In the last post, we talked about how to find a competent financial advisor. This week, I'll give you ten real questions to ask to find the best advisor for you.
Before getting started, I need to give credit for this post's title to my blogging friend, Michal Dinich over at Your Money Geek.
Michael read my last article and told me about his experience helping his mother find an advisor. She didn't know what questions to ask, so he asked them for her.
I'm in favor of everyone who's so inclined to manage their investments and take charge of their finances.
That's always a good thing and can save you a lot of money.
Many in the personal finance blogging community are DIY investors. And they have strong anti-advisor sentiment.
I get it.
And I agree with much of the criticism.
I also believe some of the criticism is a bit over the top.
It will help you discern the differences.
If you haven't read my last post, I encourage you to go back and do that to gain perspective on what I'm about to say. You can find it here.
Greed often rules
If you haven't seen this classic, I highly recommend it. One of Gekko's most memorable lines (at least for me) is, “Greed is good, Bud.”
(Michael Douglas played Gekko while Charlie Sheen played Bud Fox, Gekko's apprentice).
Sorry, I digress…
One perception of advisors, even today, is they're a bunch of money hungry, product selling, high-rollers who wear designer suits and eat out every night at Ruth's Criss on the money they confiscated from you on the commissions they made from churning your account!
I think that's a gross overstatement of the truth.
In the last post, I showed you how many brokers wear two hats. The first is a salesman. The second is as an advisor.
Each role operates under a different legal standard. I introduced the fiduciary standard in the last post.
Now let's compare the fiduciary standard to the lesser suitability standard, the most common standard before the pressure came from fee-only RIAs.
Fiduciary vs. suitability standard
In my last post (you've read it, right) I talked briefly about the standards of care under which advisors operate.
I highlighted the fiduciary standard, which is the highest legal standard of care.
There is a second standard many advisors adhere to – the suitability standard.
The suitability standard says that any product offered must only be suitable for the client based on their objectives and financial circumstances.
It says nothing about putting the client's interest ahead of their own.
A broker under this standard can recommend a fund that may be suitable but not in your best interest.
Be sure to understand these two standards before starting the interview process.
My advice is to stick with someone who only operates as a fiduciary.
Decide what you want your advisor to do for you
Do you want a full financial plan? Investment management? Retirement plan only? College funding and retirement planning? Debt reduction or student loan refinancing assistance? Insurance review and recommendations? Estate planning? All of the above?
Understanding what you want is essential to making the discussion with your advisors more productive.
With that, here are the questions I recommend.
The ten questions
I placed them in the order that makes sense to me. Feel free to ask them in the order you think best.
Use some or all of them. Some may be more important for your situation than others.
The advisor should be able to answer these all with ease.
If in the interview, they talk more than they listen, that's a red flag.
You want an advisor interested in you, not blowing their own horn about all the great things they and their firm have to offer.
With that, here are the questions.
1. Why did you become a financial advisor?
Asking this question gets to the heart of what motivates the advisor.
If the advisor fumbles on this question, you'd have to ask why.
Maybe they got into the business initially because they needed a job. Or perhaps because it's supposed to be a great career to make money.
When I initially got into the business, both of those were true.
Over time I quickly realized how much good I could bring to people by helping them become confident in their financial futures.
People's motives and perspective can change over time. Mine did.
I would answer this question differently now than I did when I first entered the business.
Have your BS sensor on high. You should be able to quickly sort out those who are sincerely interested in your well-being.
2. Why did you choose your current firm?
If the advisor owns their firm, the answer is easy. If they're an advisory with a larger firm, listen for the industry-speak.
My experience with these larger firms is that their brokers are somewhat lazy. I don't mean they don't work hard.
What I mean is they use their firm's descriptions, rather than doing their research on funds, investment strategy, etc.
Not sure how that correlates with advice in your best interest.
3. How do you research investments?
At the end of the day, you want to work with someone who thinks for themselves.
Advisors who do can tell you why they use the funds they've chosen and how the funds fit into the strategy they employ.
