Read This Before You Commit to a Financial Advisor

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When my father-in-law was searching for a new financial advisor after a few disappointing years, he asked a couple of friends whom they used.  We ended up interviewing several different advisors together.  It was all new for me, as I had never met with a financial advisor before and wasn’t quite sure what to really ask.  

 

For the most part, we were looking for someone trustworthy who would provide market-matching returns.  But needless to say, there are many other important factors to consider as well.

 

financial advisor sp500 investing like warren buffetMost of the financial advisors that we met with used a lot of financial jargon to show off their smartness.  They could clearly talk the talk of Wall Street.  They used terms like “taper tantrums” and other obscure phrases that I can’t even remember.

 

An Opposite Effect

I assume that they were trying to impress us.  But I can tell you that it, in fact, did the opposite.  Most of the lingo simply went over our head.  If anything, it worked to their detriment.

 

Confused, I began to look up the various terminology and educate myself on what they meant.  It turns out that they were using fancy names for relatively easy investment decisions and market behaviors.  Over the proceeding weeks, I became convinced that my father-in-law didn’t need a fancy financial advisor to manage his portfolio.  

 

A Different Direction

financial advisor I told my father-in-law to give me a couple of months to try out an asset allocation that I thought made sense for him.  Feeling confident after doing much research, I thought I could meet his risk tolerance.

 

Five years later, I can report that my father-in-law is beating the market and is content with the progress.  On top of that, outside a small change in his asset allocation, I haven’t had to do very much else.  It’s been a great buy-and-hold story.  Hopefully there is a continuation of good returns and a positive trajectory.

 

With that said, here are some of the questions that I wish I had asked the financial advisors during our interviews.  I divided them up by categories to follow along easily.

 

Questions to Ask a Financial Advisor

 financial advisorPersonal

  • Are you a fiduciary advisor?

A fiduciary advisor is legally obligated to act in your best interests.  They should also be willing to provide you a written letter that they accept this responsibility.

 

  • Do you work by yourself or with a team?

It’s important to know if you will be communicating directly with the advisor or if you will mostly interface with an assistant or another colleague.  Or course for administrative tasks, it may not matter who you speak with.  But when it comes to handling the strategic aspect of the portfolio, you may prefer to speak with your advisor.

 

  • What licenses, certifications and/or credentials do you have?

Your advisor should have the proper background and licenses to provide you superior service.  It’s important that they either have their Series 6 or 7 and also either their Series 65 or 66.  These exams ensure that they are a Registered Investment Advisor.  Although, the jury is out whether or not it’s important to have passed the CFP (Certified Financial Planner) exam or the CFA (Charter Financial Analyst) exam.  Warren Buffett doesn’t hold either one of these designations, so you clearly don’t have to have either one of them to be a great money manager.  However, it is nice to know that they have furthered their education in regards to investments.

 

  • How long have you been an advisor?

This question should help to ensure that they are not going to be a fly-by-night advisor, who will switch careers on you on a whim.

 

  • What does your average client profile look like?

Who is the perfect type of client for this financial advisor?  How often do they receive new clients?  Is the financial advisor experienced in working with clients like yourself, or do they tend to work with a much different clientele.  It comes down to understanding what their expertise truly is.

 

  • What is the succession planning if something were to happen to you?

This may sound morbid, but it’s an important answer to know.  Would a previously-selected individual quickly step in, or would you be in a bind to find a new financial advisor.

 

  • Could you tell me why your last client left you?  And about the last one you let go?

You want to understand why someone would leave this advisor.  If a client has never left this advisor and he has been in the financial field for a while, that sounds fishy and may be a red flag.  You also should know if there are any reasons that your financial advisor would fire a client.

 

  • How would we terminate our relationship if things don’t work out?

If you find it’s not a good fit down the road, you need to know how quickly you can get out of that relationship and what exactly will happen to your portfolio.

 

  • How long do you plan to be a financial advisor?  When do you plan to retire?

You probably desire to work with your advisor for the long haul.  The best answer that I ever heard to this question was, “I’m going to work until I make you so much money that both of us won’t have to worry about money.”  Whether that response was true or not, I definitely appreciated the message behind it.

