Selecting a financial advisor can be a stressful process. You want to ensure you’re well informed about your advisor’s ability and that your goals are aligned. Unfortunately, you can be left with more questions than answers when researching financial advisors. Worse, you may not always know exactly what to ask as you evaluate your personal financial advisor.
Consider asking these six questions to your future financial advisor..
1. How Are You Paid?
One of the first questions you should ask your financial advisor is how they are paid. In most cases, advisors are paid either as:
Though the terms sound similar, they have a vastly different impact on your financial results.
Fee-based advisors may charge fees on a percentage of assets managed, fixed flat fee or hourly fee for each client they help, but they will also take commissions from other sources like the financial products they sell clients. It can be difficult to discern where each commission is coming from, and how much you’re losing as a result.
Fee-only advisors, on the other hand, never take a commission based on product sales. This pricing model eliminates a conflict of interest and focuses on their ability to provide unbiased advice. Fee-only advisors will only charge fees on a percentage of assets managed, fixed flat fee or hourly fee. They are upfront about their pricing structure and can easily answer questions about their fees. Make sure to ask what the minimum fee is and how the fee changes over the lifetime of a partnership.
2. What Are Your Credentials?
Did you know that though many states require financial advisers to pass an exam or other requirements to practice, there is no formal state or federal law requiring specific credentials for financial advisors?
As a result, it’s possible that your financial professional has little or no experience when they accept you as a client. It’s also possible they could claim that they are CFP® professionals even if they aren’t.
To double check the credentials of your advisor, visit the Certified Financial Planner Board of Standards, Inc. website and see if their name is listed.
CFP® professionals have delved deeper into their field than those who are not certified. This extra effort will translate into more strategic moves for you, and impact your financial future, so it’s wise to look for an advisor who has the credentials.
3. What Is Your Track Record?
Your finances are among the most important tools in your life, so finding the correct person to manage them may be a little nerve-wracking. Each financial advisor you speak to will be quick to tell you that you’re in trusted hands. Rather than telling you how great they are, they should be showing you.
Do a bit of due diligence and check in on your financial adviser's record. See if any complaints have been filed against your advisor or their business. A few resources can use are:
Also, make sure you ask your potential financial advisors if they have any case studies or testimonials from past clients. Financial advisors with a strong track record will be pleased to answer your questions and showcase their clients’ success.
With a bit of research, you can give yourself peace of mind, backed by facts.
4. How Will You Create My Financial Plan?
A comprehensive financial plan should start from the beginning. Financial advisors who are fixated on the future rather than the present can weaken your financial foundation as your plans start to come to fruition.
The best financial advisors will get to know where you currently stand financially and plan the most strategic steps to help you reach your goals.
A tailored financial plan should define:
- Your financial starting line
- How to protect your existing assets
- Growing or sustaining your wealth
- Managing taxes effectively
- Planning for retirement strategically
- Preserving wealth and your family legacy
If your financial advisor hasn’t asked about your current financial situation before making recommendations for the next step, you should consider it a red flag.
5. How Do You Approach Employee-Sponsored Benefits?
Even if they aren’t offered through your financial advisor’s organization, your advisor should be encouraging you to look at your employer-sponsored benefits.
Employer-sponsored benefits are commonly underutilized and often it’s because employees aren’t informed of what their options are. Find a financial advisor who can help you navigate the options that are in your best interest.
For example, your potential financial planner should help you understand employer:
- Matching 401(k) contributions
- FSA (flexible spending account)
- Stock options
Each of these offerings can help you plan and prepare for your financial future, but it’s difficult to take advantage of the benefits if you don’t understand them.
6. Do You Work Under a Fiduciary Oath?
Fiduciary financial advisors have taken the Fiduciary Oath which means they are legally obligated as financial advisors to work in their clients’ best interest at all times. Rather than identifying products that are "suitable" to your financial circumstances, they will steer you toward decisions that are truly best for your financial health.
It’s always best to find an advisor who puts your best interest above everything else. Luckily, all fiduciary financial advisors are also usually “fee-only” advisors, which means not only can you be confident your financial advisor is working for you, you can also be clear about their payment structure upfront and how it supports you.
Make sure your financial advisors are open about their certifications, track record, and fee structure. These are the three indications that you’re working with an advisor who cares about you, versus their bottom line. A financial advisor should consider your personal finance goals and the current market trends to strategically invest in what will help you reach your goals.