Financial advisors are many things, but an oracle is not one of them. The quality of the advice you get from them depends on your transparency and the quality of information you provide them.
This means that your financial advisor will learn intimate details about your life, including your financial goals, financial history, spending habits, health situation, financial challenges and relationships, among others.
Given the personalized nature of financial advisory services, you need to ask questions to know if an advisor is competent, if they are right for you, and to clarify their approach to managing your financial future.
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In my experience, some clients are better at asking such important questions than others, but I always encourage everyone to ask them. Below, I highlight 10 such questions that I have found important and helpful for clients to ask:
— How can I be sure you have my best interests at heart?
— Can I trust you with my personal information?
— How do you keep private information private?
— Do you have a specific area of expertise?
— How do you ensure your financial advice is personalized?
— What is your approach to investing?
— How do you manage risk?
— How much will this cost me?
— What are your qualifications?
— How do you relate with other professionals?
How Can I Be Sure You Have My Best Interests at Heart?
As a client, you need to be sure that your financial advisor is concerned with your best interests. I always try to discuss this with my new clients whether they ask or not.
Some financial advisors receive a commission on the financial products they sell you. This can result in a conflict of interest where they recommend products that are not the best in terms of value for the money but provide the highest commission for them.
On the other hand, fee-only advisors don’t receive commissions on anything they recommend to you. These advisor types are more likely to act in your best interests.
Another clarifying question is whether the advisor has a fiduciary relationship with their clients. A fiduciary must act in the best interests of their clients and recommend products that are the best fit for them. Moreover, fiduciary financial advisors can be legally held accountable for that duty.
So, clarify whether your financial advisor is fee-only and has a legal fiduciary relationship with you.
Can I Trust You With My Personal Information?
If the financial advisor uses software or SaaS (software-as-a-service) products to manage any aspect of your finances, then you want to know what cybersecurity mechanisms they have put in place. Financial advisors will always use technology applications, but the question is how those tools will protect your data and money.
Don’t just settle for vague answers like “We put in place top-notch security systems to safeguard your data.” Ask for specifics.
Similarly, you want to be sure that the financial advisor will not give your information to people who have no business receiving it.
How Do You Keep Private Information Private?
Ask about the work culture and how the advisory ensures that people don’t access information they are not authorized to have. A good follow-up question: “Have you worked with people who have been in my current financial situation?”
Again, financial advisory services are all about personalization. “We have worked with more than 100 people” is inferior to “We have worked with 10 people in the same financial situation you are currently in.”
For example, if you have just won a windfall or have recently gotten divorced, you want to know if the financial advisor has experience dealing with such situations.
While situations are not always the same, they are often similar, and the more similar they are, the more useful the financial advisor’s experience.
Do You Have a Specific Area of Expertise?
Some financial advisors are just investment managers — they create and manage the investment portfolios of clients. On the other hand, comprehensive financial advisors can cover things like budgeting, debt repayment, tax planning, insurance planning, retirement planning and investment management.
Similarly, some financial advisors deal with a certain kind of clientele — doctors only, immigrants only or women only, among others.
Before choosing to work with an advisor, you want to know if they have a broad or limited scope. There is no wrong or right answer to this question. An advisor who deals only with a restricted client base will often have the learning curve and specific experience to provide greater value for that clientele. Similarly, some people only need investment management services, and a comprehensive planner may not appeal to them.
The key is knowing what you need and choosing the advisor who meets those requirements.
How Do You Ensure Your Financial Advice Is Personalized?
Since people’s circumstances differ, it is difficult to settle on one financial plan that applies to everyone. Even though there are general best principles for financial management, there will still be differences in application since time horizon, risk tolerance, risk capacity and financial goals differ.
An advisor rehashing the same talking points across all clients has not understood the value of personalization. This is why it is crucial to ask a potential financial advisor how they ensure that financial plans are tailored to each client’s circumstances and goals.
