Imagine hiring a person who will have intimate details about your life, your health, your family and your financial situation. You’d want to ask that person a lot of questions, right?
Your financial advisor is that person. Unfortunately, many would-be clients fail to ask enough questions to establish whether a given advisor is the right one for them.
Contrary to the perception that your advisor simply crunches numbers and deals in logic, the best advisor-client relationships involve sharing personal goals and unique personal or family challenges. More topics than you may realize are relevant to your financial life.
That’s why it’s so important to ask questions when you’re interviewing a financial advisor to make sure you can establish trust and open communication.
Here are 10 questions that can help you get a better understanding of an advisor’s business, expertise, and whether or not you click with their personality and approach:
— What is your background?
— Do you work with other professionals on an ongoing basis?
— Do you have a specialty or area of expertise?
— How do your offerings compare to other financial advisors?
— Will you explain investments and planning details in plain English?
— Can you explain exactly what fees I’ll be paying?
— How do you determine your investment recommendations?
— Is my information secure?
— Does your approach to money and investing align with mine?
— What brings meaning to your life?
What Is Your Background?
For a quick overview of an advisor’s professional background and credentials, start with the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck. This free service shows the advisor’s professional licensing and credentials.
For more information about someone’s educational background and career details before they became an advisor, look up the firm’s ADV Part 2, or narrative brochure. If the advisor owns their firm, you’ll get more information there.
It’s important to remember: No particular undergraduate or graduate degree leads to becoming a financial advisor. Many successful advisors earned undergraduate degrees in liberal arts topics, not math or finance, although they eventually got licenses or credentials showing their expertise in investing and planning.
While some advisory firms have employees with expertise in portfolio construction and data analysis, they also have relationship managers with outstanding people skills. When interviewing an advisor or a firm, try to get an understanding of these various employees’ backgrounds.
Do You Work With Other Professionals on an Ongoing Basis?
You can take two approaches to this question. First, ask whether the advisor has other professionals, such as tax specialists, estate attorneys and even elder-care experts, with whom they collaborate or whom they recommend.
But also find out if the advisor is willing to work with professionals you already have in place.
Prospective clients should ask how an advisor will collaborate with their professional team, says Jasmine Butler, financial advisor at Edward Jones in Tampa, Florida.
“Your professional team will most commonly include a tax professional or CPA, estate planning attorney, business attorney or lender,” she says. “Making sure your team has a collaborative approach is vital, as many major financial decisions impact you in more than one area.”
Some advisors focus on a particular profession, such as airline pilots, dentists or doctors. That means having a deep understanding of the career-specific details regarding retirement rules, selling a business or practice, and other nuances.
Other advisors specialize in working with women, LGBTQ clients or immigrants. These advisors typically have knowledge and even personal experience in some of the challenges these clients face.
Even in cases where the advisor has a broader focus, ask if the firm does comprehensive planning and if the advisors are available to consult on a multitude of financial questions.
Ask if the financial advisor takes a holistic perspective or simply manages investments, says Butler.
“As our industry has transformed over the last decade, prospective clients should look for added value in navigating major milestones, such as when to apply for Social Security, navigating health care costs in retirement and mitigating other risks,” she says.
How Do Your Offerings Compare to Other Financial Advisors?
This is related to the question of specialization, but extends to an understanding of how the firm is structured. For example, some advisory firms also have tax consultants and preparers on staff, as well as insurance agents and, occasionally, attorneys.
Other advisory firms consist of just one person in a sole practitioner role. This person may be able to assist with insurance needs or may refer those requests to an outside agent.
“I wish prospective clients would ask how my offering compares to that of another financial advisor,” says Kelly Palmer, founder and chief wealth officer of The Wealthy Parent, a financial planning firm in Chicago.
“Clients can and should shop around when finding a great match for an advisor, so if they ask me to compare myself to another advisor I know they are serious about finding a good fit,” she adds.
Will You Explain Investments and Planning Details in Plain English?
