are prepared to help you accomplish will allow you to determine the level of planning you’re set to receive.
It should be very easy and automatic for an Advisor to explain the list of services they provide, in detail and how it applies to you. Note, if their answer is vague or unclear, this may be a warning sign.
WHAT IS YOUR INVESTMENT PHILOSOPHY?
Repeat after me: Investments are important, but they are just one piece of the financial planning process. That said, it’s helpful to understand an advisor’s philosophy and approach before hiring them.
You’ll want to know ahead of agreeing to work together, does the advisor use low-cost index funds? Or do they prefer actively managed mutual funds? What about individual stocks?
There’s no one size fits all approach or “best” way to design a portfolio, but knowing the advisor’s philosophy and rationale will help you assess if their conviction and approach aligns with yours.
Additional questions to consider asking:
Will investments at my job like my 401(k) or 403(b) also be reviewed and monitored?
What is tax-loss harvesting and will you provide it?
What if I have individual stock from my company or an Inheritance that I don’t want to sell?
Last, before agreeing to work together, it’d be wise to ask for a sample portfolio or an investment proposal to see some of the thoughts they have in mind for your investments.
CLOSING THOUGHTS ON THE BEST QUESTIONS TO ASK A FINANCIAL ADVISOR
Choosing a financial advisor is going to be one of the most important decisions you will make, so take your time.
If you do this correctly, you’ll only have to go through this process once, and that’s a good thing.
Working with the right advisor for your unique set of needs and circumstances can be the difference between a worry-free retirement and a stressful one.
When interviewing financial advisors, don’t be afraid to ask tough questions. Like any other professional, they are there to serve your needs and put you first. A good advisor will welcome any and all questions you ask.
Here’s to Happy Planning — Nick Covyeau, CFP®
Disclaimer: Swell Financial is registered as an investment adviser in the state of California and provides advisory services only in states where registered or otherwise exempt from registration. All information presented here is for informational and educational purposes only and should not be relied upon as investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and other professionals to determine what may be appropriate for you. Opinions expressed are as of the date of publication, and such opinions are subject to change.