What Questions Should You Ask Your Financial Advisor?
Whether you need advice for a personal account or a joint account, before committing to a financial advisor, make sure that you are working with the best person for your situation and needs. To determine that, there are many questions to ask a financial advisor when meeting with them for the first time.
Meeting With a Financial Advisor
No two financial situations are the same. Each financial advisor, too, is different from the next. We all hold complex relations with money, making finding the right financial advisor a complicated task. However, it is a task that pays off when you find the right one, as a financial advisor can help put you on track to financial health and security.
It is important to be aware of your preferences, values, and priorities before hiring a financial advisor and setting financial schedules.
Knowing what to ask a financial advisor will help save you time, effort, and money. Below, we have compiled a list of questions for a financial advisor so you can be confident you’ve found the right match.
Do You Put Client Needs Above Your Own?
One of the top questions to ask a financial advisor is where they stand on client needs. A financial advisor who prioritizes their client’s needs is less concerned with profiting off your financial situation than they are with helping you attain financial freedom.
You can tell a financial advisor is putting you, their client, first when they listen more than they talk. They are not demanding and respect boundaries like risk tolerance. In other words, they will not attempt to steer you in a direction that you aren’t comfortable with or that is not in line with your goals.
Prioritizing clients’ needs also means taking the time to get to know you and your goals. You shouldn’t feel rushed by your advisor into making decisions. A good financial advisor will always walk you through the plans they set, and they will be available to answer questions and concerns.
Recognizing whether a financial advisor’s strengths meet your requirements and align with your goals is critical to ensuring successful collaboration.
Are You a Fiduciary?
This is one of the most important questions to ask a financial advisor, as it will reflect their fee structure and approach to financial planning. A fiduciary financial advisor must legally put clients’ financial interests above their own. Fiduciaries are banned from selling financial products in return for a commission; their only compensation is from the client. Not all financial advisors are fiduciaries.
Non Fiduciaries may have ulterior motives behind their financial advice (although this is not always the case). For example, non fiduciaries can recommend products even if they are not the best option for the client.
How to spot a fiduciary advisor:
- They will be fee-only, meaning they only make money by working with a client at a flat or hourly rate. They do not earn commission on financial products they sell to you. Fiduciaries may also be paid through a management fee, which is a percentage of the assets they manage for you.
- They are a Certified Financial Planner (CFP), meaning they are licensed and held to strict fiduciary standards.
- They are a Registered Investment Advisor (RIA) as opposed to a broker.
How Have You Helped Clients Like Me?
Inquiring about past clients is one of the most important questions to ask a financial planner. You want to be sure a potential advisor has worked with clients in your situation, with good results. Knowing what they specialize in will help you understand whether they are the right choice for you.
Some advisors focus on a specific type of client. It is best to hire an advisor who understands people in your economic position. For instance, there is a certain class of financial advisors who specialize in issues resulting from cash advances.
Are You a CFP, NAPFA, or CPA?
Financial professionals can have a complex list of initials following their names, stating their credentials. Regardless of their title, it is still a good idea to vet them. Asking what an advisor’s particular credentials are is one of the essential questions for a financial advisor.
For further research, the Financial Industry Regulatory Authority (FINRA)’s classifications database will give you all the data you need, from educational to legal requirements needed to maintain a certain title. Below are some descriptions of common professional titles and what they mean:
● A Certified Financial Planner, or CFP, is regulated by the Certified Financial Planner Board of Standards. There are four sections to the CFP certification; education, examination, experience, and ethics. According to the CFP Board, before granting the CFP designation, the applicant must successfully pass a six-hour exam. They must also have at least three years of financial planning experience before they can be certified as a CFP.
● The National Association of Personal Financial Advisors (NAPFA) is a professional association for fee-only financial executives. NAPFA helps consumers obtain objective and goal-oriented financial advice. Their code of ethics sets their affiliates apart as comprehensive, competent, and client-centered.
To be a NAPFA-affiliated financial advisor, applicants must:
● Be a fee-only advisor subject to ADV review
● Hold a bachelor’s degree from an accredited institution
● Have CFP certification
● Sign the NAPFA Fiduciary Oath
● Continue education with a certain number of credits every two years
● Display understanding of financial planning by submitting a sample financial plan or undergoing peer review
● Pay annual dues
A Certified Public Accountant, or a CPA, is sought out for their safety, industry experience, and credentials. CPAs are required to undergo educational training, gain sufficient accounting experience, and pass the CPA Exam. Earning this designation allows accounting specialists more versatility and fluidity in their careers. They are typically only licensed in one state.
How Much Do You Charge?
This is one of the most important questions to ask a financial advisor in an interview. Whether you are living paycheck to paycheck or surviving off payday loans for the unemployed, it is important to figure out how you will be paying your advisor beforehand. Before meeting with a financial advisor, you should first understand their charges. Advisors use a class of fee arrangements, of which there are four:
● Assets under management,
● Commission,
● Per hour,
● Fixed rates, OR
● Some combination of the above
Which payment option you go with will depend on what particular services you require, how long you will need them, and, of course, the financial advisor themselves.
How much a financial advisor ends up costing will also depend on whether you are enlisting the help of an online service, robo-advisor, or human advisor. If cost is an issue, consider visiting a low-fee robotic advisor or an online service.
Below is a breakdown of each of the four fee categories.
