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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.
Most 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
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
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.
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.
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?
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.
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.
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.