 

  • Have you ever been sued or have there ever been any legal actions against you?

Lots of legal affairs can be messy.  No one wants to see a long record of angry and upset former clients.

 

  • What is the smallest, largest, and average portfolio sizes that you manage?

It’s a good gauge to know what type of clients that your financial advisor has and if the advisor can meet your needs moving forward.

 

  • Could you provide client references that I can speak with?

A client reference could provide great insight into the advisor and their practices.

 

  • Why do you think you’d be a good advisor for me?  

Learn why this financial advisor believes he or she offers top-notch service.  Hopefully you will get a feel for their level of customer service and cause you to either feel very comfortable or go in another direction.

 

financial advisorFees

  • How do you get paid?

Is the advisor commission or fee-based?  If your advisor is commission-based, they receive compensation on the products that they sell you.  This means that they may sell you things that are not always in your best interest.  On the other hand, a fee-based financial advisor will either receive a flat fee or receive a percentage of the money that they are managing for you.  Usually if an advisor is fee-based, the advisor has an incentive to put their clients’ interests first.

 

  • How will I pay for these fees and how often?

It’s important to understand how you will be paying for these fees.  It may be taken directly out of your investments, or you may have to pay them out of pocket.

 

  • Do you have a minimum portfolio size or fee?

Find out early if they only work with high-net individuals.  Otherwise you run the risk of wasting your time just to find out that you don’t meet their minimum threshold.

 

financial advisorCommunication

  • How often will you communicate with me?

Do you want them to notify you every time they adjust your portfolio?  Will they be available if you need to speak with them?  How often will they meet with you?  Will you need to schedule meeting with them, or will the advisor call you to schedule a meeting?

 

  • How often will you provide information?

Will the advisor send out monthly letters to their clients?  Do they provide detailed explanations of current investment positions?  Will they take the time to help you understand any financial jargon that you don’t understand?

 

  • Will you help me become a better-educated investor?

If you don’t understand a financial position or really anything related to your investment, will your advisor take the time to help you understand?

 

financial advisorServices

  • Could you describe the firm that you work for?

Is it a large firm with many resources, or is it a smaller boutique firm that can provide you more individualized care?

 

  • Do you offer any additional personalized services?

Do they have access to tax professionals, attorneys, and/or estate planners?  A situation might arise that dictates these types of services in the future.

 

  • What is your typical client experience?

How do they ensure that each client receives personal and professional service?  I have a friend that loves his financial advisor because the advisor regularly wines-and-dines him and invites him to various events.  My friend vows he will never leave his advisor, even if he performs poorly one year, because the customer service is so excellent.  

 

financial advisor best day to invest buyer's remorseInvesting

  • Do you invest the same way for all your clients?

Do they have one financial model that they utilize for all their clients?  Or do they tailor the financial model to the needs of each client?

 

  • Do you invest your own money into the financial model?

If the financial advisor has skin in the game, you may feel more confident in his investment strategy.

 

  • What is the your investment philosophy?

Do they lean towards safer investments, like bonds, or are they more aggressive, selecting high-reward equities?  More importantly, does the financial advisor mesh with your investment philosophy?

 

  • Can you provide a sample financial plan?

A sample financial plan would help you to know exactly what to expect.  You could therefore assess the quality of the product to see if it would meet your expectations.  

 

  • How do you plan to reach the intended returns in the portfolio?

If the financial advisor is promising the moon to you, you should understand how they intend to reach those results.  It would also be helpful to learn how they have been able to accomplish these types of returns in the past.

 

  • What investment strategies can minimize my taxes?

Will they look at your total financial picture to understand ways to minimize your tax burden?  Too often, financial advisors neglect the tax element in pursuit of maximizing your returns.

 

  • What type of investments do you plan to buy for my portfolio?

Will it be a mix of bonds, stocks, and mutual funds or something along those lines that you can easily follow?  My father-in-law at one point had an account with 30 different mutual funds that bought and sold stocks on a daily basis.  His taxes were a mess to compile.  The portfolio was overly complicated and thus was very difficult to follow.

