15 Questions To Ask A Financial Advisor In Your First Meeting [Updated]

Things to Ask Your Financial Advisor

When you meet with a potential financial advisor for the first time, there are specific (phrasing matters) questions to ask. Asking about these things will tell you how your money will be managed.

The questions should be phrased purposefully to so you can hire the best financial advisor for your financial situation and goals.

Here are 15 questions to ask a financial advisor in the first meeting.

1. Are you a fiduciary all the time?
2. Could you explain all fees and expenses to me?
3. Can I have a copy of your ADV Part II?
4. What are your credentials and experience?
5. What is your track record?
6. What services do you provide?
7. Do you have experience with clients in situations similar to mine?
8. What is your investment philosophy?
9. Will you have discretion over my investment account?
10. How will you determine my risk tolerance and financial goals?
11. How often will we review my financial plan or retirement account?
12. How will you measure our success working together?
13. What happens if our relationship does not work out?
14. What are your policies on cyber security?
15. What happens to my investment if something happens to you?

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.

2. “Could you explain all fees and expenses to me?”

Expenses vary dramatically among financial advisors, investments, and portfolios. Understanding costs ahead of time ensures there are no surprises.

A client who asks about expenses and fees is doing their homework. It ties into the first question about acting as a fiduciary.

Here’s a breakdown of the different types of fees you can pay. Some are paid to the advisor, and some are for investments.

• Fee-Only

You hire a fee-only advisor when the client pays fees to the advisor only.

This arrangement tends to reduce or eliminate many potential conflicts of interest. In other words, if the client is the only one paying the advisor, they are not receiving other monies from investment or insurance companies.

The advisor is not motivated to “sell” a “preferred product” to earn more money.

Fee-only advisors have a fiduciary duty to do what is in the client’s best interest, not their own best interest.

• Commission

Some advisors earn commissions for selling products such as mutual funds and annuities. The mutual fund or insurance company pays these commissions to the advisor. And guess what? Not all commissions are equal.

Some annuity commissions are as high as 10% of the amount invested. When an advisor is put in the position of trying to decide which competing product to sell to the client, it is easy to understand that the advisor may have a conflict of interest when one product may pay him 3% and another may pay him 10%.

When advisors earn a commission, they are not acting as a fiduciary, meaning they are not bound to act in the client’s best interest.

• Fee-based

Now for the confusing arrangement. You guessed it, a fee-based advisor can earn fees AND commissions. Before you get all worked up, an advisor can’t earn a fee and a commission on the same product. However, they can charge fees on some products and earn commissions on others.

Drawing from the above two paragraphs, this means that an advisor can act as fiduciary sometimes. Other times he may not act as a fiduciary. This is known in the industry as changing hats.

It can difficult for the client to know and understand which “hat” the advisor is wearing at any moment.

In addition to asking your advisor about the fees and expenses of doing business with him or her, you can also review Form ADV.

Management fees

In addition to fees paid to the advisor, clients must know that they may also pay fees to investment and insurance companies. All mutual funds, exchanges traded funds, and annuities have a management fee (unless fees are temporarily waived).

Just like UPS charges a fee for delivering packages, mutual funds and exchange-traded funds charge fees for running funds. These internal fees can be as low as 0.05% or as high as 2.0%. Either way, it is important to know what you are paying.

Get the fee structure in writing before you commit to the financial advisor. Ask if the fees fluctuate year to year and by how much so you can plan for the future.

Like everything else in life, you get what you pay for. Don’t be scared off by high fees, and don’t be lured in by low fees.

You need to find an advisor you trust. Then consider the fees you’ll pay for his or her service. Only you can determine if the price is worth it.

If your financial advisor acts uncomfortable talking about fees, that’s a red flag. They need to be transparent. If the advisor is not transparent, you must consider whether this advisor is the best choice moving forward.

You can also use the National Association of Personal Financial Advisors (NAPFA) Comprehensive Financial Advisor Diagnostic questionnaire, which drills deep into the compensation questions you should ask a potential advisor before hiring them.

3. Can I have a copy or your ADV Part II?

Your relationship with your advisor needs to be open and transparent. Reading and understanding the Advisor’s ADV Part II is a great way to understand how your advisor operates.

Advisors must provide this document to clients, which can be found at the Securities and Exchange Commission's Investment Advisor Public Disclosure website.

The ADV Part II has information about many different things, including:

• Fee and Compensation
• Services Offered
• Disciplinary Information
• Review of Accounts
• Custody

If you have any questions about the form, just ask the advisor for clarification.

 

Todd Minear,

 

4. What are your credentials and experience?

Get to know your advisor personally and professionally. Don’t assume a bio tells you everything about a person.

Advisors often have several initials after their names, indicating 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:

• CFP Board of Standards

This is one of the most recognized and respected certifications in the financial industry because they put your best interests first.

CERTIFIED FINANCIAL PLANNER™ professionals like Todd Minear have met educational and experience requirements and ethical standards set forth by the CFP Board.

• 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.

• 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.

• 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.

• 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.

5. What's your track record?

Look into potential disciplinary action. 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
• professional designations

The SEC database has a wealth of information 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.

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.

If you find something, have a candid conversation with the advisor about the disciplinary action.

Bottom line: do your homework. Credentials are an important question to consider.

6. What services do you provide?

Financial advisors offer various services, including:

• wealth management
• investment management
• retirement planning
• tax planning
• legacy planning
• helping with Social Security strategies
• insurance optimization

They may also be connected to other professionals who can help with estate planning and more.

As you ask more questions and discuss your goals and needs, you can determine whether the advisor offers all the services you’ll need for your personal financial situation.

At Open Road Wealth Management, we provided these services in the Kansas City Northland area.

7. Do you have experience with clients in similar situations to 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 goals and needs. Early retirees ask themselves questions that are different from those of someone who has planned for years to receive FERS benefits.

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.

8. 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 to get an answer that more directly applies to the goals, strategy, and risk level discussed in your first meeting.

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.

True Wealth Management

At Open Road Wealth Management in the Kansas City Northland region, we believe in Ture Wealth Management. It goes beyond regular financial planning and wealth management because of the transparency, support, and the unique Retirement RoadMAP that we deliver.

The MAP in our unique Retirement RoadMAP stands for (Made-to-order Action Plan). It's a roadmap toward your financial goals. Depending on your priorities, it may help reduce taxes, maximize wealth and investments, allow for travel and entertainment, leverage Social Security strategies, or incorporate legacy planning. Learn about these ways that our fee-only financial advisor and wealth manager can help you.

9. 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.

10. 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, and potential future financial situation. They'll use that to personalize a strategy to reach your goals.

At Open Road Wealth Management, we call these customized plans a Retirement RoadMAP (Made-to-order Action Plan). It's focused on your goals, whether that's retirement planning, wealth management, tax planning, or legacy planning.

12. 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.

13. 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 ensures you are both on the same page and creates measurable expectation levels. That way, investors are 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.

14. 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 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, the advisor 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.