Assets Under Management (AUM)
Financial advisors who charge based on an assets under management (AUM) fee structure charge a fixed price as a percentage based on the total dollar amount of the assets they manage. This percentage is ordinarily 1% to 2% of the client’s net assets. For example, if they charge 1% on a million-dollar portfolio, financial advisors can take home $10,000 per year in fees. The more assets clients hold, the lower the percentage they will pay for consulting assistance. Hiring an AUM financial advisor is usually viewed as the most costly path for clients. With that being said, there is a silver lining. Given the fee structure, chances are the advisors will not take huge risks. Considering that the advisors earn a percentage of the clients’ assets, they have a much bigger interest in managing their clients’ portfolios perfectly
Commission
Advisors who work on commission are compensated based on product sales. In other words, the financial advisor makes money when their clients make a financial transaction that they recommend — for example, purchasing a stock or additional assets. For this specific reason, commission-based advisors often prefer selling financial products to offering financial advice for their clients. It is often said that commission-based advisors hold a conflict of interest that may lead them to recommend financial products that may not always be in the best interests of their clients.
Per Hour
Some financial advisors may charge clients per hour rather than earning commissions or a percentage of assets under management. This, of course, depends on the nature of advisory services a client requires. The hourly rate for financial advisors can vary anywhere from $150 to $400 per hour. Rates can alter based on the advisor’s experience and expertise.
Fixed Rates
Financial advisors can also opt for fixed rates. This means that the advisors are responsible for providing their clients with a list of services and their appropriate fees. Fixed fee service examples include retainer services at $2,000 to $7,500 per year or a financial plan at $1,000 to $3,000.
Will You Help Me More With Investments or Financial Planning?
With an extended set of questions to ask a financial advisor, this is the most important. While some planners prefer to do one or the other, a few can juggle both facets of monetary outlining. They help make decisions about your money that will help you reach your financial aims as quickly as possible.
Choosing the right professional planner begins by knowing what financial planning is and knowing what to demand of that individual.
Investment vs. Financial Planning Advisors
Advisors who specialize in financial planning assist with the following, and more:
- Retirement savings
- Budgeting
- Taxes
- Insurance coverage
- Asset allocation
- Risk management
- Debt repayment
- Bankruptcy
- Estate planning
Investment advisors assist their clients with all aspects of managing an investment portfolio. They give advice based on their clients’ unique financial situation, goals, and risk tolerance. Investment advice can range anywhere from a general recommendation on what type of asset allocation model you should employ to precise instructions regarding how to buy and sell investments. Make sure to always ask a potential financial planner if they provide investment-specific advice or only offer planning services.
In addition to the above services, investment advisors also typically offer the following:
- Security analysis
- Manage retirement funds
- Guide clients who are new to investing
Note that registered investment advisors have a fiduciary obligation to always act in your best interest when managing your investments. Investment advisors (as opposed to regular financial advisors) are required to be registered with the SEC or a state regulatory body. With certification, they are granted the ability to manage a client’s investments; however, they are legally required to do so with discretion. Their activities are strictly monitored by the SEC.
Will a Brokerage or Other Independent Custodian Hold My Investments?
In financial service terms, a custodian is a company that has possession of your financial assets for security reasons. A custodian is liable for keeping your assets safe. Sometimes they operate separately from the broker, who is principally concentrated on entering the financial markets on your behalf. A financial institution called a broker provides a brokerage account, commonly known as a trading account, securities account, or investment account. Custodians do not mix client assets, whereas brokers do.
In accordance with the SEC, a registered investment advisor must also be a qualified custodian. If they do not meet the legal qualifications to act as custodian of a client’s assets, they must designate another party.
For the security of your assets, it’s essential that you know whether an investment advisor is acting as a custodian, and if not, ensure they have employed a qualified party to do so.
What Do You Expect From Me?
Each financial advisor will have expectations about how often they like to meet with clients and the level of client involvement they require. It is important to understand how your financial advisor works and what approaches they implement. Ensure that you have everything laid out from the get-go to avoid any confusion in the future.
How Will You Diversify My Investments?
Chances are you have heard about how important it is to diversify your portfolio, and this is exactly what you should ask your financial advisor about. An efficient asset allocation is how you construct a diversified portfolio, after all. As the old saying goes, “don’t put all your eggs in one basket.” If you’re seeking an advisor to help you manage your investments, it’s vital that they can explain to you their strategy for diversifying your portfolio.
This is one of the best questions to ask a financial advisor if you’re concerned with investments. There are many different approaches you can take to investing, so it is important that your advisor shares the same ideals and can utilize a strategy with which you agree. Inquire about the financial advisor’s unique investment philosophy to ensure they can take an approach in which you feel confident.
How Do You Measure Success?
There are many methods through which advisors measure success, both monetarily and through their clients’ satisfaction.
Some of these may include:
- When their clients achieve their goals
- When they improve their client’s general approach to money
- When they make a certain amount from clients or investment returns
Any financial advisor must be able to define success and demonstrate why they have chosen a particular method.
How Much Money Will I Make on My Returns?
There’s no way to know for sure whether your investments will earn any return. This is why it is also a telling question to ask your financial advisor. While the reasonable answer is “I don’t know,” some advisors may make bold claims that they will increase your returns by a large percentage. Their response to this question will give you a hint of their general demeanor and how truthful and transparent they are.
How to Interview a Financial Advisor
Financial advisors believe that it is important to conduct interviews before signing on new clients. It is a relationship that you are attempting to build with someone who will later be in charge of your money. Like any relationship, trust and shared goals are essential.
Be sure to tell advisors that you are also interviewing others. The process may be long and tedious, but this is not a situation in which you would want to make an immediate decision. The decisions you and your financial advisor make now may well affect your finances decades down the line. You are hiring someone who will hopefully boost your financial standing and help you better utilize your assets in the investment market and beyond.
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