 

  • Do you take into consideration my future Social Security or pensions income as part of my asset allocation?

It’s important to know if future income will affect how the advisor will allocate your investments for the future.

 

  • Do you adjust the portfolio based on potential economic risks, and do you adjustment the portfolio to alleviate these risks?

Will the financial advisor take into account various risks?  How do they plan to handle the ups and downs of the market?

 

  • Do you or your firm receive any outside compensation for recommending certain investments?

They may directly or indirectly receive some type of compensation off of their recommendations to you.  Thus, those recommendations may not be in your best interest as the client.

 

  • Where will my money will be held?

You want to ensure that your money will be in a safe place and not in some Ponzi scheme, like the one Bernie Madoff placed his clients funds into.

 

financial advisorComfortability

  • Finally, you have to ask yourself, “Am I comfortable with this advisor?”

Are there any red flags at all?  If you answer “yes,” then it’s time to continue searching or potentially take the plunge and invest on your own.  

 

So readers, did I miss anything?  Do you have any additional questions that would be beneficial to ask a potential financial advisor?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

51 Comments

  1. Great list, Rob. I think this question will tell you everything about him or her – “Do you invest your own money into the financial model?” It’s like Congress not going on the healthcare plan they make the rest of us subscribe to. If you’re not doing it, why should we?

  2. I really like the question regarding client education. To me, you can tell how passionate the advisor is by the responses that he/she provides. I think that the best advisor is not only trying to help you manage your money, but will also try to provide you some basic education too.
    Leo T. Ly @ isaved5k.com recently posted…Basic Personal Finance ConceptsMy Profile

  3. Mr. FAF and I don’t have a financial advisor yet, but these are all the questions I would ask if I were to find one.
    I hear you on the jargon. Sometimes or oftentimes people think that using complicated words makes them look smart and professional. And it’s unfortunately true in many cases (I.e lawyers). However, it could be a tactic to confuse us and make us tuned out so that they can tell us what to do at the end of the conversation.
    Ms. Frugal Asian Finance recently posted…Food Expense Report – July 2017 – $511.93My Profile

  4. I had a financial advisor for many years. Once I got into personal finance I realize he wasn’t acting in my best interest. I fired him and move all my assets to vanguard index funds.
    According to Scott Alan Turner, with the fiduciary rule in affect they can have you sign a bice document which allows them to un-fiduciary rule themselves.
    Budget On a Stick recently posted…Walking on SunshineMy Profile

    • Wow that’s awful that they can make you sign a document waiving your rights. Definitely shady and not something I’m sure people had in mind when the law went into effect.

  5. Very good comprehensive list! Most people would benefit from a reputable financial advisor since the average net worths are so low. Personally I don’t feel financial advisors are necessary and neither does Charlie Munger. That assumes that the individual has some interest in their finances. If the answer is no, then talk to a financial advisor.
    Jeff – MaximumCents.com recently posted…Habits – Impact Per YearMy Profile

  6. There are many questions here. I didn’t ask this many when my wife got switched to a different advisor. After the first meeting with the new advisor, I didn’t really like the vision of that particular brokerage.

    So we left and since I’m investing it ourself without the additional expense. I do miss the face to face interaction but they were investing way too conservatively for a girl in her 20s.

    I’m glad he showed me a sample portfolio before I committed more money and transferring my own accounts.
    Josh recently posted…Why I Don’t Shop At AmazonMy Profile

    • Thanks for sharing Josh!!! I figured most people aren’t going to ask all the questions but if there were a couple that resonated that they might be helpful 🙂

  7. Questions are good and your list is extensive.
    All Advisors are suppose to act in the client’s best interest, whether fiduciary (I think that is one of those jargon words) or not. It’s good business practice and common sense. An advisor doesn’t want negative publicity from an upset client.

    • I definitely agree that advisors don’t need the bad publicity. They are definitely feeling the pushback at this point with Vanguard and the Roboadvisors invading their territory.

