Financial Planning

Get To Know Your Advisor

My post last week about the different ways advisors are transforming the financial services industry to serve more people received a lot of great feedback and was one of my most emailed and commented on posts to date; thanks to everyone who took the time to read it and drop an email/tweet/etc. to me!  I appreciate the feedback and always enjoy the conversations.

There was one tweet in particular that sparked this follow-up post; now that financial advisors are working with individuals who have historically been overlooked, what questions should you ask to determine if you want to work with a financial advisor or not?

If you haven’t interviewed a financial advisor before and aren’t sure where to start, I’m going to share some fundamental questions you should ask to help you better understand what type of financial advisor you are sitting across the table from and whether or not they are a good fit for your needs. I recommend writing your questions out on a piece of paper prior to your initial meeting. As a financial advisor, I love to see new clients come in with a list of questions. It tells me they are serious about their future and have taken time to think about the important relationship we are about to begin. I also think it sends a message that although you are looking for financial advice, you know your sh*t and your list may intimidate advisors not out for your best interest—this is just my opinion, but I don’t think it can hurt to come in prepared.

Before we get to my suggestions, the first questions you should have on your list are the ones surrounding your concerns. These will vary from individual to individual, but there will be a factor or concern unique to your personal situation that you should definitely ask about. So start with any questions you may have–don’t worry if they seem “silly”; I promise you they aren’t. You shouldn’t begin working with a financial advisor with any lingering questions.

Fundamental Questions To Ask A Financial Advisor

Are you held to the fiduciary or suitability standard? Or, are you a fiduciary?
Without creating a post within a post, advisors held to the fiduciary standard are required to put their clients’ best interests before their firm’s or their own. Advisors held to the suitability standard are only required to do what is suitable for their clients–meaning there is no recourse for an advisor not doing what is best for their clients as long as they can prove their recommendation was “suitable”. Yes, suitable is a vague word.

The fiduciary vs. suitability debate really comes down to advice vs. sales. If you are working with a fiduciary financial advisor, you are more likely to be receiving financial advice and planning with recommendations not tied to commissions, sales goals, or other conflicts of interests. If you are working with a financial advisor not held to the fiduciary standard, it is very well possible that you are receiving financial advice, but there may be ulterior motives behind the recommendations you may receive.

Aside from asking the advisor if they are a fiduciary, you can also look for a CERTIFIED FINANCIAL PLANNING™ professional–these advisors are held to the fiduciary standard by the CFP® Board. You can also look for fee-only advisors, who are fiduciaries because they compensated by their clients–not investment, insurance, or other third-party companies.

It’s not hard to guess where I stand in the fiduciary vs. suitability debate, but I’m not naive enough to suggest that all fiduciary advisors are honest and do what is best for their clients; you’re always going to find some bad apples in the bunch. I’m also not going to claim all advisors compensated through commissions are criminals; I know there are good advisors operating under the suitability standard–there will be no painting with a broad stroke here. Ultimately, you decide what you are comfortable with–just make sure you understand where the advisor stands.

How are you compensated?
This ties into the fiduciary conversation and is a good follow-up question. Financial advisors can be compensated via fees (flat, hourly, and percentage of assets managed) or commissions. Again, it is up to you to decide what compensation model you are comfortable with. Is it fee-only? Commission-only? Fee and commission? I’m not suggesting a right answer but that you know what the answer is.

I’d also encourage you to ask why the advisor chose that business model; the answer to this should shed light on how the advisor views their role in the relationship.

Once you know how the advisor is compensated, be sure to know how much you will be paying. What is the percentage, if it is AUM (assets under management)? If you’re comfortable with commissions, what is the percentage of commission?

Do you have any conflicts of interests between your firm and your clients?
The answer should always be YES. There is not a financial advisor without some type of conflict of interest, but there are advisors subject to more conflicts than others.

For example, a fee-only advisor charging a percentage of assets under management has an incentive to recommend bringing investments under their management; this doesn’t mean the recommendation is bad, but there could potentially be a conflict if the 401(k) plan it is currently in is low cost and has good investment options.

Financial advisors charging hourly plans are subject to a conflict of taking their time with the planning process to increase the hours billed.

Financial advisors earning a commission are subject to a conflict of recommending a product that pays a higher commission over a lower-cost but lower commission product.

These are just a few examples of conflicts of interests financial advisors may be subject to; it’s impossible to avoid some sort of conflict of interest, but if the advisor discloses the conflict and explains why the recommendation being made is best for your plan, you can then make an informed decision and move forward.

What is your approach to financial planning?
This will help determine if the financial advisor is truly an advisor and planner or just an asset allocator or salesperson. I believe most individuals are looking for financial planners and advice; if this is the case for you, then you’ll want to hear that the planning process involves looking at cash flow, savings, college planning, estate planning, investment planning, retirement and more.

Your financial plan and the corresponding recommendations should be driven by your goals, not the other way around. This question should help you determine what will be steering the plan.

What is your investment philosophy? Do you personally follow this philosophy?
If the financial advisor is going to be making recommendations on or managing your investments, it is important to understand their approach. This question is not designed to get into performance and returns; while that may be something you are interested in, no advisor can guarantee any returns, and what they did in the past doesn’t matter because it may not play out the same in the future. Since future returns are impossible to know, the best thing you can do is understand the advisor’s stance on investing–active vs passive funds, diversification, rebalancing, expenses, tax-loss harvesting, etc.

After learning about the advisor’s investment philosophy, find out if they invest the same way as their clients. How does their answer make you feel?

What type of communication should I expect throughout the year?
How frequent will you meet? Is there additional communication between meetings? Are you able to contact them if you have questions throughout the year?

Communication is the foundation of all long-term relationships, so be sure you the advisor’s communication style and frequency fit your needs.

What is it about your profession that you enjoy?
When I work with someone, whether it be my CPA or my barber, I want to work with someone who is passionate about their craft. Does the advisor answer this question with a genuine passion and excitement, or are they just an advisor because that’s where they ended up?

This question has no right answer, but it can tell you a lot about the advisor and what it will be like working with them.

With answers to these questions, along with your own personal questions, you should have a good idea of what type of advisor you’re dealing with and whether or not they are a good fit for your needs and values.

If you find yourself looking for more question, be sure to check out Jason Zweig’s list below from last August.

Good luck with your search!

Read More:

Jason Zweig: The 19 Questions To Ask Your Financial Advisor

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.