Some people choose to manage money on their own whereas others choose to employ a financial advisor. Both routes are perfectly fine and are based on a person’s individual situation.
Maybe you are new to managing money or maybe you’ve come into newfound wealth all at once. Regardless of your situation you may be wondering what questions to ask financial advisors. Asking the right questions will help you understand if a financial advisor is right for you and if you’ve selected the appropriate advisor.
In general, financial advisors help you manage your money. They can cover everything from investing, life insurance, savings, etc. A good financial advisor does not simply fit you into a cookie cutter financial plan, but rather advises on investments and strategies based on your financial goals. Upon working with an advisor he or she will usually ask you a series of detailed questions regarding your current financial situation, your future goals (buying a home, sending your children to college, paying off debt, etc.), and your overall risk tolerance.
The number one question to ask financial advisors is in regards to their certifications. After all, this is someone who will be handling most if not all of your wealth. However, not all advisors are created equally. You may find a slew of advisors with a bunch of different letters at the end of their name and not know what they mean. Below are the most popular (1):
Chartered Financial Analyst (CFA): Considered the gold standard of financial advising due to the rigorous testing involved to obtain this certification. To obtain a CFA, applicants have to past a series of tests at three different levels. A CFA has a wide knowledge of money management.
Certified Financial Planner (CFP): A CFP is an advanced certification indicating the professional has at least 6,000 hours of professional experience and has passed a rigorous exam. Advisors with this certification focus on planning across a wide range of areas such as investments, estate planning, and insurance.
Certified Public Accountant (CPA): A CPA is better suited for someone with regards to working through business or personal taxes. Becoming a CPA requires 150 hours of classes and is a well-regarded title. He or she has a deep understanding of accounting and tax principles.
Make sure to also check with BrokerCheck to confirm he/she are properly registered.
A fiduciary is someone who has taken on the responsibility of acting in the best of interest of another. Some, not all, financial advisors are fiduciaries which means they must act in a client’s best interest. An advisor who is considered a fiduciary must manage your assets with your best interest in mind which may including recommending tools or products in which they do not make a commission. Not all advisors are governed by fiduciary duty but must adhere to a suitability standard set by the Financial Industry Regulatory Authority (FINRA (2). Under this standard, an advisor must have reasonable belief that his/her recommendations are suitable for their client. To check if your advisor is a fiduciary, you can verify a CFP through the boards’ website. In my experience this is not a common question to ask a financial advisor but it is super important.
Financial advisors typically operate on either a fee or commission-based structure (sometimes both). With a fee-based structure, you are charged by the hour, or as a % of your assets (standard is 1% but can vary). A strictly “fee only” advisor does not earn commission. With a commission-based model, financial advisors work on a commission, based off products they sell to clients. With this model, while the client may never get a bill from the financial advisor, he/she may end up paying for investments with higher than average fees as a result of the advisor earning a commission on that product. There are certain advisors that work off both commissions and fees. In this case as the client you would pay a fee (either hourly or as a % of assets) and a commission from the products the advisor sells. If you don’t want to work with someone who works off a commission make sure to look specifically for “fee only”. Make sure your advisor communicates their all in costs-you don’t want your portfolio to get eaten up by fees. Don’t forget to ask about the tax bill associated with your portfolio.
Are you the sort of client who wants frequent consultation or are you comfortable to let your portfolio ride waiting for a quarterly check in? Make sure you find someone who communicates the way you want. You may need to be a little flexible but overall you should be on the same page about how and when to communicate.
If you’re going to entrust someone to manage your money you have to believe what they’re selling. Talk to your advisor about his or her investment style and whether it matches up to your own risk tolerance. Also, make sure to discuss your portfolio benchmarks. If you’re asset allocation is mostly based on tracking to the S&P, then attempting to secure a return above and beyond market average is likely not attainable.
It is important that you know what questions to ask financial advisors before making a decision to hand over your assets. Regardless of how you approach the situation, don’t feel pressured to decide. Let the advisor know you’re considering other options so they know you’re not deciding on the spot. You want to feel comfortable with this person-if they make you uneasy, it’s probably not a good match. You are paying someone to make handling money easier. Your advisor should be able to put things in layman terms so you can better understand. If the advisor uses jargon you don’t understand and can’t clarify, walk away.
Below are some resources to help you find a financial advisor near you.
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