  8. I went through the process myself before deciding I can manage my finances…myself. It was interesting meeting these people who are trying to convince me they have my money’s (and my) best interest at heart. They didn’t even know me, but knew what to do with the cash. All good questions to ask up top….
    Dads Dollars Debts recently posted…100th post- Starting a blog!My Profile

  9. I have a buddy of mine who is a financial advisor. He is trying to get my business and although I would love to help him out, I’d rather just do it myself. I have a feeling that we may not see eye to eye on some things and I’d rather not complicate the friendship. Good list there.
    Mr Defined Sight recently posted…US Credit Card Debt Is Out Of ControlMy Profile

  10. If they could survive that interview process without turning into a jerk they would probably be worth working with. The two I seriously talked to both loved to talk and use fancy terms. However, they both got real quite when I started breaking down their fees and showing them the insane loses I would suffer over 30-40 years.

    I think services like Betterment and Personal Capital are going to force the traditional advisor out or at least force them to quit robbing people. The younger generation coming up is perfectly comfortable with things being done all online if it means saving money.
    Grant @ Life Prep Couple recently posted…Happiness Comes From Progress. So Stop Comparing!My Profile

    • I definitely agree there is more competition than ever which is good for consumers. Hopefully it becomes a win/win relationship for FAs and investors instead of what it may have been in the past.

  11. Wow, you’re thorough, that’s for sure! Definitely sounds like a long interview, but if they’re taking care of your money, I’d say that’s more than appropriate. Like you, I’m more of a DIY’er when it comes to finances, but I’d never completely rule out the possibility of calling in an expert if needed. I think this reflects a lot of things in life – if it’s something important, take the time to do your research!

    Thanks for the thought-out questions, MSM!
    Matt @ Profitable Matters recently posted…Starting In Tech: Why Tech Skills Can Benefit Your Life and How To Get StartedMy Profile

    • I figure people wouldn’t ask every question but some of the questions that really resonated with them. Otherwise you might be there for a couple of days 🙂

  12. Great work with going it alone and doing so well out of it. I keep wondering if we should get a financial advisory, but over here they have such a bad reputation for not working in their clients interests even when they are obligated to do so, that it feels like a bigger risk than putting in the hard yards and learning what to do myself.

    Nice list MSM. I’m not sure that I would have the guts to ask some of those questions though.
    Eliza recently posted…Do your choices reflect your priorities?My Profile

    • Thanks for sharing Eliza 🙂 I figure if your financial advisor gets mad at some of the questions he’s probably not the right person for me. It’s a business relationship that we’re entering into, nothing personal 🙂

  13. Nice list, and a complete one too! I would have ended up with a financial advisor (came close once), if I hadn’t found the Bogleheads forums. Financials for a parent-in-law could get tricky, but glad it worked out!

  14. The big problem is when you are outside of USA that a fiduciary advisor has no legal value and he could say whatever he wants.
    Great advice to find a good advisor but also good in terms of balancing how much effort you will have to put into this.
    Alex @ Asset plus recently posted…High frequency trading no moreMy Profile

  15. Good list! An advisor reached out to us earlier this year and I avoided the conversation for the short-term, but he said he’d reach back out in the fall. Bookmarking this for that time! 🙂

  16. I have financial planner for the big picture because of the way they integrate all aspects of my life into one consolidated plan (i.e. mark risk, taxes, estate planning, legislation changes etc).

    I don’t mind paying for the comfort of knowing that I can focus on what I am passionate about while they cover all the things I am missing in the market.
    Church recently posted…The Financial Art of Saying “Thank You”My Profile

  17. I just left my financial advisor, and those are all good questions. I do find that it’s just as important to listen to the questions they ask you and the ones they don’t. I left mine because he didn’t grasp that my investing strategy was evolving from single stocks and bonds to index funds, and why I was making those changes. Instead, he just kept giving me suggestions.
    Emily Jividen recently posted…Tales of a Gardening Wannabe: Flaming Tongues and a Roll of the DiceMy Profile

    • That’s unfortunate to hear Emily. Sounds like he wasn’t listening to you anymore which is terrible. Especially since you are the client. Hopefully you are in a better place now 🙂

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