There are many stories about advisors who speak over the heads of prospective clients, using industry catchphrases and arcane concepts. If that happens, it usually means the advisor is more interested in showing off, is a poor communicator or simply isn’t connecting with you.
In those cases, it’s important that investors not feel intimidated, or believe the advisor is much smarter and grasps more sophisticated concepts. The best advisors know how to explain investment ideas using straightforward language, making sure clients understand and have the opportunity to ask questions and discuss.
Can You Explain Exactly What Fees I’ll Be Paying?
Palmer says clients should ask what jargon around fee structures means for their portfolios.
“There are distinct differences between fee-based, fee-only and flat-fee, and it’s important for the prospective client to truly understand this,” she says.
Fee-based advisors charge a combination of fees and may also earn commissions from products they recommend. Fee-only advisors do not accept commissions, reducing potential conflicts of interest. Flat-fee advisors charge a predetermined fee for their services, providing cost transparency and simplicity for clients.
The investment advisory industry can be complicated to understand, so it’s important that clients feel comfortable enough to ask questions about the fee structure.
Jeff McClean, CEO at Solidarity Wealth in Salt Lake City, suggests asking, “What are the different ways that you get paid?”
That question, he says, “forces the truthful advisor to reveal any commissions or incentives that may not come up with the generic ‘how do you get paid?’ question.”
For savvy potential investors, he adds, “The answer should be short and sweet: ‘I only get paid by my clients.'”
How Do You Determine Your Investment Recommendations?
Investment advisors determine recommendations by assessing clients’ financial goals, risk tolerance and time horizon. Frequently, that’s based on the client’s financial plan.
Advisors tailor strategies, focusing on the right mix of diversification and optimization to meet clients’ objectives while simultaneously minimizing risks.
McClean says “How do you think about investing?” is an open-ended question that gives prospective clients a chance to see whether an advisor’s approach matches theirs, without having to divulge their own approach first.
Is My Information Secure?
Securing client data is crucial for financial advisors to maintain trust and protect sensitive information. It’s also a function of an advisor’s business that regulators watch closely.
Breaches can lead to financial fraud, identity theft and reputational damage for the advisor. Advisors must use increasingly robust encryption, access controls and data storage measures to safeguard client information.
In addition, clients must have easy access to their investment statements and financial plans, which these days are created and stored using cloud-based apps.
McClean suggests asking, “What does your technology look like so I can see and evaluate my investments?”
He adds, “It’s amazing how antiquated certain systems are or how limited the information is that advisors or firms provide their clients on their own investments.”
Does Your Approach to Money and Investing Align With Mine?
Palmer says prospective clients should ask for an advisor referral if they don’t think the one they are meeting with is a good fit.
“Sometimes during an introductory call, it’s clear that we aren’t a great match but I would love it if that prospective client asked for a referral to another advisor so I know they will be in good hands, even if they aren’t mine,” she says.
Butler says the question of clarity about the client’s relationship with money is often overlooked. She says prospective clients should bring up the topic of how they view money, how they were raised to handle it and how they navigated any past financial hardships or successes.
“These sorts of insights help financial advisors like me understand more of the behavioral aspects that impact our clients’ decisions and concerns,” she says.
What Brings Meaning to Your Life?
Advisors often want to share more of their own stories with prospective clients to help build rapport and to understand if the person or couple is a good fit.
“It’s entirely reasonable to want to understand your financial advisor as a person,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors in El Segundo, California.
“Clients should ask how and why their advisor got started in the business and what they enjoy doing outside of work,” he says. “These can be deeply illuminating questions that highlight the advisor’s personality, experience, commitment and passions.”
Asking those in-depth questions, he says, and paying attention to their responses, can give prospective clients insights into an advisor’s core values to see if they match up.
“Clients often discover that having a strong alignment in personal values plays a pivotal role in their choice between advisors,” he says. “What’s more, the greater the overlap in values, the higher the chances of building a successful and enduring relationship that benefits both parties.”
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10 Questions to Ask Financial Advisors originally appeared on usnews.com
Update 10/12/23: This story was previously published at an earlier date and has been updated with new information.
