If you're considering hiring a financial advisor, it's a good idea to have a list of questions ready during your interview process. Financial advice can be quite helpful if you're finding yourself unsure about how to proceed with a particular financial decision. At the same time, you'll want to have confidence that you're working with a qualified individual or team of individuals.
Here, we'll discuss the top questions to ask a financial advisor.
1. Are you a fiduciary at all times?
1. Are you a fiduciary at all times?
This is a foundational question: Is the advisor always a fiduciary? In other words, does the advisor always have your best interests in mind and not their own?
A fiduciary obligation requires the advisor to act in your (the client's) interests above their own at all times. Some advisors wear a few hats; from one angle, they can act as an advisor; from another, they can be a product salesperson. An advisor will guide you to make sound financial decisions, while a salesperson may be at least as concerned with fulfilling their own quotas or sales requirements.
The stark reality is that many advisors, especially those working for large brokerage institutions, are both advisors and salespeople at the same time. They may only choose to work with select clients that have the ability to pay high advisory fees or purchase high-cost investments.
Confirming that your advisor is a fiduciary at all times is essential before beginning any sort of advisory relationship. Eliminating conflicts of interest will make for a more fruitful interaction on both ends.
2. How do you get paid?
2. How do you get paid?
This is another question core to the relationship, and it's key that you understand the dollar amount you're paying for any services received.
Many advisors charge an "AUM fee," or a fee corresponding to the assets they manage for you.
In practice, many advisors charge 1% of assets managed, which may not sound like much. But the reality is a bit surprising: A 1% fee applied on a $1,000,000 balance is $10,000 per year, and the fee will increase proportionally as the account balance increases. Over time, and due to the nature of compound interest, fees can really add up!
Other advisors may have different fee structures, which may vary depending on whether they actually manage money for you. Some advisors may charge trading commissions on any trades they place on your behalf, while others may have more bespoke cost arrangements.
Fee-only financial planners, on the other hand, may charge you on an hourly basis for as-needed advice, or they may charge a fixed-fee retainer for ongoing access to advice. Other planners might also be willing to work on a project basis, depending on the depth and complexity of your needs.
The only way to know is to ask -- but be sure you understand the dollar amount you're paying for any service. Don't be satisfied with just a percentage amount!
3. What is your investment philosophy?
3. What is your investment philosophy?
Asking about an advisor's investment philosophy is an important way to learn how they think about risk, and it's also an opportunity to have them showcase their knowledge about investing and broader financial planning.
You may not necessarily agree with the advisor's philosophy right off the bat. But it's important to see that they actually have a philosophy to offer. You'll know quickly if the advisor displays fluency in the topic.
They should be able to give you some sense of their knowledge and opinions about stocks, bonds, exchange-traded funds (ETFs), mutual funds, and insurance products. Taken holistically, the advisor should have comprehensive investment knowledge and be able to explain their personal philosophy around investing money.
4. Do you have any financial credentials?
4. Do you have any financial credentials?
Credentials are not necessarily the be-all-end-all for an advisor. But they do signal a commitment to the study of financial topics and a commitment to their professional craft.
Most financial credentials, like the chartered financial analyst (CFA) designation or the certified financial planner (CFP) marks, are voluntary in nature. This means the advisor took the time and energy to put in the work required to earn one or more of them, even when it may not have been in their job description.
Many of the heavier-lift credentials take hours upon hours of dedicated study to complete, and some exams, like the vaunted CFA exam, are only given infrequently. It's not uncommon at all for a candidate to take several years to complete the CFA program.
In general, take the advisor's credentials in the context of their entire picture as an individual. Alone, a few letters after someone's name may not mean much to you. But paired with a track record of fiduciary guidance and varied experience, credentials can carry quite a bit of weight.
5. Do you incorporate tax planning into your recommendations?
5. Do you incorporate tax planning into your recommendations?
Like it or not, taxes are an ongoing expense for investors of all ages. A tax-aware advisor will recommend products (and accounts) that best position you to minimize your lifetime tax liability. Simple changes to your investment plan -- like ensuring all investments are placed in their most tax-efficient location -- can make things simpler and lower-cost for you, as well as easier for any tax advisor to track.
As an example, holding dividend-paying stocks in a taxable brokerage account will lead to taxable income every time a dividend is paid. Holding growth stocks in a taxable account, on the other hand, won't generate as much taxable income unless you begin to realize gains (though this is something under your control).
Small bits of knowledge like this can add a ton of value over the long haul, so be sure that your advisor has some knowledge of tax planning before agreeing to hire them.
6. How often will you communicate with me/us?
6. How often will you communicate with me/us?
Try to get a sense of how frequently you'll communicate with your advisor or if you should only expect one or two contacts per year. For some people, this might be enough; for others who need more of a high-touch advisory relationship, be sure that your advisor is willing and able to provide one.
Also, be sure you understand the advisor's preferred mode of communication; this should align with your expectations. In other words, get a sense of whether you'll be meeting with your advisor virtually or if they typically do in-person meet-ups. Having someone you can connect with in a way that works for both of you will lay the foundation for a productive relationship.
To the extent possible, try to get this information before signing on the dotted line.
Related investing topics
Why picking an advisor is so important
Why picking an advisor is so important
The financial advisory industry can be somewhat of a black box, and wading through a seemingly never-ending sea of cost structures and service offerings can be exhausting. Knowing the key questions to ask an advisor can no doubt help you find the right person for advice, but it can also help you reach your financial goals. Working with a trusted partner makes sense as long as you can identify the value they provide and as long as you see results over the long term.
Of the questions above, the two to pay particular attention to are the ones around their fiduciary responsibility, as well as their compensation. If an advisor isn't always a fiduciary (that is, they won't commit to placing your best interests ahead of your own), really consider if that's a relationship you want to have around.
Second, be able to identify the dollar amount you're paying for the services on an ongoing basis. If you wouldn't take out a checkbook and pay for the services of your own volition, be extra careful. Most percentage-based advisory fees are subtracted "behind the scenes" or on the last page of your statement, so it's easy for them to go unnoticed. Know exactly how much you're paying and exactly what you're receiving in return.
Searching for an advisor doesn't have to be a strict interrogation. It can even be fun. You want to like your advisor, and you want to feel that you can trust them to put your interests first.
Take your time, do your due diligence, and hire someone who gives you confidence around your financial decisions.
