What To Ask Before Hiring a Financial Advisor

Updated: Apr 5





A financial advisor can make all the difference in your finances. A financial professional can help you restructure debt, save for children's college funds, or plan for retirement. Although many financial advisors offer similar services, not all advisors are the same. There are advisors with experience working with people with a particular net worth or income range. Some advisors want to earn referral fees for selling products to their clients.


It is essential that you understand what you need before you hire a financial advisor to help you. A great financial advisor is like a good therapist: you can spend years researching, interviewing, and ultimately suffering because you generally only get what you pay for. A bare-bones advisor who gets you to fill out forms and provide your data does not necessarily do you any favors. On the other hand, an advisor who costs a bit more but is down to earth, fully engaged, and understands your situation is worth every penny.


Here are some things for us all to bear in mind when choosing an advisor and to evaluate their performance.


Are you certified? (What is your educational background?)


If you are to trust someone with your money, you'd naturally be inclined to know about their qualifications. Many financial advisors have exceptional credentials beyond the basics. Different various financial advisors use titles such as:

  • Chartered Financial Consultant (ChFC). Professionals with this title have done the same course as a CFP. However, they have not excelled in the board exam or finished with many years of experience.


  • Certified Financial Planner (CFP). Professionals with this title are competent to aid you with your finances wholesomely. To develop into a CFP, one must learn courses, pass strict board tests, and have a few years of experience. One must also pledge to adhere to specific Rules of Conduct.


  • Chartered Financial Analyst (CFA). CFAs specializes in investing. This title demands a two-year course, four years of experience, a string of tests, and distinct ethical standards. According to Forbes, only 20% of applicants for this role qualify for it.


  • Certified Public Accountant (CPA). CPAs are accountants who have done courses, qualified for the exams, and done accounting for at least a year. They are qualified to aid you with special tax needs, e.g., Estate planning.


  • Registered Investment Advisor (RIA). An RIA professional specializes in investments. RIAs must adhere to the fiduciary standard and register with the SEC.

The type of financial advisor you appoint depends on your needs. For example, if you want assistance selecting investments for retirement, you could hire CFA or RIA. If you're going to establish a comprehensive financial plan, you could hire a ChFC or CFP. If none of these titles fits your description of your financial advisor, check out the designations database from FINRA. It tells you what specific titles mean, what education is required, and the organization that backs them up.


Related Article: 20 Questions to Ask a Tax Professional Before Hiring Them


Are you a fiduciary?


A fiduciary is an individual who is ethically and legally expected to act with your best interests in mind. Anyone can call him/herself a financial advisor, but only certain specific professional designations are held to a fiduciary standard, for example, registered investment advisors and certified financial planners.


Advisors are expected to:

  • Disclose all their fees

  • Reveal any potential conflicts of interest

  • Place the client's interests ahead of their own

  • Explain how they're compensated

We recommend having a Registered Investment Advisor (RIA) because these people have a fiduciary responsibility to act in your best interest and are legally bound to invest money accordingly. Insurance agents and Stockbrokers do not have this higher fiduciary duty. Investment advisors bound to the higher fiduciary standard are expected to select or recommend the best product for your position. In contrast, brokers only have to endorse a product that fits your suitability requirements.

How Do You Get Paid?


Financial advisors make their money in various ways. These include:


Hourly: This type of business model is transparent and aligns the financial advisor's work with the client's expenses. A standard hourly rate is between $150 and $300. Investment-related costs, such as mutual fund fees, ought to be above the hourly rate. Before employing an hourly financial advisor, enquire for an estimate of how many hours it will take to get the job done, given the work you have reviewed with the advisor.


Best for: The hourly model is recommended for people whose financial planning requirements are focused rather than ongoing and broad-ranging. Clients paying hourly rates ought to be prepared to partake in part of the heavy lifting for their plans. This model is not advisable for "do-it-for-me" types. Since you may only require to visit the advisor once every few years, and as a result, you will do some of the work yourself. Paying hourly will be cheaper than paying a percentage or a retainer of your assets under management.


