Questions to ask a financial advisor before hiring
When you’re speaking to a potential financial advisor, you need to know the questions to ask that will tell you everything about how your money will be managed.
The phrasing of your questions matters, so you get the best answers to help you in your hiring decision.
1. “Are you a fiduciary all the time?”
While we know you probably care most about “fees,” we think the fiduciary question should be the first question because not every advisor is a fiduciary all the time. That’s because of how they’re paid.
So, first let’s talk about what a fiduciary is. A fiduciary is a person who has a legal and ethical responsibility to create a trusting relationship where he/she will act in good faith.
Financial advisors who are paid through commissions can have a conflict of interest if their decisions are based on the larger commission rather than recommending a product that’s in the best interest of the individual planning for retirement.
The White House Council on Economic Advisors estimated in 2015 that when conflicted advice is given, the retiree loses around 12% of the value of his or her retirement savings over 30 years.
Some financial advisors are ALWAYS fiduciaries by the nature of how they charge clients for their financial services.
That’s why it’s imperative that consumers ask their advisor if they’re a fiduciary.
Fee-only financial advisors, also called fee-only fiduciary financial advisors, always put the client’s best interests at heart because of how they’re paid. They receive compensation from the client for their financial advice rather than from a brokerage or for selling a particular financial product.
So, ask your financial advisor if they are a fiduciary all the time.
4. “What are your credentials, experience, and track record?
Get to know your advisor personally and professionally. Don’t assume a bio tells you everything about a person.
Advisors often have a bunch of initials after their name that indicate a high level of expertise in financial planning, accounting, and wealth management. Ask about their credentials and experience.
Here are some of the credentials you might see next to your financial advisor’s name:
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CFP®
This is one of the most recognized and respected certifications in the financial industry because they put your best interests first.
CERTIFIED FINANCIAL PLANNERS™ like Todd Minear have met educational and experience requirements and ethical standards set forth by the CFP Board.
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CTFA – Certified Trust and Fiduciary Advisor
This certification is for bankers, brokers, financial planners, and tax and trust professionals who pass a test, meet educational and experience standards, agree to continuing education, and agree to a code of ethics. The American Bankers Association issues the CTFA certification.
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CFA® - Chartered Financial Analyst
This is a distinction for investment professionals. It ensures they have the expertise and skills in investment analysis. These professionals complete the CFA® program, pass the exam, and have acceptable work experience.
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CPA - Certified Public Accountant
You’re likely familiar with a CPA if you hire one to complete your tax return each year. A licensed accountant must meet educational and work requirements, hold a specific accounting position, and pass an exam.
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PFS - Personal Finance Specialist
CPA’s can also get another credential, called the Personal Finance Specialist certification, that shows expanded tax expertise, financial planning knowledge, and services.
You’ll see CFP® next to Todd Minear’s name at Open Road Wealth Management. He also has an MBA or master’s in business administration.
In addition, the advisor may have expertise in a field. For example, we specialize in federal retirement benefits and can help retirees maximize their Thrift Savings Plan and other federal retirement vehicles.
Ask your advisor why he chose one designation over another and how it separates him from the competition.
Industry trends
Ask your agent how they stay up to date on industry trends.
If your agent has one of the certifications mentioned previously, they may be required to take continuing training.
Also, if they’re a part of a membership group, they may be advised of best practices and regulatory changes that impact the industry.
Look for an advisor who is active in his or her industry. While not essential, an advisor who is involved in trade groups and organizations may have connections to other resources that may help your relationship grow in the future.
The active advisor constantly learns, collaborates, and engages with others in the industry.
In addition, make sure your advisor is registered with the appropriate regulatory agency.
Look into potential disciplinary action
Then, have a very candid conversation asking about disciplinary action.
Finally, check yourself to see if the advisor is telling the truth.
The Securities and Exchange Commission has a database of disciplinary records for advisors with more than $110 million in assets.
The SEC also has basic information on advisors, including previous firm associations, previous employers for 10 years, criminal charges and convictions, industry exams, and professional designations. There is a wealth of information in the SEC database that gives clients a true picture of the person they are hiring.
