You may not interview a fast-food manager about her menu or quiz a mall employee on the origins of the cashmere in his sweaters. But it’s appropriate — even expected — to ask questions of a financial advisor before you hire one.
In this article, I’ll walk you through some questions you may want to ask a potential financial advisor and explain why the answers matter.
Before vetting financial advisor candidates, it’s also a good idea to determine whether you need a financial advisor at all. For some, managing your own investment portfolio or investing through a robo-advisor may be a better option.
Table of Contents
- How Do You Get Paid?
- Where Do You Keep My Money?
- What Types of Investors Do You Typically Work With?
- Can You List All the Services You Provide?
- How Will Our Relationship Work?
- Do You Have Any Investment Minimum Requirements?
- What Is Your Investment Philosophy?
- What Happens if You’re Not Available?
- How Do You Measure Success?
- When Things Don’t Work Out With Clients, What’s the Reason?
1. How Do You Get Paid?
Money expert Clark Howard says the most important consideration when hiring a financial advisor is to make sure they’re a fee-only fiduciary.
Fee-only fiduciaries are legally obligated to put your best interests above their own financial gain. They don’t make any money from commissions.
It’s more complicated than it should be to figure out whether a financial advisor is a fee-only fiduciary. Asking these questions is one of the fastest ways to figure it out:
- Do you have a fiduciary duty to me?
- Are there any conflicts of interest I should know about?
- Do you get paid by anyone other than your clients?
- Do you or any advisors with your firm earn commissions of any kind?
- What is my total cost to work with you?
“Most firms should be able to tell you within just one sentence if they’re a fiduciary or not,” says Certified Financial Planner Wes Moss, a managing partner with Capital Investment Advisors. “It should be very much black and white. There’s not a, ‘Well, we are sometimes.'”
Asking about total cost will help you figure out all the ways your financial advisor may charge you. That can include advice fees, transaction fees, expense ratios and other factors, so make sure you get a bottom-line price.
Other Ways To Verify Fee-Only Fiduciaries
The Garrett Planning Network and the National Association of Personal Financial Advisors work only with fee-only fiduciaries, so those are great places to start looking for an advisor.
The U.S. Securities and Exchange Commission (SEC) also requires financial advisors to fill out what’s called Form ADV, which includes information about an advisor’s business operations. It’s a good way to investigate whether a financial advisor ever gets paid on commission.
Financial advisors must indicate the ways they get paid in Form ADV Part 1, Section 5. They also must detail compensation they receive outside of client fees in Form ADV Part 2.
Form CRS — the Client Relationship Summary (also called ADV Part 3) — is a relatively new addition to the document. It’s shorter and standardized. It includes information about how a firm makes money, potential conflicts a firm may have, required investment minimum amounts and the types of services an advisor provides.
The SEC has provided an easy way for investors to find these documents on the Investment Adviser Public Disclosure website. Type in the firm’s name or the individual advisor’s name for disclosure information
2. Where Do You Keep My Money?
Much like you want your advisor to have a fiduciary duty to you, you don’t want to take any chances with who holds your money.
Another way to ask this question is, “Who is the custodian of my money?”
A third-party custodian, usually a brokerage firm or bank, should hold your funds rather than your financial advisor.
We recommend Fidelity, Vanguard and Schwab as third-party custodians, three companies with trillions of dollars in assets under management (AUM). You want to work with a financial advisor who can help you set up accounts with a reputable intermediary, which settles trades, collects dividend and interest payments and provides accurate third-party account statements.
You’ll get online access to monitor your accounts. Using a third-party custodian won’t fully prevent a financial advisor from going rogue with your money, Clark warns. But it is a major nod to transparency and accuracy.
“Having your account with a major company where the money is not managed there but is housed there gives you the ability to see what you’ve got and how it’s doing,” Clark says.
3. What Types of Investors Do You Typically Work With?
Most financial advisors or firms work with a specific client base.
Is it “ultra net worth” investors, the “millionaires next door” or those who are already past retirement age? It’s probably helpful if a financial advisor’s other clients’ situations are similar to yours. That way their expertise and time is geared toward issues that are relevant to you.
It’s also a good idea to ask about a financial advisor’s overall philosophy. What guides their approach?
For example: “Our firm has this guiding light that is helping families find happiness in retirement,” Moss says.
4. Can You List All the Services You Provide?
Unless you’re nearing retirement, Clark thinks the purpose of hiring a financial advisor should usually go beyond investing.
You can invest on your own through a target date fund or a low-cost mix of index funds. If you’re interested only in investing help, you can also consider investing through a robo-advisor, which is often considerably less expensive than a human financial advisor.
