Financial advisors can provide a powerful resource in reviewing your assets, providing advice, and helping you develop the best strategies to achieve your financial goals. A good financial advisor will be analytical and act ethically with your best interest in mind. However, finding the right financial advisor can take time. Discussing your financial position with strangers may feel uncomfortable, and it can be difficult to know who to trust. One way to feel more confident in choosing the right advisor for you is to understand which questions to ask your financial advisor.
Your task in the interview process is to find a professional who understands your goals and can help you reach them. The following questions will help you know if you've found the right person, even if you're new to investing and hiring your first financial planner.
By law, advisors who are fiduciaries are held to a higher standard. They must put your best interest above their own, disclose potential conflicts, and cannot earn a commission from recommended products. In contrast, most broker-dealers must only meet the lower standard of recommending "suitable" products, which leaves you open to less-than-ideal suggestions and hidden fees.
The Department of Labor's 2017 "Fiduciary Rule" has more people claiming fiduciary status, so it is critical to obtain confirmation — preferably in writing — that your advisor acts as a fiduciary 100% of the time.
A financial planner's specialization should align with your financial needs and goals. For example, are you only looking for help with IRAs and 401(k)s early in your career, or do you need comprehensive assistance with a broad range of financial considerations? Some examples include:
Trusts and estate
Your chances of finding a long-term, trusted advisor will increase if you determine precisely what expertise and services they can provide now and in the future to help you reach your financial goals.
Just as you would research a surgeon's track record for a particular medical procedure, you should verify the past performance of someone who will help define your financial future and the quality of your retirement years.
Ask the advisor for examples of clients similar to you who benefited from their expertise. If the advisor offers to have you contact those clients, that's even better.
Financial advisors who say they work with everyone raise a red flag as a jack-of-all-trades, master-of-none. If your advisor's specialty aligns with your needs, you have a better chance of them being able to offer the specific kind of guidance you seek.
This alignment could be with your:
Stage of life. Early career, established family, recent or pending divorce, pre-retiree, retiree, etc.
Specific wealth status. Early accumulation, stock options, middle or upper middle class, high net worth, etc.
Profession. Doctor, college professor, corporate executive, entrepreneur, etc.
By having worked with other clients similar to you, an advisor will likely have accumulated resources and experiences that prove valuable to your situation.
The size of a financial advisor's practice doesn't necessarily determine its quality; however, you're looking for an advisor whose healthy practice has a sufficient number of satisfied clients to be an ongoing operation. Advisors with more clients can justify strong support teams that let them focus on what's most important to you: quality communication and portfolio management. You don't want an advisor so overwhelmed that they cannot actively manage your assets and provide timely advice. Ask any advisor you interview how many teammates comprise their practice. Are they a sole practitioner or do they work with a team to provide comprehensive financial advice such as portfolio construction and management, financial planning, estate planning, and perhaps even trust services?
Financial advisors are often paid a percentage of the Assets Under Management (AUM), so they’ll set a minimum investment for a client to open or maintain an account. Taking on clients with fewer investable assets could affect profitability and their ability to stay in business.
Other advisors will define a specific client base with an arbitrary minimum investment level. Still, others may choose not to establish a minimum investment but to charge minimum or fixed fees.
Whatever your financial advisor's reason for establishing a minimum, by meeting it, you’ll be a valuable client to an advisor with whom you can look forward to a long-term relationship.
Before proposing an investment strategy, a financial advisor must understand your financial situation, goals, time horizon, available resources, and personal risk profile. Within that context, they can explain how your money will be invested and what types of investments they prefer.
Your financial advisor should monitor your investment performance actively and rebalance holdings as needed to meet your long-term goals.
Your advisor should track your portfolio's performance regularly to be sure it can meet your long-term goals. Ask them to define success regarding your specific financial goals to get a glimpse into what they value, so you know whether your values and theirs are a natural fit.
Understand your advisor’s plan for surviving market volatility. An appropriately diversified portfolio will resist losses during market downcycles, but your advisor should make appropriate adjustments to protect your portfolio in the long term.
Financial planners and financial advisors work under various fee structures. To have a transparent, conflict-free relationship, you might focus exclusively on fee-only advisors, who are paid solely for their time, knowledge, and money management activities. Fiduciary advisors further ensure transparency because, by law, they can't be commissioned on products they recommend.
As mentioned previously, some financial advisors are compensated by taking their fees as a percentage of Assets Under Management (AUM). Marketwatch reports that a typical fee might be 1% of AUM, possibly decreasing as the amount invested increases. Other advisors may charge a flat fee for specific services or an hourly charge.
Be sure to ask any advisor you interview for their fee schedule. They should have a document summarizing their fees on hand to share with you. Clarify all the fees you could face, including those related to specific investments, before you formally hire any advisor.
You might propose negotiating with a fee-only advisor if you feel the fee doesn't match the proposed services. A relationship must be fair for everyone involved if it is to last.
A fair fee will likely balance the range of services received and the amount of money invested. For example, 1% of $250,000 is $2,500 per year, which a planner may consider too little for investment management and financial planning services. Conversely, a $2,500,000 portfolio at that same 1% fee is $25,000, which may be too much even for comprehensive investment and financial planning.
One solution could be a negotiated fixed monthly or annual fee — regardless of investable funds — to know you are receiving all the services you desire.
Have an advisor identify upfront all the costs you could be facing. For example, if your financial advisor handles your investments, you must cover any trading or brokerage costs and custody fees. Investments in funds can also trigger fund-related fees.
You may also encounter add-on fees if your financial situation goes beyond investment management and standard financial planning. For example, trusts, estate issues, business succession, and charitable giving could be considered beyond an advisor's standard services. Be sure to get a clear definition.