Some advisors may not manage $110 million, so you will only find their name or firm registered with state regulators. So, don’t be alarmed if you don’t see a filing with the SEC.
In Missouri, brokers and advisers register with the Secretary of State. Call 1-800-721-7996 to check on an advisor.
In Kansas, the Office of the Kansas Securities Commissioner at the Kansas Insurance Department regulates the financial industry.
Financial Industry Regulatory Authority (FINRA) also offers free background information on financial brokers, advisors, and firms.
Bottom line: do your homework. Credentials are an important question to consider.
5. What services do you provide?
Financial advisors offer a range of services, including retirement planning, tax planning, estate planning, and more.
Some may not offer estate or tax planning and may refer you to another individual in their network.
As you ask more questions and get to your goals and needs, you can determine if the advisor offers all the services you’ll need for your personal financial situation.
6. Do you have experience with clients in similar situations as mine?
You can ask this specifically with the phrasing above or broadly: Who is your typical client?
While most financial advisors can help most individuals, regardless of net worth, the advisor may specialize in certain types of clients.
Every client has different types of goals and needs.
A high-net individual may be more interested in wealth than a young professional retiring early, looking to maximize savings and investments.
A federal employee with a Thrift Savings Plan, pension, and other benefits upon retirement will have different financial interests than a small business owner who doesn’t have a pension.
Also, ask about the investment strategies the financial advisor has used with other clients in a similar professional or financial situation.
7. What is your investment philosophy?
Financial advisors study the ups and downs of the market daily and have a good understanding of the economic principles that drive it. That’s why you are hiring them. That being said, financial planning is not a science. There are best practices, but a level of personal choice is involved.
Ask your advisor about his investment philosophy.
Ask this question twice. First, ask it at the start of your conversation. You can ask “What is your investment philosophy?” You’ll likely hear a broad answer.
Then ask it again at the end of your conversation so you get an answer that more directly applies to your goals, strategy, and risk level discussed in the conversation.
You can ask the same question about philosophy or get more specific and ask, “How do you incorporate investment strategy with financial planning?”
Be sure your advisor provides you with an investment policy statement. This statement will outline the strategy that you both agree on.
At Open Road Wealth Management, we have a self-assessment tool to determine if we’re a match.
8. Will you have discretion over my investment account?
This question gets to the heart of how your advisor will manage your money. Will he help you select funds and then leave the money alone, or will he make transactions for you without your approval?
Discretionary fund
To do this, a discretionary fund may be set up. Determine the discretionary limits. Are there certain funds you want invested in, or certain funds you want to avoid? Discuss the degree of discretion before you start your investment plan.
Investment Policy Statement
Your advisor should prepare an IPS (Investment Policy Statement) for you. Go over this with your advisor to understand the guidelines your advisor will follow when managing your portfolio. The IPS should address the amount of agreed-upon risk as well.
9. How will you determine my risk tolerance and financial goals?
9. How will you determine my risk tolerance and financial goals?Risk means something different to you and I. You need to determine what you consider risky since it’s your money.
While you ultimately hold the keys to this decision, your advisor should help you pick a risk level you can tolerate based on your financial situation and personal goals.
Gone are the days of solely using pen-and-paper risk profile questionnaires. Also gone are the days of basing risk tolerance on just your age. Today’s advisor should use a three-pronged analysis to address your acceptable level of risk.
Risk Tolerance
This is the amount of risk you are comfortable with and is based on your personality. Your mindset, approach to investing, and purpose should be considered. Your advisor should take the time to get to know you through a conversation or questionnaire.
Risk Required
This is the amount of risk you need to take to generate the required return to meet your goals. A financial plan or analysis determines the required risk to achieve one or multiple goals. The plan or analysis will consider your current resources and ability to add more resources in the future.
Risk Capacity
This is the level of risk that you can afford to take. Generally, the more time you have the more risk you can afford to take. For example, if you plan on paying for your child’s education and he starts college in 6 months, you probably don’t have much risk capacity for this goal.
Once these areas of risk are identified, a balancing of the factors can be administered to determine the appropriate amount of risk for you.
