Just as you’d vet someone you’re interested in dating, it’s wise to ask a few well-chosen questions of your prospective financial advisor. You are trusting your intimate money details to this individual, so finding the right partner from the beginning is important.
What you optimally want in this relationship is honesty. Not only should they be willing to tell you the good news, but there needs to be mutual trust to tackle the challenging topics too. The advisor’s ease in answering these questions will also demonstrate their comfort level with transparency.
While everyone has a unique situation, here are 10 questions that will help you get a gut-check impression of a quality financial advisor and decide whether you wish to move forward in working together.
— What is your background?
— Do you work with other professionals on an ongoing basis?
— Do you have a specialty or area of expertise?
— Who is your ideal client?
— Will you provide a financial plan for me?
— How do you determine your investment recommendations?
— Who will have access to my information?
— Who will be available to work with me in your absence?
— How are you compensated?
— What brings meaning in your life?
What Is Your Background?
There is not a single path to becoming a financial advisor. As the industry has evolved, many advisors obtain degrees through diverse majors such as finance, economics or even psychology before starting their careers. Others may have had a long career in a completely different field but felt compelled to make a change. Thus, age is not an accurate indicator of experience.
What is important is to determine what this advisor brings to the table in the form of industry-specific training and credentials. Professional designations such as a certified financial planner (CFP), chartered financial consultant (ChFC) or wealth management certified professional (WMCP) indicate a dedication to ongoing professional education. All advisors must have a registration and pass specific regulatory exams for licensing. These credentials can be easily verified online, as well as flag any concerns about the advisor.
Do You Work With Other Professionals on an Ongoing Basis?
Financial planning and investment management are among the various skills that an advisor can bring to the table, but few advisors excel at both. The most astute advisors are those who have acknowledged where their talents and interests lie. However, they can offer a well-rounded service by bringing in teammates or Centers of Influence, known as COI. This is especially important if they are newer to the industry and have yet to experience a true market downturn.
Having seasoned professionals regularly available can help them maintain a cool head when markets move rapidly. Additionally, an advisor who builds a strong, independent team of COIs can provide as many services as a larger firm, allowing you to select solo advisors and boutique firms with confidence. Advisors must disclose their relationships and any revenue-sharing that may occur between them. They also need to have vetted these individuals in terms of their credentials and expertise that they bring to the table.
Do You Have a Specialty or Area of Expertise?
Many advisors have enhanced their practices by narrowing their focus. In the beginning, advisors are often so focused on growing their business that they will accept a wide range of clients. Over time, they realize they can increase their value proposition to their clients by working with a much smaller subset of clients. Advisors may create a broader niche practice, such as women business owners, or they may focus on a specific employee, such as FedEx pilots. This can be valuable for a client because the advisor has more common interests, can understand their perspective and knows the details of company benefit plans more fully.
Who is Your Ideal Client?
Advisors should be able to clearly articulate an answer to this question because this is the client that is most important to them. If you resemble this profile well, the advisor will likely perform beautifully for you, as there is a good match between profitability, comfort level and the advisor’s long-term goals. If you are outside the parameters, it is worth asking why the advisor is interested in working with you. They may be looking to expand their services or may feel indebted to an existing client who referred you to them. Either way, you can determine how much attention your account will receive with these answers and if this is sufficient to meet your needs.
Will You Provide a Financial Plan for Me?
Financial advisors have different reasons for offering financial plans, and it can affect the quality of the plan you receive. Some advisors truly prefer to manage investment assets and consider the financial plan to be a loss leader to earn the right to manage your portfolio. While the cost of the financial plan may be less, a rote plan may miss goals important to you. Thus, no matter how well the advisor manages your portfolio to help you build wealth, you could still fall short. Should your prospective advisor fall in this camp, understanding the other professionals they work with can give you the best of both worlds. For example, your advisor can team up with a planning specialist to craft comprehensive recommendations to meet your needs. The financial plan may be a bit more expensive, but it is an excellent investment in your overall partnership.
How Do You Determine Your Investment Recommendations?
A quality advisor will not be able to give specific recommendations before they have reviewed your situation and understand your risk profile, so expect broad answers here in the initial meeting. What you are striving to learn is who is actually calling the shots on how your money is invested and the types of investments they favor. Just as an advisor may be more skilled in managing investments versus crafting a financial plan, the opposite may be true. A comprehensive financial planner may excel at drawing out your needs and priorities, but be less sure about making in-depth investment recommendations. There are excellent third-party providers that partner with these advisors to provide these services, but asking this question helps the advisor discuss all the relevant disclosures that you need to make a judgment call on working with them.
Who Will Have Access to My Information?
Securing confidential information is becoming more important for advisors and their clients. Not only does this give your potential advisor the opportunity to discuss their cybersecurity protocol in detail, but you will also learn how the advisor’s team is expected to provide services to you.
Who Will Be Available to Work With Me in Your Absence?
There are two situations where you want to understand an advisor’s contingency plans.
The first is when the advisor takes personal time away from the office. The stock market does not take a vacation, so knowing who will be available to answer your questions during a time of volatility is very reassuring. An advisor who pays attention to these details can enjoy needed rest and relaxation, while you can feel confident that your trades will be executed on a timely basis.
The second is the written succession plan required in the advisor’s disclosure documents for an untimely disability or death. Either event can set into motion a series of events that can leave clients ill-prepared and unnerved. Unfortunately, this is an area of planning where many advisors have failed to fully formalize action, which can cause unnecessary delays in having immediate access to your investments and potentially transferring accounts.
How Are You Compensated?
Clients are often nervous about this question, but advisors expect to be asked. Quality advisors can clearly explain their fee schedule, commissions, hourly rates or project charges. They also do not hesitate to provide compensation details in writing.
A fee-only advisor is called a fiduciary, and they are held to the highest possible standard with the regulators. They are required to act in your best interest at all times and cannot recommend actions unless they are the best option for you. Commissioned advisors are held to a suitability standard, meaning that the recommendation meets your needs. Both standards are designed to protect you, the client, but have meaningful differences in how an advisor can proceed.
Each type of advisor has their advantages and disadvantages, although the fiduciary standard is considered to be ideal. There are circumstances where an advisor can wear multiple hats, as some solutions may be only offered on a fee-basis or as a commissioned product.
This is a question you can ask anytime you want to be certain as to the standard of care they must exercise in executing on your account.
What Brings Meaning in Your Life?
A financial advisor is going to ask you a lot of intimate questions. Therefore, it is appropriate for you to know more about them as a person and not just as a professional. By asking this probing question and listening closely, you can learn a lot about their overall values and if they align with yours. Clients find that being well aligned on personal values can be a difference-maker in their overall decision to choose one advisor over another. Additionally, the greater the overlap, the more likely that this relationship will be successful and long-lasting for both parties.
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Update 09/09/22: This story was previously published and has been updated with new information.