Ask your potential advisor whether he or she is primarily a financial planner or an investment advisor. Financial planners typically offer a wider range of services while investment advisors have a more narrow focus.
Do they specialize in something? And do they offer services such as tax planning, retirement income, insurance optimization and estate planning?
If your financial advisor answers “yes” to those questions, especially the second one, he or she probably is a financial planner who offers more than just investment advice, which is what you want.
5. How Will Our Relationship Work?
It’s a good idea to understand the logistics of your financial advisor’s relationship with a typical client. Here are some specific questions to ask:
- How often will we meet?
- What happens during a typical meeting?
- Will I hear from you between our scheduled appointments?
- Will I have access beyond the appointments if I need it, and what form will that take?
6. Do You Have Any Investment Minimum Requirements?
It’s a good idea to look up or ask about an advisor’s minimum required investment amount before you spend considerable time vetting him or her.
The investment minimum can reach well into six figures or even higher for many financial advisors.
You should also ask, or at least calculate, whether there’s a minimum amount of money you need to invest so that hiring the advisor is cost-effective for you.
For example, Clark recommends Schwab’s Intelligent Portfolios Premium. It charges an initial $300 planning fee and then $30 per month thereafter. If you invest the minimum $25,000, you’ll be paying 1.44% annually, excluding the initial $300 charge.
A typical full-service advisor charges about 1%. So, depending on the fee structure, sometimes it doesn’t make sense to work with someone unless you can exceed their investment minimum.
7. What Is Your Investment Philosophy?
You may want to ask a more specific question in order to get a detailed answer. But there are several questions you could ask that fit within this framework.
You need to understand the value proposition that your advisor or firm offers and the typical asset classes they use to invest. Do they prefer:
- Passive or active investing?
- Growth or value stocks?
- Domestic or international?
- Small-cap or large-cap?
There isn’t necessarily a wrong answer to these questions. But make sure you understand and feel comfortable with how your advisor typically invests before you hire them. It will save you both some angst down the road.
“Your financial relationship with a financial advisor will never work if you don’t think about investing in a similar way,” Moss says.
8. What Happens if You’re Not Available?
There are thousands of independent advisors who operate with a staff of just one or two people. What happens if they go on vacation, retire, change careers or pass away?
Relationships with full-service financial advisors are intended to be long term, so it helps to understand the totality of the firm.
If you’re considering a solo financial advisor or a boutique firm, be aware that it can create quite a headache if something were to happen to your advisor.
This dynamic is another reason that it’s a good idea to work with a financial advisor who keeps your money with a third-party custodian such as Vanguard, Schwab or Fidelity. If you decide to work with a one-person advising service, and that person isn’t available to help you, it’s good to know there’s another way to access your funds.
9. How Do You Measure Success?
The answer to this question can tell you a lot about how your potential financial advisor views their job and whether their personality is a good fit with yours.
Financial advisors who subscribe to the same low-cost, long-term investment strategy that Clark advocates probably won’t measure success based solely on return on investment (ROI).
It’s not that performance is irrelevant. But long-term financial planning focuses on keeping clients on track to meet their goals, including retirement. Optimizing for performance this year often looks different from focusing on long-term goals.
Some financial advisors may evaluate whether they’re succeeding on how satisfied their clients are with the direction of their plans. Others may measure their performance against a popular index.
Whatever the answer, asking this question will help you learn more about whether you and your financial advisor are aligned.
10. When Things Don’t Work Out With Clients, What’s the Reason?
This question may put your potential advisor on the spot, but it’s a good question to ask anyway.
The answer may give you some insight into a financial advisor’s personality and character: How comfortable he or she is addressing this issue can tell you a lot.
But there are legitimate reasons for things not working out between a financial advisor and client. Moss says that often the reason is misalignment.
If a client doesn’t understand a financial advisor’s investment philosophy, how often they’ll meet or communicate and other basics, their expectations may not match reality. That can create disappointment. If an advisor has lost clients because of this before, it may not mean the relationship is a bad fit for you. It does mean you need to ask more questions to make sure the two of you are on the same page.
If you’ve read this entire list of questions to ask a financial advisor, you can consider yourself ahead of the game toward hiring one. If you ask these questions before making a decision, you should understand what your financial advisor is about and whether he or she is a fit for your needs and goals.
Choosing a financial advisor is a big deal. Take your time and gather as much information as you can before making a decision.
Remember, Clark strongly emphasizes how crucial it is to work with a fee-only fiduciary. You also want to keep your money with a third-party custodian.
However, beyond the necessities, you want to make sure you’re comfortable with the personality of your financial advisor, and that their investment philosophy and typical customer base matches you well.