Once your appropriate risk is determined, your current portfolio should be analyzed and stress tested so you understand how it could behave in different market situations. You and your advisor should have a high level of confidence with this analysis. If necessary, the portfolio should be altered to match your acceptable risk level. Acceptable levels of risk and portfolios change, so be sure to monitor both over time and make adjustments as necessary.
Risk should be one part of the goal-setting strategy. Ask about their process for creating a comprehensive financial plan customized for you. A good advisor will take the time to understand your goals, dreams, current financial situation, potential future financial situation and help develop a personalized roadmap to reach your goals.
10. How often will we review my financial plan or retirement account?
Your investment plan shouldn’t be static. It should change as the markets, economy, and personal circumstances change.
It requires regular review and adjustments, but the frequency of those reviews may vary depending on the financial advisor.
That’s why you should ask about their reviews and also your reviews. You should have a conversation with your financial advisor quarterly, bi-annual, or annually.
How will we communicate?
Ask if that financial review happens over the phone, in person, or through email?
Also, will you get regular correspondence, including statements with information on your account performance?
Regular, clear communication is key to a successful advisor-client relationship.
11. “How will you measure our success working together?”
11. “How will you measure our success working together?”This is an important question to ask before you agree to work with an advisor because it makes sure you are both on the same page. It creates measurable expectation levels. That way an investor is not disappointed down the road.
Success varies depending on an investor and risk level. Individual performance will vary among the advisor’s clients. That’s why you need to ask how success will be measured for your individual plan.
Establishing measurement tools at the start of your relationship also helps you set goals together. That way, you can evaluate if you are on track to meet your goals as time goes on.
Can you provide references or client testimonials?
After you ask your advisor about how they’ll measure success, determine how previous clients measure success. Are they satisfied?
When you ask for references or testimonials, you can gain insight into the advisor’s track record and client satisfaction.
You can also get candid feedback on the advisor’s ability to meet client expectations.
12. What happens if our relationship does not work out?
When you choose a financial advisor, you enter into a relationship. It’s like any other relationship in life. Sometimes it works out. Other times it doesn’t.
With more than half of investors looking for new advice, you need to ask what happens if the relationship doesn’t work.
Communication issues, fund performance, and strategy are some of the reasons you may change advisors. When money is attached to that relationship, it can get messy just like a normal relationship between spouses. You need to ask what happens if you take your money elsewhere. While it may be a sore spot for the advisor because his source of income is gone, it’s a fact of life in the financial industry. Specifically, ask how the advisor feels when a client leaves so there’s no disappointment later.
Also, ask how the funds and investments are transferred when you leave. Is it a fairly simple and standard procedure, or is there a waiting game?
Sometimes it is the advisor who wants out of the relationship. Advisors want to enjoy the relationship as much as the client does. If a client is a burden or has unreasonable expectations, a good advisor may exit the relationship to make room for a client he perceives may be a better fit.
13. What are your policies on cyber security?
Cyber security is a big issue, and your financial advisor needs to make sure the personal and sensitive information you share with him is kept private. However, a survey by the Financial Planning Association Research & Practice Institute found only 29% of advisors say they are ready to deal with cybersecurity risks even though the vast majority know it’s a problem. That’s why cyber security policies are a question you need to ask your advisor.
Hackers are breaking into computer systems for large and small companies, so extra steps must be taken to ensure your information is safe. Your advisor should have a written policy that addresses cyber security.
Ask who has access to your information and the steps taken to protect it. Also, what happens to all that information if you leave the firm? Does your advisor handle all cyber-security steps, or do they have a person or firm dedicated to addressing the growing and changing threats?
14. What happens to my investment if something happens to you?
Life happens, and you should always be prepared. That’s why we advocate strongly for estate planning as part of a comprehensive plan. LINK
Just the same, you should ask your financial advisor about succession plans and safeguards in place to ensure continuity of service and security if something happens to the advisor.
Hiring an advisor
This may seem like a lot of questions, but choosing a financial advisor is likely a long-term plan. Take the time on the front end to do your due diligence before hiring someone and having an experience which does not meet your expectations.
You want to hire someone you fully trust as the best person to manage your money.
Now that you know the questions you should ask your advisor to find a fit that works for your financial goals, risk tolerance, and investment philosophy, these are the 5 questions you should not ask your advisor.