Related to this is the nature of the ongoing relationship between you and the advisor. You want to know if the advisor treats clients as “clients” or as human beings they want to form long-term relationships with.
Of course, you don’t want an advisor who is so friendly that they can’t tell you the truth; but neither do you want one that is concerned only about the money and devoid of any emotional touch. Striking the balance is key, and you will know who is more likely to do so from their responses to your question.
What Is Your Approach to Investing?
Even comprehensive financial advisers will still have to make investment decisions — what assets to buy and which asset allocation formula and portfolio management strategies to use, among others.
Financial advisors often have different investment approaches. There is the ongoing debate about passive versus active investing, and differing approaches to environmental, social and governance, or ESG, investing or impact investing, for example.
If you have strong opinions on these issues, you should ask financial advisors about their approaches to investment management. For instance, a client who cares about values-based investing should not select an advisor who believes that only the rate of return matters.
How Do You Manage Risk?
Many investors are so enamored with returns that they ignore the importance of risk. What matters is how much return you can achieve given your risk tolerance and capacity. Consequently, you want to know how potential financial advisors manage portfolio risk. This includes asking what depth of diversification they target (narrow or broad) and whether they deploy advanced risk management strategies, such as hedging.
You also want to know how their risk management strategies affect return expectations.
How Much Will This Cost Me?
Some financial advisors receive commissions while others — fee-only advisors — do not. There is also a flat-fee model, in which financial advisors charge a one-time fee for a comprehensive financial plan, and an hourly fee model, where they charge per hour spent attending to you.
However, knowing the fee structure is not enough. You also want to ask what the advisor charges, on average, and how that compares with the industry average.
While fees are important, you don’t need to go with the cheapest advisor. The key term is “value for money.” If an advisor charges a higher-than-average fee, quiz them on the value they believe justifies the extra cost instead of ditching them outright.
What Are Your Qualifications?
We all know that a certification is not a necessary index of knowledge, expertise and experience. However, in the financial advisory space, a certified financial planner, or CFP certification, is often an indicator that you are dealing with a fiduciary financial advisor. So, it is not out of place to ask if the advisor has the certification.
Note, though, that you still need to ask if the advisor is registered with the Securities and Exchange Commission as an investment advisor to confirm their fiduciary status.
Furthermore, it is fine if you consider the CFP certification as a minimum qualification that an advisor must possess before you can trust their expertise.
It is worth noting that the academic backgrounds (undergraduate and postgraduate) of financial advisors vary. Therefore, avoid judging financial advisors who do not come from a finance, accounting or economics background. As long as they have the relevant qualifications (especially the CFP designation), the academic background should not be a deterrent.
How Do You Relate With Other Professionals?
There are situations where financial advisors collaborate with other professionals — lawyers, estate planners, tax professionals, accountants — to deliver value to their clients.
If you currently work with those professionals or foresee yourself working with them, then it is crucial that you ask your advisor how they collaborate with others. If conversations are advanced, you can even mention the names of the professionals you currently work with and ask the financial advisor if they have experience working with them and what their experience was like.
These collaborations are important because you don’t want those who should be furthering your interests colliding due to different perspectives or work culture. It’s better to find a good fit at the beginning than trying to reconcile those relationships when the time comes.
Relationships with accountants and other professionals are valuable because they also have an understanding of the flow of money and protecting assets. You can benefit from having more than one set of expert eyes on your financial situation and major life decisions.
Takeaway
With these questions, you will be able to evaluate financial advisors and select the one best for your needs.
A final point: Do your research. In a bid to get you onboard, some advisors can lie, tell half-truths or skillfully avoid answering some questions. Thus, you need to do due diligence by researching their website, speaking to any of their clients that you know, and searching for them on the CFP Board verification portal, among other resources.
In summary, the choice of a financial advisor is too important to be treated with levity. Approach it with the sense of significance that it deserves.
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10 Questions to Ask Financial Advisors originally appeared on usnews.com
Update 10/17/24: This story was published at an earlier date and has been updated with new information.
