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Updated on Tuesday, May 4, 2021
Finding the right financial advisor is essential to getting the most out of their services, and asking informed questions will help you determine if a certain financial advisor is right for your goals and budget. Think of the process as a job interview — you want to investigate whether this person is really right for the important job of managing your money.
Below, we cover 11 key questions to ask before choosing a financial advisor so you can ensure you’re comfortable with the background, investment strategies and fees of the person you entrust with your financial future.
- 1. What are your certifications?
- 2. Are you a fiduciary?
- 3. Do you have any disclosures?
- 4. How do you get paid?
- 5. Are there any other costs or fees?
- 6. What services do you offer?
- 7. What are your typical clients like?
- 8. How will I be able to communicate with you?
- 9. What is your investment philosophy?
- 10. What are your benchmarks for portfolio success?
- 11. When will I know when to change my strategy?
1. What are your certifications?
Because there are no licensing requirements to become a financial planner in some states, investors should take caution when entering into a relationship with a professional. To ensure that your investments are being managed by someone who has undergone a formal training and credentialing process, take a look at their certifications.
Certain certifications require extensive training, coursework and an examination process, as well as ongoing education. Looking at an advisor’s certifications can also give you a better sense of what services and areas the specialize in. Certified financial planner (CFP) is one of the most common types of financial advisor certifications, and these professionals tend to specialize in services such as retirement planning or estate planning. Certified financial analyst (CFA) is another common yet prestigious certification. CFAs focus more on analyzing investments and building portfolios. If you want someone to help you address the tax implications of your investments, on the other hand, a personal finance specialist (PFS) might be worth looking out for, as they are tax experts who can handle both your taxes and investments.
Make sure to research any certification that your advisor claims to have to see what actually goes into it. While the certifications mentioned above require extensive coursework, not all require as much effort or knowledge to acquire.
2. Are you a fiduciary?
While many financial advisors have the legal responsibility to act in a client’s best interest, not all have that obligation. The former are fiduciary financial advisors, who are required by law to put their clients’ interests ahead of their own. Advisors not bound to the fiduciary rule often abide by the suitability rule instead, which only stipulates that the advisor must make recommendations that are suitable for the client but not necessarily the absolute best for them.
As such, non-fiduciary advisors may recommend investments that may charge a higher fee or give them a larger commission, even if it wouldn’t be the best investment strategy for their clients. In other words, they can be more worried about their own bottom line than yours, which is why it’s important to find a fiduciary financial advisor. That way, you can ensure you’re working with someone who truly has your best interest in mind.
You can narrow your search for a fiduciary by looking for advisors who are registered with the SEC or who hold certain certifications, such as the CFP or chartered financial consultant (ChFC) qualifications. However, you should also independently verify that the advisor is a fiduciary during your consultation.
3. Do you have any disclosures?
Much like asking whether a financial advisor is a fiduciary, it’s important to ask whether they have any disclosures on their record. This includes any regulatory or disciplinary issues, such as a criminal or civil action in court or an administrative proceeding before the SEC within the last 10 years. Financial advisors should be able to provide a record of any past complaints, and investors should be wary of advisors with a track record of misconduct.
Before entering into an agreement with a financial advisor, you should also check a firm’s disclosures in its SEC-filed paperwork, which can be found online or through an SEC branch. A firm’s Form ADV will provide information on whether there have been any issues with a financial advisor or their firm in the past, as well as details on the nature of the issue and how it was resolved.
4. How do you get paid?
Different financial advisors have different types of fee structures. Understanding how a financial advisor earns their income will help you determine what kinds of costs you may incur and how the advisor may approach the relationship.
Here are some of the most common fee types charged by financial advisors:
- A percentage of assets under management (AUM): One of the most common ways that financial advisors charge clients, particularly for ongoing portfolio management, is based on a percentage of the assets they manage for the client. Larger portfolios are generally charged at a lower rate. The average rate for portfolios ranges from 0.59% to 1.18% of assets under management.
- Hourly rate: Certain financial advisors charge an hourly fee, typically for a service like ongoing consulting on specific financial topics. With this fee type, advisors bill their clients based on how much time they spend working on their account.
- Flat fee: Financial advisors may also charge a predetermined amount for a basic service, like an annual review of a client’s portfolio or the one-time creation of a financial plan.
- Commissions: Financial advisors may receive commissions if their clients use certain products or invest in particular funds. This may create conflicts of interest as an advisor may be financially incentivized to make certain recommendations.
- Performance-based fees: Advisors can charge fees that are based on a percentage of portfolio profits — sometimes only if the financial advisor exceeds a predetermined performance benchmark. While some financial advisors charge performance-based fees, many shy away from this compensation structure because it can incentivize more risky investments.
Understanding your own financial needs will help you determine which payment structure would provide you with the most value. Before signing up with a financial advisor, try to estimate the cost of each payment structure, or ask the advisor what kind of costs you can expect for a given portfolio size. Flat or hourly fees may seem more expensive, for instance, but can be cheaper in the long run than an asset-based fee, depending on how involved the advisor is in managing your portfolio.
5. Are there any other costs or fees?
Financial advisors often pass certain investing costs along to their clients, in addition to the fees they charge for their services. A client may also owe costs paid to a brokerage firm for having an account on their platform, as well as costs associated with trading stocks and other securities.