As an existing client or prospective client of a registered advisor, you must receive their ADV and CSR forms, which provide a detailed breakdown of the services and fees involved.
Be sure your financial advisor uses a well-known, reputable third-party custodian such as Charles Schwab, Fidelity, or LPL Financial to hold your investment and retirement accounts. Using a custodian protects investors from their advisors going rogue since their authority becomes limited regarding what they can do.
Custodian involvement also grants you FDIC and SIPC insurance for your funds and provides online access to monitor your accounts.
Hopefully, your relationship with your financial planner will be a long one. However, regardless of the level of trust developed, you should meet at least once a year to stay actively engaged in monitoring investment performance and making any needed changes to your strategy or portfolio balance.
Part of that engagement can take the form of questions to ask your financial advisor regularly.
Markets will fluctuate, and you may see changes in your portfolio through regular updates you receive on your investments. However, if you aren't being updated, insist on seeing the latest report and reiterate the need to be kept informed.
When reviewing a report, your primary concern is if your current investment strategy is appropriate for existing market conditions and if that strategy is still on schedule to reach your goals. If you have doubts or can't conclude that from the report you receive, initiate a conversation with your advisor.
Reaching your financial goals requires having enough resources to contribute to your investments and savings. You may have to follow a specific budget to do so.
If you have any concerns about the best budget, your advisor can help design one for your long-term and short-term goals. It’s important to share detailed information if the budget is to be realistic. Your budget will be based on your yearly earnings, savings, and the regular and extraordinary expenses you expect to face. Make sure you update your advisor with life changes at least annually so that you can fine-tune your budget and/or investment needs to remain on track.
Every financial plan is unique. Your financial planner may start with a template but will customize it to reflect your specific situation. However, that process may leave some blind spots that could create problems in the future.
You can determine blind spots in two ways:
Ask your advisor what else you can do to save more for retirement, spend less, be better prepared for emergencies, or increase the returns on your investments.
Reflect on financial behaviors you feel you can improve on and share those potential improvements with your advisor to integrate them into your plan.
The COVID-19 pandemic allowed many people to test their emergency readiness, and many failed. While no one could have forecasted a global pandemic, life will always throw you curveballs.
By building an emergency fund, you’ll be better equipped to weather such events without affecting the pace of your financial plan. An open, trusting relationship with your financial planner can result in recommendations that keep your long-term plans on track.
In the short term, your advisor can recommend tax breaks you’re unaware of or help you invest your money in ways that lower your taxes.
Organizing where your assets are held once you retire can be even more valuable. Strategic tax planning can affect how much of the money you withdraw from investments you get to keep and how much you have to pay in taxes. Lastly, well-crafted estate planning can minimize how much inheritance your heirs lose to taxes.
As crucial as minimizing your tax burden is to your savings and investments, it should not be the sole driver in your investment decisions.
Tax regulations provide ample opportunities to save money, such as contributing to tax-advantaged retirement accounts, making deductible charitable donations, and claiming tax credits or exemptions during tax preparation. Regulations constantly change, so opportunities open and close, and timing is often critical.
Your financial advisor may be able to help you minimize your tax burden. If not, you may want to seek the help of a tax professional.
Financial planning and investing are not set-it-and-forget-it activities. Change is constant in your circumstances, the markets, the economy, and even your goals. You must revisit and revise your strategies regularly to ensure that your performance is on track and that your investment selections are still viable. Much like flying an airplane over a long distance, you want to course-correct as needed to reach your final destination.
If started early, a retirement plan can span several decades, during which you will cross various stages of life. Many of the changes that occur will be unpredictable and possibly damaging to your plan. Time plays a vital role in long-term plans such as retirement — primarily because of compounding — so it’s essential to catch issues early and correct them.
You can pinpoint weaknesses and find ways to overcome them by maintaining an ongoing dialog with your financial advisor. For example, the 401(k) you contributed to at a lost job can be replaced with an IRA to keep your retirement account contributions on track.
It’s impossible to predict all the life events that will affect your finances. How do you know if and when you will have children and if they will need college funding? How can you predict your parents' needs as they age and whether you will have to help them? What if you face a divorce?
While each life event presents you with a new challenge, your financial planner has likely addressed them before with other clients and can provide valuable advice. Take advantage of that trusted resource.
Due to constant market changes, it’s important to review your investment strategy as a whole to determine what might be over or underperforming. Investment portfolios should be rebalanced as needed in order to stay on track.
If your advisor anticipates that you may fall short of your goals in the long term, you might be advised to save at a higher rate for some time to catch up. Be clear about your goals so that your advisor can participate fully in helping you reach them.
Your wealth-building plan is vulnerable to countless life events that can derail it. Online and cable newscasts report daily on homes destroyed by fires, floods, or hurricanes. Accidents and illnesses result in unaffordable medical costs, and personal property is stolen or damaged.
Insurance can protect you from losses due to catastrophic events. Not being adequately insured can instantly consume a retirement nest egg that has taken decades to build. Your retirement may be delayed, or your dream of leaving a legacy might be dashed.
Your financial advisor can help you determine if your assets are adequately protected, so make that conversation part of each periodic review.
During advisor selection, you will ask questions to find someone whose expertise fits your needs, whose client base reflects you, and whose values match yours. You're looking for the right person to manage your money — someone you can trust with sensitive financial information and who has the ability to help you meet financial goals.
Once you’ve selected a financial advisor, you'll likely ask more questions, but they’ll be focused on monitoring your advisor's performance regarding your investments. Together you will fine-tune investment tactics and strategies that carry you to and through retirement. The ongoing dialogue created by questions and answers will ensure you are both on the same path.
Sharon O' Day has been writing in the personal finance space for half a decade, with an MBA in Finance from the Wharton School.