You wouldn’t trust just anyone with your kids, your mental health or even your hair, so you should be just as picky when it comes to the person who manages your money. But with so many financial advisors out there, it can be tough to know if you hired the right person for the job.
One way to find out: Before you sign on, ask advisors a few probing questions to find out if they have your best interests at heart and understand what you need as a client. Here are nine to get you started.
You don’t want to be seen as just a commission check for someone in sales or a guinea pig for someone brand new to the industry.Michael Mustian, founder, WisePath Advisors
1. How do you get paid?
There are many ways financial advisors get paid for their services, including commissions from selling certain funds, insurance commissions, charging a percentage of assets under management, flat fees and hourly fees.
“Understanding of how a financial advisor gets paid will help clear up whether they are working in your best interests or not,” said Charles Ho, a certified financial planner and the founder and CEO of Legacy Builders Financial. That’s because advisors who earn money by selling you certain investments or products will likely give you biased advice that benefits their wallet above yours. Fee-only advisors, on the other hand, don’t have any conflict of interest when it comes to managing your portfolio.
He added that asking advisors how they’re paid can help you weed out inexperienced professionals. “There are many financial advisors who are so new and still drinking the Kool-Aid of whatever firm they are at that they don’t have a clear understanding of how clients are being charged fees,” he said.
2. How many clients do you work with?
Finding out the size of an advisor’s client base can tell you a lot about what kind of service you can expect to receive. For instance, if advisors have a lot of clients ― say, over 200 ― they’re most likely financial salespeople and not financial planners, said Michael Mustian, an accredited asset management specialist and the founder of WisePath Advisors. They need to continually get more clients in order to make a living, which he said poses a conflict when trying to do what is in the best interest of the client.
On the other hand, if advisors don’t have many clients ― fewer than 40 ― they may be just getting started and may not have much experience. He said the sweet spot is 75 to 100 clients for one advisor, though a person can handle closer to 150 with a team for support.
“The big reason this is important is ... if you are having someone put together a plan for you today, you really want them for the long haul to make the necessary adjustments,” Mustian said. “You don’t want to be seen as just a commission check for someone in sales or a guinea pig for someone brand new to the industry.”
3. How do you track success for your clients?
If you pay an advisor to manage your investments and grow your wealth, you want to make sure you’re getting results. When meeting with potential advisors, you should find out how they measure and track client success over time.
Jirayr R. Kembikian, a certified financial planner with Citrine Capital, said it’s important to look at not only the quantitative financial metrics but also the behavioral changes you’re working together to improve. “Review these metrics at least on an annual basis to determine if the relationship is successful or needs to be modified,” he said.
4. How is your money invested?
You probably wouldn’t want to visit a nutritionist who eats nothing but pizza and fries or a doctor who smokes two packs a day. So when it comes to financial advisors, you want to know that they practice what they preach. That’s why you should ask advisors how their money is invested.
“If they are not willing to tell you or show you how their own money is invested, then maybe they don’t completely believe what it is that they are telling you,” said Michael Troxell, the principal and founder of Modern Financial Planning. “That would be a good indicator whether to continue the discussion or not.”
5. What does your ideal client look like?
Financial advisors have varying areas of expertise and investment styles. One advisor could be a great fit for one client while a poor match for another. That’s why you should ask advisors you’re considering working with what their ideal client looks like.
“If they provide a general answer like ‘I work with anyone and everyone who needs financial help!’ and you are just looking for general advice, they are probably a good fit for you,” said Ron Strobel, a certified financial planner and the founder and CEO of Retire Sensibly. “However, if you’re looking for specific advice like help with complex stock options or splitting up your assets due to a divorce, you may want to keep looking and find an expert in those areas.”
6. Are you a fiduciary 100 percent of the time?
A fiduciary is a person who is legally and ethically required to act solely with your best interests in mind. Just about anyone can call him- or herself a financial advisor, but only certain professional designations are held to a fiduciary standard, such as certified financial planners and registered investment advisors. Others, such as stockbrokers and insurance agents, are not.
“A common response from a dually registered agent might be a sidestep answer, such as ‘When I am managing your investments, yes, I am always a fiduciary,’” said Justin Chidester, a certified financial planner at Wealth Mode Financial Planning in Logan, Utah. “But it doesn’t address the fact that there are still aspects to their advice and what they do where they may not be a fiduciary, such as selling you an investment product in the first place or perhaps an insurance policy.”
7. How do you communicate with clients?
Everyone has different communication styles, including when working with a financial advisor. You might enjoy frequent phone calls and emails or prefer a more hands-off approach.
“It’s fair to expect regular communication from your financial advisor, but ‘regular communication’ is subjective,” said Leah Hadley, the president of Great Lakes Investment Management in Cleveland. “Would you like a quarterly phone call? Do you prefer to meet in person, or do virtual meetings fit better into your schedule? Does your advisor meet with clients quarterly, semiannually or annually?” she said. Find out how your advisor prefers to communicate with clients and ensure it meets your expectations.
8. What is your investment philosophy?
According to Vid Ponnapalli, a certified financial planner and the founder of Unique Financial Advisors, different financial advisors have different investment philosophies. Essentially, an investment philosophy is a set of guiding principles that helps advisors make proper financial decisions. “It explains what goes into the process of choosing appropriate investments for a given situation of their clients,” he said.
For example, advisors might say their philosophy is to focus on long-term investing, a globally diversified portfolio and low-cost exchange-traded funds. The advisors could explain that their choice of investments depends on factors such as the client’s risk tolerance or tax situation.
It’s important to ensure your advisor’s philosophy aligns with your values and goals. At the very least, he or she should have one and be able to explain it to you.
9. How will you make sure I understand and follow through on your advice?
Financial advisors typically create comprehensive financial plans for their clients, which cover all the major elements of personal finance, said Kevin Mahoney, a certified financial planner and the founder and CEO of Illumint. “Too often, though, advisors deliver this tedious, unfamiliar information in a lengthy, legal-like document,” he said.
Understandably, clients can feel overwhelmed by their plan and become paralyzed by the many daunting tasks in front of them. “Add a demanding job or young children to the mix, and it’s unlikely that the client will change much about their financial circumstances,” he said. So before hiring an advisor, you should confirm that he or she understands the type of communication, assistance and accountability you need to achieve results.