Finding a financial advisor can be stressful. You want someone you can trust, is competent, and has your best interest in mind. Here are 12 questions you can ask financial advisors so you know you can trust them.
1. Are you a Fiduciary?
A Fiduciary has to put your interest before their own interest, even if they make less money. The best example is paying off a mortgage. If you have enough money to pay off your mortgage, a Fiduciary would show you the data as to why it’s better to keep or pay off your mortgage. They’d let you know how this impacts their fees. And they would discuss the conflicts of interest involved with making this decision. When I’ve done an analysis of this kind 9 times out of 10 it’s better to pay off the mortgage. Have them sign a fiduciary oath to verify they are always a fiduciary.
2. How are you paid?
Advisors can be paid commissions, hourly, based on a percentage of money managed, or on a monthly, quarterly, or annual retainer. If you understand how they are paid, you can ask important questions about conflicts of interest.
3. What conflict of interest are there working with you?
ALL financial advisors have conflicts of interest. If they receive commissions, they get paid more the more money you invest. If they get paid based on a percentage, there’s the same conflict. If they’re paid hourly, are they qualified to do your analysis? or do they have to do a lot a research someone else might not have to do. If they’re retainer-based, will they do less work because they aren’t charging you a lot? A good advisor will be up front and transparent about their conflicts BEFORE you start working with them.
4. How much do you cost?
A good advisor is worth their fees. If you don’t know how much they’re charging, you cannot evaluate that. Ask your prospective advisor exactly how much they charge and what you get for that service.
5. What services do you offer?
If you know what they are going to do for you, you know whether it’s worth the fee. There’s a difference between an advisor that works for a life insurance company and sells insurance and a Certified Financial Plannerâ„¢ that offers comprehensive financial planning, investment management, and tax planning and preparation.
6. Do you work for me? or a company?
In other words, whose interest do you have to look out for? Most brokers work for their brokerage firm. They have a duty to put the brokerage companies interest ahead of yours. Whereas an independent registered investment advisor is a fiduciary and must put your interest ahead of their own, even if it means they make less money. Yes, this is a repeat of question 1. But it’s worth asking twice in a different way.
7. Are you independent?
An independent advisor isn’t tied to a specific company. They are free to give advice on numerous products and services. The uncommon example that most savvy investors miss is when they start working with Vanguard or another similar company. Vanguard will suggest Vanguard funds because that’s what makes them the most money.
8. Are you fee-only?
A fee-only advisor has the least amount of conflicts of interest. They get paid by the client and not the company they work for.
9. Are you a CFP®?
For more than 30 years CFP®s or Certified Financial Plannerâ„¢s have been the standard of excellence for financial planners. They’ve met extensive training and experience requirements and continue to meet education and ethical requirements.
10. Do you offer comprehensive financial planning or just investment management?
When you’re comparing fees, it’s important to know if you’re getting just investment management or comprehensive financial planning and investment management. Comprehensive financial planning offers goal analysis, cash flow analysis, tax projections and planning, investment analysis and management, insurance review (P&C, Life, Health, Disability, Long Term Care), and estate review. Some advisors help you pick funds. There’s a clear difference.
11. Do you offer tax service?
For retirees and investors with stock options, tax planning and preparation and filing can be an integral part of your financial plan.
12. Have you been disciplined?
The best way to figure this out is to ask for the ADV Part 2 or look it up at https://adviserinfo.sec.gov/.
Takeaway
A lot of these questions should be apparent on their websites. But if a friend is recommending a financial advisor or you met someone at church and you want to know you can trust them, these are the questions I’d ask them.
