Finding the right financial advisor can be overwhelming. There are so many terms and different options. But vetting a financial advisor will help you make an informed decision. The right financial advisor is your teammate and is going to be very involved in your finances, so choose wisely.
Questions To Ask Yourself
Before you start your search, it’s important to define what you need. Is there a specific issue prompting you to seek help right now? Is there something unique about your financial situation?
Many financial advisors have specialties, like doctors or lawyers. You can find someone who specializes in certain stages of life, like young professionals or retirees. Many specialize in planning needs such as divorce, business ownership or student loans. Some even focus on different careers or lifestyles.
Knowing what you need help with will narrow down your search. These days more and more advisors work with clients remotely, which makes it easier to find a specialist. Both XY Planning Network and Garrett Planning Network will filter advisors by specialty if you aren’t sure where to start.
Editorial note: Jessica Goedtel is a CFP and member of the XY Planning network and receives no commissions or perks for mentioning the network in this article.
Questions You Shouldn’t Have To Ask A Financial Advisor
Before you ever talk to a financial advisor, you should be able to have all of the following questions answered by their website. If they are not transparent on any of these issues, you may not want to work with this financial advisor.
If they’re a credentialed advisor, you can also review their disclosure forms, such as their ADV or Form CRS on the SEC’s Investment Adviser Public Disclosure website for even more details.
How Are They Paid?
This is the most important thing you should know before talking to an advisor. There are three broad categories of advisor compensation:
- Fee-only. These advisors get compensated only by the fees you pay to them directly. This can mean a fixed dollar amount or an hourly rate. It can also mean a percentage of the investments the advisor manages or even a percentage of your net worth or income.
- Commissions. These advisors are paid via a commission on the products they sell you, such as life insurance or specific investment products.
- Fee-based. This is a mixture of both fees and commissions.
Choose the option you are most comfortable with before reaching out to any advisor.
Do They Have Anything Negative on Their Record?
Licensed financial advisors are required to disclose customer complaints, regulatory actions, civil or criminal matters, bankruptcy filings and employment terminations. You can find this information on FINRA’s BrokerCheck or the SEC’s Investment Adviser Public Disclosure site.
BrokerCheck deals with advisors licensed to sell securities, and the SEC site handles Registered Investment Advisors. Don’t worry if you aren’t sure which one to use. Both sites share information and the advisor you are looking up should come up on both.
If the advisor works for a larger firm, look that up as well to see if the firm has disclosures. There’s a lot you can learn about a potential advisor from these sites. While a lack of complaints or legal actions doesn’t guarantee an advisor’s quality, the presence of any of these should be a red flag to avoid working with someone.
Are They a Fiduciary?
A fiduciary advisor is legally and ethically bound to act in your best interest. This means putting your needs ahead of the advisor’s own needs. A fiduciary is required to disclose any potential conflicts of interest, which helps give you confidence that their recommendations are right for you and not just something to line the advisor’s pockets.
What Are Their Credentials?
There’s a whole alphabet soup of designations for advisors. But what do they mean, and how do they help you?
Some common designations include:
- CFP—Certified Financial Planner. CFPs have gone through coursework and extensive testing on several pillars of financial planning in addition to a 4,000 hour experience requirement. They are held to rigorous professional and fiduciary standards to maintain their credential.
- CFA—Chartered Financial Analyst. CFAs core focus is investment analysis. Like the CFP® designation, they have met educational and work experience requirements and have passed a notoriously difficult test.
- CPA—Certified Public Accountant. A CPA is a licensed accountant. In the financial planning world, this usually means that they have some experience with taxes.
A good financial advisor doesn’t need any credentials, but they can be a quick way to vet someone’s knowledge or experience. A credential often requires continuing education and reporting requirements to maintain it. It’s a good sign that the advisor is staying current with their knowledge.
If you can’t find the answers to any of these questions easily, consider going to the next advisor on your list.
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Questions You Should Ask a Financial Advisor
Once you’ve finished your vetting process and have narrowed down your list of potential advisors, it’s time to interview them. Here are questions you should ask when meeting with a financial advisor for the first time.
How Will We Work Together?
Every financial advisor has a different process. They may meet with you a few times, give you a plan and recommendations, and send you on your way. Other financial advisors will meet with you on a regular basis, such as annually or quarterly. Have the advisor detail their process to you.
Discuss how you can reach out to them with questions. If you’re hiring them for a specific situation, such as a college funding analysis, they may not be able to answer questions on your retirement plan. If they meet quarterly, are you able to reach out between meetings? If you’re getting a one-time financial plan, will you be able to come back in a few years for updates? Often these options come at an additional cost so discuss them up front.
What Services Do You Offer?
When people think of the term “financial advisor,” they usually think about investments. Financial advisors help with investment strategy, but they may have other services available. Other offerings can include tax planning and preparation, debt-repayment strategies, estate planning, retirement planning and bookkeeping.
This can be helpful if you have special planning needs. For example, let’s say you’re a resident physician, and you have a ton of student loan debt. You could find a specialist who works in that field, and they’ll help you go over different repayment plans. They can also review different tax strategies to reduce those payments and help you file your income certification each year.
Review with the advisor what offerings are included in their fee, and what is at an additional cost. They may also refer out services to other professionals, such as a CPA. If that’s the case, discuss how that relationship works and the costs.
How Do You Avoid Conflicts of Interest?
This question expands on their fiduciary duty. How the advisor is paid can help reduce conflicts, but not always. Conflicts of interest should be disclosed, but see if they can take it a step further. Ask them how they actively avoid conflicts when giving advice. Even better, ask for a few examples.
How Can You Help Me?
You’re at the end of your interview, and hopefully the financial advisor has listened to your concerns and thoughts. When they answer this question, they should be able to address your specific needs. A good financial advisor will make you feel heard and understood.
Above all else, interviewing a financial advisor is the best way to find out if they are a good fit for you. They could have all the right boxes checked, the best credentials and the right fees. But if you aren’t comfortable with them, then they aren’t the right choice for you. Trust and rapport are foundational to a successful client-advisor relationship.
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