Per Project: The advisor charges a flat fee to do a given task for this model, such as a pre-retirement plan and review. Much like the hourly model, this is an immensely transparent way for financial advisors to charge you for their work. This model is not so common, unlike the hourly model, but a majority of hourly advisors should be able to adjust to "back into" a fee for your plan before beginning. Similar to the hourly model, any other underlying investment-related fees are separate.


Best for: This type of model is best for investors who have a specific need rather than an ongoing need for guidance.


Percent of Your Assets: A majority of investment advisors charge via this model (often referred to as the assets under management, or AUM, model), securing a percentage of the client's assets under management on an ongoing basis. The common rate is 1% for any $1 million portfolio, although clients with bigger portfolios will pay a lower percentage. Such fees are commonly on top of what the investment charges are. Advisors who use the AUM model generally have minimum portfolio thresholds.


Retainer: Under this model that is picking up traction in the marketplace, you are charged a flat monthly or annual fee for advice, much as you would for cable TV or a gym membership. These fees are added to any investment-specific expenses.


How these advisors get paid may affect the decisions they make. For example, if they earn a commission for sales of certain products, there is an incentive to sell the same products whether they suit your needs or not. If they earn a fee for each trade made in your account, they get an incentive to make many trades, even when you are better off with the "buy and hold" strategy.


To avoid these setbacks, look for an advisor whose payment option is "fee-only." That means an hourly rate, a flat fee for services, or a percentage of your assets. A fee-only financial advisor works for you and you alone.



What's Your Investment Philosophy?


A good financial advisor is expected to tailor their advice to fit your needs. However, their investment philosophy and overall approach to picking investments influence their recommendations. For example, an advisor who is a huge believer in keeping low costs will possibly direct you towards index funds rather than actively managed funds.

Experts believe that you are better off with a financial advisor whose investment philosophy matches your own. For example, if you usually stick to simple investments, you probably won't be happy with a financial advisor who moves money around in complicated ways to maximize profits.


A financial advisor you are on the same page with you gives you the confidence to stick to your plan over the market's ups and downs.

One way to acquire a sense of a financial advisor's philosophy is to ask them what they do with their money. If they invest similarly as you, you feel confident about the advice they give you is the same they'd follow.


What kinds of clients do they specialize in?


It is best to work with someone who spends a lot of their time working with individuals just like you. Reach out for a copy of their written description of their ideal client. If you have specific investment requirements, it's ideal to choose an advisor to deal with them. A majority of financial advisors work with precise types of clients and recognizes their particular requirements.


For example, an advisor working with millennials is likely to be knowledgeable about matters like writing prenuptial agreements, saving for your children's education, or refinancing student loans.


One of the best ways to find a financial advisor who perceives your needs is to find someone close to your own age.


How Will You Pick Investments for Me?


Matters investing, you do not want to place all your eggs in one basket. A good financial advisor does not put all your money into one investment. Instead, they choose a blend of various investments, such as real estate, different types of stocks, and bonds.

There is no such thing as a one-size-fits-all asset allocation. Your advisor should tailor your portfolio to suit your needs based on these factors:

  • Risk Tolerance. Some individuals are willing to take huge risks with their money in pursuit of massive gains. Others like to play it safe and protect their money. Your financial advisor is required to know and respect your risk tolerance when choosing investments.

  • Age. The closer you are to retiring, the less risky your investments need be. This usually means keeping less in low-risk investments.

  • Tax Considerations. Depending on your goals, there may be distinct funds that will help you evade taxes on your investments. Examples include 529 plans for college savings, IRAs for retirement funds, and health savings accounts for medical expenses. A good financial advisor can tell you how much you ought to expect to pay in taxes on your accounts and how much money you will be able to keep after taxes.

  • Goals. How you invest banks on what you are investing in. Saving up to buy a house within the next year contrasts from investing for a long-term goal like retirement in 30 years.

  • Other Assets. Chances are, your financial advisor will not manage all your assets. They ought to know about and factor in the assets far from their control, e.g., your workplace 401(k).

