In this article we will discuss the 8 questions to ask a financial advisor that will help you assess their expertise, fees, and approach!
First, What Exactly Is a Financial Advisor?
Historically, the role of a financial advisor has been to provide clients with investment strategies and investment management. Thanks to the evolving financial landscape, today a great financial advisor can also help you manage your money through the process of comprehensive financial planning.
A financial plan often includes advice with: retirement planning, investment planning, tax planning, insurance planning, estate planning, and more. Personal financial advisors who offer both investment management and financial planning as a bundle often refer to it as wealth management services.
What Are 8 Questions You Should Ask a Financial Advisor?
Because financial advisors have many different service models and specializations, it’s important to do your homework when evaluating who to partner with.
Here are eight important questions to ask before hiring a financial advisor:
1. Are You a Fiduciary?
This is one of the most important questions to ask a potential financial advisor. A fiduciary is legally obligated to act in your best interest. In working with a fiduciary, you are more likely to receive objective advice. You can feel confident that your plan isn’t motivated by incentives to sell you commission-based financial products.
It’s important to note that even fiduciaries can have conflicts of interest when working with clients. The important distinction is that fiduciaries are required to disclose these to their clients, reinforcing their commitment to acting in their client’s best interest.
Not all financial advisors are fiduciaries. Many advisors at banks, insurance companies, or large investment firms work under commission-based arrangements, where they earn compensation by selling financial products.
It’s also common for advisors to work for companies that require that they are a fiduciary when offering financial planning, but that they remove their “fiduciary hat” when they want to sell products. This hybrid arrangement is usually referred to as an advisor being “fee-based.”
The best way to make sure that your financial goals take priority is to hire a financial advisor who is a fiduciary in every aspect of their work, commonly referred to as a “fee-only” advisor.
2. Who Is Your Ideal Client?
This question helps you determine whether your potential advisor is experienced in working with clients like you. Ideally, you want to find a financial advisor who specializes in your stage of life or career path.
Some financial advisors focus on working with high-net-worth individuals, while others focus on helping young families with student loan debt or those preparing for retirement.
Beyond asking your financial advisor who their ideal client is, you can also search for a fee-only financial advisor based on their specialization using websites such:
- XY Planning Network
- NAPFA (The National Association of Personal Financial Advisors)
- CERTIFIED FINANCIAL PLANNER® Board (CFP®).
3. How Do You Get Paid?
Knowing if your financial advisor is a fiduciary is a helpful hint towards understanding how your financial advisor is compensated. There are three common advisor compensation models:
- Fee-only: These financial planners and financial advisors usually charge a percentage of your investment assets, a flat fee, or retainer for financial planning services. They do not earn commissions on product sales and are almost always fiduciaries.
- Fee-based: Advisors who are “fee-based” can charge you direct fees for financial planning advice but can also earn commissions from products they sell. This creates potential conflicts of interest as they don’t always serve as fiduciaries.
- Commission-based: These professionals make money solely from commissions on the sale of financial products including mutual funds, insurance policies, and annuities. The commission rates that they receive may incentivize them to recommend specific products over others. Commission-based advisors are almost never acting as fiduciaries.
Understanding how your advisor is paid helps you identify the incentives behind their advice. Are you paying your advisor for objective advice or are they incentivized to sell you products?
4. What Are My All-In Costs?
Once you understand how your advisor is paid, it’s important to ask about the all-in costs of working with them. Common costs can include:
- Financial planning fees, annual retainers
- Assets under management (AUM) fees billed from your investment accounts
- Fund expense ratios (particularly for mutual funds and ETFs)
- Additional transaction fees for buying and selling investments charged by your custodian
- Tax implications, including capital gains taxes that you might pay to switch to your new advisor
- Administrative fees for managing accounts, including fees for paper statements, checks, wire transfers, etc.
Many financial advisors offer bundled services, combining investment management with broader financial planning services. While cost isn’t the only factor you should consider, it can be helpful in evaluating if the value you’re receiving is worth the investment.
5. How Will Our Relationship Work?
Ask your financial advisor how they prefer to communicate and how often you’ll meet. Are they available for questions between meetings? Will you receive quarterly, semi-annual, or yearly updates? Are they accessible via phone, email, video call, or in person?
Understanding this can help ensure you get personalized financial advice that fits your needs and expectations.
Advisor engagement models can vary greatly. Some examples include:
- Ongoing Engagement Model: Long-term relationship usually covering investments, retirement planning, taxes, estate planning, and more. Sometimes an ongoing engagement model is exclusive to investment management, while other times it includes comprehensive financial planning. This engagement is usually offered for a flat-fee, retainer, or assets under management (AUM) fee. You will likely meet with your advisor 1-4 times per year.