You should know what kinds of investment costs you can expect to pay in addition to your financial advisor’s fees. You’ll also want to be aware of the tax implications of your portfolio and whether your advisor is taking steps to minimize these costs, as some advisors don’t. Your financial advisor should help you estimate your tax burden, given your portfolio size and structure.
Knowing your total costs of work with a financial advisor — as opposed to just the fee the advisor charges — can help you assess whether it’s truly in your budget.
6. What services do you offer?
Financial advisors can offer a wide array of services. Understanding which services you’re likely to need can help you find a financial advisor who can provide those services and who has experience working in the areas in which you need help.
Services an advisor can provide include:
- Portfolio management
- Debt management
- Estate planning
- Retirement planning
- College expense planning
- Insurance planning
- Charitable contribution planning
You should also keep in mind that some advisors offer more holistic wealth management services, which encompass every aspect of your financial situation. Meanwhile, others focus solely on managing your investments — these advisors won’t necessarily consider your broader financial situation or integrate your investment portfolio with financial planning.
You’ll also want to pay attention to which services an advisor specializes in providing. For instance, some may specialize in helping their clients prepare for retirement, while others may focus more on estate planning and building a family’s financial legacy. If you know there’s a particular area in which you’ll need extensive assistance, it is important to find an advisor who has deep knowledge and expertise in that area.
7. What are your typical clients like?
In addition to understanding which services a financial advisor offers, it’s important to know what kinds of clients they typically work with. Some manage the assets of a few wealthy individuals with complex needs, while others work with a large set of clients with more standard goals.
When you’re entering into a relationship with a financial advisor, ask what their typical clients are like. This includes the typical size of their clients’ portfolios and their clients’ usual long-term goals. Some advisors also specialize in certain types of clients, like younger investors, doctors or business owners.
Account minimums are a good indication of what types of clients a financial advisor typically serves. If the advisor requires clients to invest a significant amount of assets, that’s a sign they generally only work with clients who can afford that level of commitment. On the other hand, if their account minimums are low — or if they don’t require a minimum investment — their services will likely be more accessible for the average investor.
8. How will I be able to communicate with you?
Before making an agreement with a financial advisor, they should set an expectation for how you’ll be able to communicate with them and how often. Many financial advisors give their clients a quarterly status update, as well as a longer annual strategy meeting, but clients with more specific needs or complex situations may need to meet more often. It’s important to set the expectations for communication in advance, so you can hold your advisor accountable if you aren’t able to communicate with them as much as you’d like.
Similarly, it’s important to find out how your advisor typically communicates with their clients to make sure that aligns with your preferences. Some prefer phone calls while others may communicate mainly over email. Your advisor should let you know the best way to get in touch with them in case you need to let them know of any changes that may impact your portfolio.
Finally, you’ll also want to consider whether you’d prefer to be able to meet with your advisor in person or if you’re willing to conduct all your meetings remotely. In the latter case, it may not matter where your advisor is located. On the other hand, it may be important to find an advisor with a local office if you’d prefer in-person meetings.
9. What is your investment philosophy?
Investment strategies are one of the most important differentiators between financial advisors. Advisors have different approaches, both in terms of what types of investments they prefer, as well as how they typically diversify portfolios and how they respond to certain market trends.
Certain financial advisors may prefer passive management, meaning they try to match the returns of a market benchmark through a buy-and-hold approach. Meanwhile, others believe that active trading is the best way to maximize their clients’ assets by attempting to beat the market through more frequent trading.
In addition, some advisors offer pre-built model portfolios that they match their clients to based on their preferences and needs, while other advisors will build customized portfolios for each client. Financial advisors should be able to explain why they believe their investment strategies are optimal for the success of their clients’ portfolios.
10. What are your benchmarks for portfolio success?
Clients can assess their portfolio’s performance against broader market trends, but there are also different barometers for success. It’s important to know what growth financial advisors will target for their clients’ portfolios, as well as how they’ll measure whether a portfolio is effectively meeting their clients’ goals.
Some analysis can be as simple as comparing portfolio growth against popular mutual fund indexes, like the S&P 500 or Dow Jones Industrial Average (DJIA). Depending on the index fund, they may include large cap, mid cap, or small cap stocks. For more complex investment strategies, there may be higher benchmarks for success, especially if the financial advisor is pursuing investment strategies that carry more risk.
Investment benchmarks can be misleading, though. Ultimately, the financial advisor’s main objective should be helping you towards your financial goals instead of successfully reaching some esoteric criteria. You should consider it a red flag if an investor promises any particular portfolio results — if it sounds too good to be true, it probably is.
At the end of the day, what’s essential is setting clear goals with objective criteria for success, and understanding how your financial advisor measures your portfolio’s performance. This will help you determine whether you’re actually on track to meet your financial goals.
11. When will I know when to change my strategy?
There are a lot of circumstances that can inform whether you should change your investment strategies — financial advisors should be able to help you navigate changes in both the market and your personal life, so your financial future can stay on track. You’ll be able to anticipate some of those changes, like a job change or the birth of a child, but others may come as a surprise, such as a sudden windfall or an unexpected market collapse.
Ask a financial advisor how they can help you plan for some of those life changes, and also which strategies they may be able to recommend, such as insurance policies, to help ensure your family’s financial security. A financial advisor should be able to adjust your overall savings goals and portfolio strategy to accommodate changing circumstances.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.