Pro tip: If you have an IRA or 401(k), make sure you also sign up for a free analysis from Blooom. After linking your accounts, they ensure your asset allocation aligns with your risk tolerance. They also ensure you are adequately diversified and aren't paying too much in fees.



Who is your custodian?


If there is one question you don't want to overlook, it's this one. Ideally, your financial advisor has employed an independent custodian, like a brokerage, to hold your investments rather than act as their custodian. Advisors are required to arrange for a custodian for assets they manage for their clients, stored in physical or electronic form.

Confirm that the financial advisor is using a major third-party custodian's services to manage your retirement/ investment accounts.


Recognized custodians include Schwab, TD Ameritrade, and Fidelity.

When your financial advisor works with an authentic third-party custodian, it is impossible to go rogue with your capital. They have limited authority to oversee your accounts and manage your investments. A third-party custodian also equips investors with SIPC and FDIC insurance.


"Helping protect our customers' assets is a crucial part of our commitment to providing the best service possible," says Fidelity.

Each third-party custodian maintains online access for you to observe your accounts. A majority of them have physical branches across the country for you to visit.

How often will we meet and communicate?


Most financial advisors have a common rule about how often they meet with clients, for instance, quarterly, semi-annually, and annually. Of course, in case you request a supplemental meeting, most advisors are happy to oblige.

Pick an advisor whose schedule works for your needs. You don't want an advisor who is overbearing, but you don't want one so hands-off that you question why you are paying them.


Will the advisor email you weekly? Ask for an annual face-to-face meeting? Set up a phone conversation monthly? Ask your financial advisor how often they will be in touch and how. If you understand what to expect upfront, you'll be on the same page.


Are there any conflicts of interest?


Nearly all financial advisors have conflicts of interest which it's just the nature of the profession. For instance, you may incur higher fees for certain services, unlike other advisors, and subsequently, they may buoy you to sign up for services that cost you more for their benefit.


But there are particular conflicts of interest you'll want to stay clear of.

If the advisor you are interviewing is not a fiduciary, there is a conflict of interest. Advisors without the fiduciary status are not legally obligated to put your needs above theirs. So, the rules allow them to sustain themselves first. Advisors who earn a commission on investment also have the likelihood to push some aspects on you so they can make more money.

Are you primarily an investment advisor or financial planner?


When surveying the universe of financial advisors, this is one question on the road that an investor encounters. There are financial planners and investment advisors/wealth managers.

The latter type of advisor has a narrower awareness about investments than financial planners, who examine all main aspects of a financial plan, for instance, household budgeting, insurance, and estate planning, to name a few. Nonetheless, it's worth noting that the best advisors understand holistically concerning their clients' plans while financial planners maintain top-notch investing acumen.


If you're looking for a financial planner:

  1. Ask prospective planners about the demographic groups they typically serve and their unique expertise.

  2. Suppose you have identified specific fields you need to work on.

  3. Look for someone who has earned the chartered financial consultant designation or the certified financial planner discussed below.

If you are looking for an investment advisor:


Enquire about their investment strategy: Does it conform to your philosophy? Does the financial advisor dabble in arcane investments such as options and futures and or use basic portfolio building blocks like low-cost mutual funds? Is the strategy easy to understand? (If not, enquire more until it is. If the advisor gets agitated, you are not a match.) The gold-standard classification for this kind of advisor is known as the chartered financial analyst.

Does the advisor approach their job with humility? You know that by enquiring about what they expect a balanced portfolio to return in a decade. Any advisor whose portfolio returns higher than the mid-single-digits over a decade may be taking excessive risks and/or is not realistic.


What is Your Performance History?


Each client or investment model is ordinarily different. Plus, the following year will be different from the previous year, so past performance does not imply what you will earn in your accounts. Financial advisors might deliberate an investment model that fits your profile and needs, and we often consider lifelong capital markets assumptions based on quantitative research. However, pay attention to hedging language. Financial advisors should make it clear that situations shift constantly, and there's no foretelling of what you will earn. A skilled advisor should help you move the conversation to your circumstances and needs (or "goals"). You can only control how you invest and how much capital you invest, and the markets will do their own thing.



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