Before turning over your hard-earned money to a financial advisor, it’s wise to ask a range of probing questions.
After all, the advisor-client relationship can be one of the most intimate professional relationships of your life.
An advisor should be there to guide and reassure you when everything is sailing smoothly, says Tom Halloran, president of Voya Financial Advisors in Braintree, Massachusetts. And the advisor should let you know when you hit rough waters or need to change direction.
It behooves you to make sure any advisor you partner with is up to the task. To that end, here are the 11 questions to ask financial advisors before hiring them:
— Are you a fiduciary?
— What are your qualifications and how do they benefit me?
— How did you get into the financial services industry?
— Do you have a specialty or certain area of expertise?
— Is there a team supporting you? If so, who will be my primary point of contact?
— How long have you been helping clients?
— Who is your typical client?
— How are you compensated?
— Can you explain a financial concept to me?
— What types of investments do you use in your clients’ accounts?
— What’s important to you?
Some of these questions may feel uncomfortable to ask. But remember: It’s your financial future on the line here. You deserve to know what you’re getting into, and with whom.
Are You a fiduciary?
A fiduciary is a financial advisor who is required to act in your best interest at all times. A fiduciary cannot recommend a strategy or investment unless it is the best available option for you.
Nonfiduciary advisors, on the other hand, may provide recommendations that are “suitable” for your situation. Nonfiduciary advisors could recommend a more expensive product because they get a commission for it.
The tricky part here is that some advisors can take off and put on their fiduciary hat, depending on what they’re doing. If working with a fiduciary is important to you, ask financial advisors whether they’re a fiduciary at all times.
What Are Your Qualifications and How Do They Benefit Me?
Anyone can call herself a financial advisor or planner. A key question to ask financial advisors is about their exact qualifications.
You can verify a claim on BrokerCheck, an online tool provided by the Financial Industry Regulatory Authority, or FINRA, which allows you to view the background and current registration of any FINRA-registered advisor. Make sure you follow up by asking how the advisor’s qualifications will benefit you as a client.
“A designation is just letters until it’s put into use, so a good way to sort through the noise is to ask an advisor what they value about the designations they have,” says Tyler Landes, a fee-only financial planner at Tandem Financial Guidance in Kansas City, Missouri. “How has that training helped them to serve clients better?”
How Did You Get Into the Financial Services Industry?
This may sound like a job interview question, which is exactly what it is.
When you meet with an advisor for the first time, you are interviewing the person for the job of being your personal financial advisor. Asking advisors how they got into the industry can reveal a lot about where their passions lie and their personal philosophy on financial planning. It can also help you identify areas of strength and weakness in the advisor’s experience.
Do You Have a Specialty or Certain Area of Expertise?
Financial planning is a complex process that requires different strategies for different goals or life stages. Advisors may specialize in one or more areas such as retirement planning or financial planning for women entrepreneurs. They can also focus on different areas of the planning process such as managing investments or developing holistic plans.
Advisors trying to earn your business would often rather talk about you and your needs first, so they can tailor their sales pitch to your problems, but you’d be better served by asking them what they provide their clients first. In what areas are they most experienced? What services do they provide?
Is There a Team Supporting You? If So, Who Will Be My Primary Point of Contact?
Advisors seldom work in isolation. They’ll probably have a staff of people to support them, from client-relationship managers to investment managers.
“It’s important to ask about how often an advisor will meet with you and how much you will deal with the advisor versus other team members,” Halloran says. “When creating a personalized, holistic and actionable financial plan, you want to be sure you’re working with a consistent individual who can help you adapt your plan to life’s changes along the way as needed.”
How Long Have You Been Helping Clients?
Look for an advisor with experience helping clients through market volatility and uncertainty. It’s easy to do well for your clients when the stock market is on an upward trend.
The real merit of an advisor is tested during bear markets. Ask advisors how long they’ve been helping clients and in what capacity.
Financial advisors commonly transition into the industry after having worked in other areas of finance such as tax preparation or banking. You should look for an advisor who has at least four years of experience in the areas of financial planning in which you’re looking for help. You can review their background for yourself on BrokerCheck.
Who Is Your Typical Client?
You want an advisor who has experience working with people in situations similar to yours. “If you’re young and starting a family, you wouldn’t go to an advisor who specializes in retirement distribution planning,” Landes says. “If you need help with cash flow and budgeting, it doesn’t make sense to use an advisor who specializes in portfolio management. You are some advisor’s ideal client, and they are looking for you, too.”
Ask financial advisors who their ideal client is and who they typically work with to get a sense of whether their expertise is a good fit for your needs.
How Are You Compensated?
Compensation can be an uncomfortable subject to discuss with a financial advisor, but don’t be afraid to come right out and say it: How are you paid?
You deserve to know how advisors will make money off your account. And chances are they’ve been asked before. Conflicts of interest are one of the biggest problems in the industry because some advisors may be more interested in earning a higher commission than ensuring their client’s financial well-being.
Don’t be afraid to push this issue until you get a clear answer and even ask for it in writing.
Can You Explain a Financial Concept to Me?
“One of the key services a financial advisor provides is education,” says Dana Anspach, founder and CEO of Sensible Money LLC in Scottsdale, Arizona. “They help you sort through the vast amount of information out there and figure out what applies to you and what doesn’t. That means it is critical your advisor communicates in a way that resonates with you.”
To this end, she suggests asking an advisor to explain a financial concept, such as what a bond is or how an index fund works. “What you are looking for is an answer that you can understand,” she says. “If an explanation is filled with jargon and hard to follow, maybe that isn’t the right advisor for you.”
What Types of Investments Do You Use in Your Clients’ Accounts?
If this is your first meeting with an advisor, it’ll probably be too soon for them to tell you definitively what your account would be invested in. A good advisor should need to complete a thorough review of your financial situation before discussing an investment strategy.
To get an idea of what that strategy may include, however, ask the advisor what types of investments they use with their clients in general. This way, you may be able to discover if they favor funds over individual securities, or if they like to use more exotic investments that could be riskier.
What’s Important to You?
Your relationship with your financial advisor is likely one of the most important and long-lasting financial relationships you have.
Your advisor will likely be involved in many of your most personal decisions, says Jesse Abercrombie, an Edward Jones financial advisor in Dallas. As such, you’ll want to work with someone you connect with on a personal and professional level. An advisor with whom you have a good rapport and who seems to share your values could be a positive sign for the future, he says.
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