4. Why do you recommend the funds you offer?
The question is another one to flesh out the truth. The advisor should be able to tell you the reasons they chose the funds they offer.
Is it costs? Performance? Is it because the funds best fit the investment strategy they employ?
Good advisors have an investment strategy they've thought about and can articulate to you in simple terms without industry jargon.
If it's more industry speak, move on to the next advisor.
5. Do you have sales quotas you have to meet?
Sales goals are the lifeblood of the brokerage industry. It's less prevalent in RIAs but still a part of the culture.
After all, the firms need to generate revenue and be profitable. They do that by the asset management or planning fees their advisors make.
The pressures of not meeting those goals at the end of the month, quarter or year can be tremendous.
If you're working with someone who takes commissions, the pressure to sell a high commission product to meet the sales goal can be overwhelming.
That's where one of the more significant conflicts lies.
It's another reason I recommend fee-only advisors. Though there may be pressure to meet goals, it won't involve a product that generates a commission.
It will involve completing a financial plan or proposing an asset management solution to facilitate your investment goals.
6. What conflicts of interest do you have? How do you handle those?
The question is important. As I said in my first article on the topic, no one operates in a conflict-free environment.
If I get paid to manage your money or do a financial plan, that automatically puts me in a position where I'll have conflicts.
If an advisor says they are a fiduciary and don't have any conflicts, pose the mortgage question to them.
The gist is if you have a mortgage you're considering paying off out of money the advisor manages for you, how would they handle it?
Telling you to use those funds to pay it off gets them a pay cut. That's a conflict for them.
How they answer speaks to their integrity, IMO.
7. Do you offer financial planning? If so, how do you charge for it?
Some make it a part of their investment management services. In other words, if you hire them to manage your money for a percentage of assets type of fee, they throw in a financial plan as part of the package.
There's nothing wrong with this unless all you want is a financial plan and not investment management.
I like firms who offer standalone financial planning for a separate fee. You should be able to get the services you want and not be forced into something you don't.
8. What is your process for determining what's best for me?
Every advisor should be able to answer this questions without hesitation.
If they can't, you're probably going to be disappointed in their service and recommendations.
You deserve to know what to expect when working with your advisor.
9. How do you get paid?
Of course, this is one of the most important questions.
However, if the advisor hasn't passed your screens from the other questions, it doesn't matter.
Below are some secondary questions to ask within the larger fee question.
Are they fee-only or fee-based, offering both fees and commissions (the hybrid model)
If fee-based, what percentage of their business is fee vs. commission? Why is it that way?
What circumstances would cause you to choose commission over fees?
10. Why should I hire you?
Every advisor will tell you they're the best thing on the planet. In most cases, all advisors have access to the same products and services.
What you want to know is how they think they are different than other advisors.
If they start regurgitating industry speak about investment returns, research capabilities, and the like, I would move on.
Don't waste your time with someone who hasn't had an original thought about what they do.
Too many people hire an advisor based on a recommendation from a friend, family member or colleague at the office. That's a great place to start. It shouldn't be the only criteria. The problem is that everyone's circumstances are different. Their needs may not match yours. Their personality may be a fit for their advisor. You may not be a fit.
If you're looking for a long-term relationship with an advisor, make sure your personalities are going to be compatible. It is said that knowledge is power. I disagree. Knowledge is just knowledge if not applied. The application of knowledge gives us power.
Remember, know what you want in an advisor before starting the process. That's a prerequisite to finding the right one.
Be an educated consumer. If you're looking for an advisor, use these questions to help you discern who to hire. Or use these as a foundation to develop your own based on what's important to you.
Many advisors are salespeople equipped to sell you stuff, including why you should work with them. Going to these interviews prepared will put you in control of the meeting and allow you to make a better decision.
Now it's your turn. If you work with an advisor, how did you choose them? If you're considering an advisor, did you find these questions helpful? What other items would you add to the list? I welcome your feedback in the comments below. Thanks so much for stopping by.
Like what you see? Get our latest content straight to your inbox.
We write about personal finance, lifestyle, and overcoming adversity.
Plus, I'll send you a copy of Pursuing a Better Investment Experience.