- Project-Based Engagement Model: One-time or occasional services like creating a financial plan or updating a retirement strategy. You may be quoted a stand alone price for this engagement or hourly rate. You will likely meet a few times with your advisor during the course of the engagement.
- Commision-Based Engagement Model: Selling a product such as life insurance or an annuity. Once the sale ends, there is usually no obligation for the sales professional to provide you with formal ongoing advice.
Clear expectations about how you will engage with your advisor can improve the likelihood that you have a smooth and productive partnership.
6. Do You Offer Financial Planning or Just Manage My Investments?
Now that you know how you will meet with your potential advisor, you should have very clear expectations about the services they offer.
Many financial advisors focus solely on investment management. They will generally answer planning related questions but don’t have a planning centric service model.
Other financial advisors, especially CERTIFIED FINANCIAL PLANNER® professionals (CFP®), specialize in comprehensive financial planning services and offer investment management as an add-on.
Maybe you are only looking for investment advice. Alternatively, you might be looking for help with your budget and don’t have investment related questions. It’s important to know whether your advisor will help you craft a complete financial plan or simply manage your investment portfolio.
7. What’s Your Investment Philosophy?
Most financial advisors have their own approach to investing, known as their investment philosophy. Satisfaction with your financial advisor is often based on transparency with how they help you manage your money.
Some financial advisors use a passive investment philosophy. Passive investing typically involves investing in index funds using ETFs or low cost mutual funds. This creates exposure to hundreds or thousands of stocks and bonds without the need to predict which individual companies will perform well.
Passive investing is used by advisors who believe that trying to outperform the overall market is not sustainable over the long-term. These advisors look to capture the aggregate returns of the total market.
Alternative, some advisors use an active investment approach, where they buy and sell investments with the goal of beating the stock market. Active investing involves purchasing individual stocks, bonds, and alternative investments. Performance can vary dramatically depending on the advisor’s luck and skill, with potentially higher costs due to trading and risk.
Understanding your advisor’s investment approach can help you to reduce unrealistic expectations and confusion.
Example: If your financial advisor has a passive investment philosophy, you might be confused when they don’t attempt to trade your accounts as the market is falling. Alternatively, if your financial advisor has an active investment philosophy, you might be overwhelmed with the frequency of trade confirmations and charges you see.
8. What Tax Hit Do I Face If I Invest with You?
Taxes can greatly affect investment returns, so ask how your advisor will minimize tax liabilities when structuring your portfolio.
You might find that your potential financial advisor wants or needs to sell your after-tax holdings in order to transfer your investments to their firm. This can create short-term and long-term capital gains tax consequences.
Be sure to have your advisor project the tax consequences of transferring your investments to their firm so that you can decide if the tax cost makes sense.
Be sure to ask a potential financial advisor if they offer tax-loss harvesting, tax-efficient investment strategies, and how they would optimize your withdrawal plan in retirement to minimize taxes.
Is It Worth Hiring a Financial Advisor?
Ultimately, the value of hiring a financial planner or financial advisor depends on your individual situation. The right advisor can offer confidence, peace of mind, and help you avoid costly mistakes.
Whether you’re navigating retirement planning, trying to manage your investments, an advisor can provide expert guidance tailored to your needs.
Other Tips to Consider When Choosing a Financial Advisor
When evaluating potential financial advisors, consider these additional tips:
Discover How Stage Ready Financial Planning Can Help You
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We help you create a clear and easy to understand plan so that you can retire with confidence and live your ideal lifestyle. Schedule your intro call today!
FAQs
How Do I Prepare to Speak to a Financial Advisor?
Many financial advisors offer an introductory call that requires very little preparation. The goal of this call is to learn more about you and see if there’s potential for a good partnership. To prepare for an intro call, it can be wise to have a list of questions ready. Be sure to have an idea of your financial goals to ensure you’re getting the most out of the conversation.
If you’ve decided to take the next step in a potential partnership with a financial advisor, you will likely need to gather your financial documents. The documents you may be asked to gather include:
- Current bank and credit card statements
- Loan statements
- Investment account statements
- Tax returns
- Estate documents
- Insurance policy statements
- And more
How Much Money Should You Have Before Talking to a Financial Advisor?
While there’s no set amount of money required to speak with a financial advisor, some advisors have fee and asset minimums. Read carefully on your prospective advisor’s website to see if they outline any fee or investment minimums that might cause you not to be a good fit.
Regardless of your current net worth, talking to the right financial advisor can help you create a financial plan that aligns your resources with what matters most to you.
How Do You Get the Most Out of Your Financial Advisor?
To maximize your relationship with your financial advisor, it’s helpful to stay engaged and communicate regularly. Try to respond promptly to their communications or requests for documents.
Whenever possible, update them on important life changes to ensure they adjust your investment strategy or financial plan. Remember that your financial advisor can only help you if they have all of the relevant information and if you take action with their advice!