15 Questions To Ask A Financial Advisor Before Hiring Them
Let’s talk about questions you should ask any financial advisor to make sure they are a good fit for you
Making sound financial decisions is crucial for your financial well-being.
Whether you're planning for retirement, saving for your child's education, or looking to invest wisely, a financial advisor can provide valuable guidance.
However, not all financial advisors are created equal, and choosing the right one is essential. In this blog post, we'll explore why you may need a financial advisor, and then provide you with 15 key questions to ask when considering hiring one.
These questions will help you ensure you make an informed choice that aligns with your financial goals.
Why Do You Need a Financial Advisor?
Complex Financial Situations: If your financial situation is intricate, involving investments, retirement planning, taxes, and more, a financial advisor can provide comprehensive expertise.
Time Constraints: For individuals with busy schedules, a financial advisor can save time by handling financial matters efficiently.
Expertise and Guidance: Financial advisors bring valuable insights and professional knowledge to help you make informed financial decisions.
Long-Term Planning: Financial advisors can assist you in creating and implementing long-term financial plans, helping you achieve your goals.
Considerations Before Asking Questions
Before diving into the questions, keep in mind that you should seek a financial advisor who aligns with your goals, risk tolerance, and values.
Additionally, it's crucial to understand the advisor's fee structure and potential conflicts of interest.
Now, let's explore the 15 questions:
1. Are You a Fiduciary?
Why it's important: This is a big on. A fiduciary is legally bound to act in your best interest, ensuring you receive recommendations that benefit you.
You might think that allowing someone to manage your money automatically means they’re a fiduciary—but not all financial advisors fall under this standard of care.
Only fiduciary financial advisors are required to place your best interest over theirs. Fiduciary financial advisors typically work for Registered Investment Advisors (RIAs). They can also be certified financial planners (CFPs), but you should always double-check before working with one.
The financial advisors who work for brokerage firms aren’t typically fiduciaries. These professionals instead are required to work under the legal bounds of the suitability standard. Under this standard, these advisors are required to give advice and product recommendations that are only suitable for you, meaning they may have high fees or offer the advisor a large commission.
2. How Do You Get Paid?
Why it's important: Understanding the advisor's fee structure helps you avoid potential conflicts of interest. Fee-only advisors often provide more transparent advice.
Typical fee structures include:
Commission-based advisors receive fees when their clients purchase financial products that the advisor recommends.
Some financial advisors charge by the hour or by the project for their services.
Financial advisors whose fees are based on assets under management (AUM) will charge a percentage based on the client's net assets they manage.
Fee-only financial advisors do not accept commissions for products sold; instead, they charge by the hour, by the project, by assets under management, or some combination of these.
We would argue that not one of these is better than the other (expect maybe to avoid commission based advisors in line with question number 1), it all depends on what you need and what you are most comfortable with.
3. What Are My All-In Costs?
Why it's important: Be aware of all costs, including management fees and any other expenses, to manage your finances effectively.
Some advisors will hide this or not be totally clear up front. Make sure you probe them on this question.
4. What Are Your Qualifications?
Why it's important: Qualifications and credentials indicate the advisor's expertise. Ensure they have the necessary knowledge to address your specific financial needs.
In order to sell securities, financial advisors are required to pass licensing exams by FINRA.
Having academic and professional training and education is a good indicator that your advisor is plugged into the world of finance and understands its complexities.
Additional credentials, such as the CFP or CFA designation can give you further confidence that your advisor has undergone rigorous professional education.
5. How Will Our Relationship Work?
Why it's important: The level of access and communication with your advisor can impact your financial planning. Clarify how often you'll meet and communicate.
6. What's Your Investment Philosophy?
Why it's important: Ensure your advisor's investment approach aligns with your goals and risk tolerance to achieve long-term success.
7. What Asset Allocation Will You Use?
Why it's important: Diversification is vital for managing risk and generating returns. Understand your advisor's strategy for asset allocation.
8. What Investment Benchmarks Do You Use?
Why it's important: Benchmarks help evaluate investment performance. Ensure your advisor uses relevant benchmarks to gauge your portfolio's success.
9. Who Is Your Custodian?
Why it's important: An independent custodian (such as a bank or broker-dealer) adds a layer of safety and transparency to your financial management. Independent custodians ensure the safekeeping of clients' assets by holding them in segregated accounts. This separation of assets protects clients from the risk of loss or mismanagement by the custodian or other financial institutions.
10. What Tax Implications Do I Face If I Invest With You?
Why it's important: Understanding the potential tax consequences of your investments is essential for maximizing your net returns.
11. What's Your Approach to Risk Management?
Why it's important: Your advisor should have a clear strategy for managing risks and protecting your investments. This should make sense to you and if it does not don’t stop asking about it until it does.
12. Can You Provide References or Client Testimonials?
Why it's important: Feedback from past clients can offer insights into the advisor's track record and client satisfaction. If they will not at least let you talk to someone they work with how confident are they in their services?
13. How Do You Stay Informed About Industry Trends?
Why it's important: Staying informed about industry trends ensures that your advisor is up-to-date and can adapt to changing market conditions. Look for an answer here that makes sense, or better yet ask them about some current financial trend (by reading Dinner Table Discussions!) and see if what they have to say makes sense.
14. Do You Have a Written Financial Plan for Me?
Why it's important: A written financial plan provides a clear roadmap for achieving your financial goals and serves as a valuable reference.
15. How Do You Handle Market Volatility and Economic Downturns?
Why it's important: Understanding your advisor's approach during challenging economic times can help you prepare for market fluctuations.
Final Thoughts…
Selecting the right financial advisor is a significant decision that can impact your financial future. By asking these 15 key questions, you can ensure that the advisor you choose is well-suited to your unique needs and can provide the guidance necessary for your financial success.
Remember that an informed decision today leads to a more secure financial future.
