July 2022 7 ESSENTIAL QUESTIONS TO ASK A FINANCIAL ADVISOR

Planning for retirement can be daunting, so it’s no wonder that some choose to enlist the help of a financial advisor. Yet when the time comes to meet with an advisor, some people may feel lost. What questions should you ask a financial advisor?

How can you know whether an advisor is trustworthy? Or whether they have your best interests in mind? Whether they’re worth the cost?

Here are seven essential questions you should ask a financial advisor. Whether you’re starting to work with an advisor, or still searching for the right person, these questions can help. Asking the right questions can help ensure an advisor is working for your financial success.

1. ARE THEY A FIDUCIARY?

This may be one of the most important questions to ask a potential financial advisor. Not all financial advisors are fiduciaries – there is an important distinction.

So what is a fiduciary? Why should it matter to you?

A fiduciary is a professional with an obligation to work toward the best interests of their clients. For financial advisors, being a fiduciary means adhering to strict legal and ethical standards. These standards are governed by the Security and Exchange Commission (SEC) or other regulatory bodies.

Fiduciary duty is a legal and ethical standard that requires fiduciaries to put their clients’ interests above their own. This results in fewer conflicts of interest and more trustworthy recommendations. A fiduciary is free to recommend the best products and services to meet your financial goals.

NON-FIDUCIARY ADVISORS

Non-fiduciary advisors do not have to uphold the same ethical standards as fiduciaries. Generally, they only hold to a standard known as a suitability obligation. This means they have to make recommendations that are suitable for their clients.

While their recommendations may meet your needs, their suggestions may have hidden incentives.

For example, an advisor may be a broker or broker-dealer pushing a product that earns them a higher commission. While this product might be suitable to meet your needs, there may be better options.

When evaluating a financial advisor, find out if they are bound by fiduciary duty. Discover as early as possible whether there are any potential conflicts of interest. You want an advisor who will act in your best interest.

2. HOW DO THEY GET PAID?

Financial advisors are professionals like any other and are paid for their time and expertise. It’s important to understand the distinctions between different cost structures. A good question to ask a financial advisor is how they make money.

Most advisors have a few different cost structures: commission, fee-only, and fee-based.

Advisors paid by commission earn their income based on products sold. These products may include mutual funds, annuities, or insurance.

When working with commission-based advisors, you may find yourself steered toward products that don’t fully align with your best interests. Such advisors may make recommendations that benefit them financially but which aren’t the best option for you.

Fee-only advisors only make money off the fees they charge clients. This tends to result in more transparent pricing structures. Different advisors and firms have different fee structures, but the most common types of fees are:

• A flat fee for the specific services they offer
• Hourly fees or consulting fees – you’re charged based on how much time the advisor spends working with you.
• Retainer fees – for instance a flat annual or monthly fee
• A percent of assets under management (AUM), often averaging around 1%

Fee-based advisors take an approach blending fee-only and commission. These advisors start with a simple fee structure but may earn a commission selling products on top of their other services. As with commission-based fees, there may be conflicts of interest in working with these advisors.

When deciding on whether to work with a financial advisor, ask how their fee structure works and how they get paid. If you can learn from the outset how they make money, you will have fewer surprises down the road.

3. WHAT ARE MY TOTAL COSTS?

Besides the fees an advisor charges for their services, there are other costs to consider. For example, if your portfolio includes mutual funds, there will be extra operating expenses paid from your returns. Other possible costs include brokerage costs, fund fees, transaction fees, or marketing costs.

Sure, all these costs will show up in your annual prospectus, but how many people take the time to read those?

At first glance, some of these fees may not seem like much. But like any costs, they can add up to a significant difference in your returns. Ask your advisor what your all-in costs will be, and have them walk you through any potential hidden fees.

It’s your money, after all. You want to know exactly where it is going.

Related to this, ask the advisor if there are any minimums. Some advisors require a minimum investment, and it’s better to find this out as early as possible.

4. WHAT EXPERIENCE AND QUALIFICATIONS DO YOU HAVE?

If you wanted to climb Mt. Everest, you would need to hire a guide to make the ascent. When choosing a guide, I’m sure we’d all want to find someone with a lot of experience.

You would want a guide who knew the route, what to prepare, the pitfalls to avoid, and who understood the risks. I’m not sure anyone would want to attempt that summit with a guide who had little to no experience.

EXPERIENCE

If you’re looking to hire a financial advisor, you’re looking for an experienced guide and partner. You want someone to help you navigate the complex world of finance and investments. You’ll want an advisor with experience working with clients like you.

This is important. An advisor may have years of experience at a firm, but did their daily work involve helping clients like you? If you’re planning on retiring in the next few years, you’ll want an advisor with experience helping other retirees.

Of course, even an advisor without a lot of relevant experience may still be a good fit. They may make up for lack of experience in other ways that benefit you.

Regardless of their experience, learn as much as you can about an advisor. Ask them to tell you their history in the industry and what experience they have helping people like you. Learning their story will show whether they can actually help you achieve your goals.

CERTIFICATIONS

Besides their experience, you’ll also want to find out what kind of certifications and credentials they have. Are they licensed? What kind of educational background or training do they have?

With doctors or lawyers, you know you’re working with a professional holding a specific degree. This is not always true of financial advisors. People who call themselves financial advisors can have a wide range of experience or qualifications. The burden is on you to find out their background.

If you were looking for someone to help with taxes, you would likely look for a Certified Public Account (CPA). That title suggests a level of trust and expertise. There are similar designations for financial advisors.

For instance, you may be searching for an investment advisor. You’ll want to see if they are registered as an Investment Adviser with the SEC. You can use the SEC’s Investment Adviser Public Disclosure website to see if they are properly registered. With this site you can also look up their firm’s Form ADV for more information.

Or you may be looking for a financial planner to help you with the bigger picture of your finances. A Certified Financial Planner (CFP) is a professional who meets strict standards set by the Certified Financial Planner Board of Standards. A CFP would hold to the fiduciary standard mentioned above, and their advice would meet ethical standards.

Asking about an advisor’s certifications can help you decide if they will offer trustworthy advice.

DISCLOSURES

Finally, you’ll want to find out if they have any disclosures on their record. If they have faced any regulatory or disciplinary actions in the past, you’ll need to know. That way, you can ask for an explanation and make an informed decision about working with them. 

There are a couple online tools that will help you vet an advisor. One is the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck. Another is the SEC’s Investment Adviser Public Disclosure website. Both can be valuable resources when researching an advisor or their firm.

5. WHAT SERVICES DO THEY PROVIDE?

This is where you need to ask yourself a question: what are you looking for in a financial advisor? Are you only looking for someone to manage your investments? Or do you need someone to provide deeper wealth management or financial planning services?

You may have an interest in other services, such as help with taxes, insurance, or Medicare. Many financial advisors provide a range of services, which can include:

• Retirement planning
• Tax Planning
• Insurance Planning
• Medicare Planning
• Trust and Estate Planning

It’s helpful to know whether the advisor specializes in helping certain types of clients. If you’re looking to build a robust retirement plan, you’ll want an advisor who specializes in retirement planning. You may also be looking for related services, such as help with Medicare, life insurance, or inheritance issues.

When meeting with an advisor, ask what additional services they may have and whether they can meet all your financial needs.

6. WHAT IS THE CLIENT EXPERIENCE LIKE?

When evaluating a financial advisor, you’ll want to get a feel for how the relationship will work. Ask them to give you a sense of a typical client experience.

Some advisors love getting to know their clients and building an ongoing relationship. They maintain an open door and communicate with their clients often. Others may prefer a more hands-off approach, providing quarterly or annual updates.

To get a sense of the working relationship, ask the advisor questions like these:

• Will this be a one time transaction, or will we have regular meetings? If so, how often will we meet?
• How often do you provide updates to clients?
• Are you available for phone calls whenever I have a question, or do we need to schedule an appointment?
• What is the appointment scheduling process like?
• How often would we meet in person?
• Are you available for virtual meetings via FaceTime or Zoom?

Make sure the advisor has a communication style that meets your needs and preferences. You may prefer an advisor who only reaches out on occasion, or one who likes to maintain more regular contact. Use that first meeting to see whether the advisor fits with your personality and communication preferences.

Another beneficial question is to ask who would be available to offer help if your advisor is not available. For instance, if you have a question while they are gone on vacation, is someone else available to help? Is there a backup plan in place in the event your advisor is out due to severe illness? You want to be sure that someone will be able to help you.

7. WHAT’S THEIR INVESTMENT PHILOSOPHY?

When choosing an advisor, you want to find someone who has the same investment philosophy as you. There are many different approaches and philosophies among investors. Your advisor’s approach should align with your beliefs, financial goals, and current life stage.

Ask specific questions of your advisor. Do they create a custom portfolio for your individual needs? Or do they offer a few standard asset allocation options you can choose based on your goals?

WHAT IS THEIR APPROACH TO RISK?

One important area to discuss with a potential advisor is risk. What is their approach to risk?

You’ll need to determine your own level of risk tolerance to help you make an informed decision.

If you’re younger and starting to save for retirement, you may be willing to take on more risk. In this case, you may want an advisor that favors aggressive growth. If you’re more risk averse, it may be good to find an advisor with a more conservative philosophy. They’ll help you focus on preserving assets.

Whatever your investing philosophy, make sure your advisor operates with a similar approach.

DO THEY FACTOR IN TAXES?

Taxes are another important area of discussion. Do they account for taxes as they invest? How will taxes affect your returns?

Ask them to what extent they factor taxes into their approach, and if they offer any help in tax planning. Taxes can be a particularly complex subject, so any help they can provide on that subject may add significant value.

There may be other philosophies behind the advisor’s approach. Examples include value investing in undervalued stocks, or impact investing in companies and funds that have social or environmental impacts. The more your advisor’s philosophy and beliefs align with your own, the better.

HOW DO THEY MEASURE SUCCESS?

Finally, ask how they measure success. Ideally, they will define their progress based on your timeline and within the bounds of your risk tolerance. Your advisor should not focus on earning a higher commission alone. Their definition of success should be the extent to which they meet your financial goals.

There are a lot of factors to take into consideration when choosing a financial advisor. Take the time to do your research, to vet the advisor, and to ask the right questions. The more questions you ask, the more confidence you can have that you’re choosing the right person.

If you decide that hiring a reputable fiduciary is the next step on your financial journey, we can help. Contact Strategic Wealth Designers today for a consultation.