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8 Questions To Ask When Choosing A Financial Adviser Or Financial Advisor

8 Questions to Ask When Choosing a Financial Adviser

Your finances are your world. Remember to ask the right questions before putting your trust in someone to oversee them.

Hiring a financial adviser is a big decision. You are entrusting your finances to someone, and you want to ensure they will be the right fit. If you are feeling a bit overwhelmed by the prospect of choosing a financial adviser, read on for a few important questions to ask when interviewing them.

1. What are your qualifications? Do you have any certifications?

First and foremost, you want someone who is competent in handling finances and investments. You should ask about their educational background as well as their career up to that point.

When it comes to credentials, the vast majority of advisers only hold the Series 63, 65, or 66 which allows them to give investment advice and analysis. The exams to obtain these licenses take from 75 to 180 minutes and may take only a few weeks to months to study and pass.

It is recommended to look for someone who has completed more than just the initial licensing requirements. The CFP® designation has been the standard of excellence for financial planners. It is a rigorous process to obtain the designation and will help to assure you that they have gone above and beyond most other advisors to increase their financial planning knowledge.

There are four pillars you must meet to become a CFP®:

  1. Education. You must hold a bachelor’s degree or higher from an accredited college and you must have completed coursework on financial planning through a CFP® Board Registered Program.
  2. The Exam. This exam is a six-hour, proctored test with stand-alone, scenario-based, and case study questions with a historical pass rate in the low 60 percentile. 
  3. Experience. You are required to have either 6,000 hours of professional experience related to financial planning or 4,000 hours of apprenticeship experience. 
  4. Ethics. You must adhere to high ethical and professional standards which are monitored by the CFP® Board. To maintain the CFP® designation an advisor must also complete 30 hours of continuing education every two years.

After the CFP® designation, there are other credentials that may complement your needs in an adviser. Feel free to ask about the letters behind their name, what they needed to do to obtain them, and how it helps them serve their clients.

2. Are you a fiduciary?

A fiduciary is required to put your interests first—not theirs and not their company’s. Their duty of care and loyalty is to you.

Rather than a fiduciary standard, most financial advisers fall under a lower standard of care called a suitability standard. Under a suitability standard, the adviser is only required to provide you with suitable recommendations, even though they might not be in your best interest.

3. Are you a fiduciary at all times?

Some advisors are only required to act as a fiduciary under certain circumstances. They will put their fiduciary hat on sometimes and take it off at other times. The problem with this is that you never know when they are acting as a fiduciary and when they are not, which can make it harder for you to know if they are acting in your best interest when making recommendations.

4. How are you compensated?

Not all financial advisers make money the same way. It is critical to understand how your financial adviser is paid because the manner in which someone is compensated can affect the recommendations they make for you.

Financial advisers fall into one of three methods of compensation. Those who are commission-based, fee-only, and fee-based.

Commission-based advisers make their income from the products and investments they place you in. This could include investments such as mutual funds, bonds, annuities, and other insurance products. Often these commissions are made through up-front fees, as well as ongoing annual fees. The client pays these fees (which are often not explicitly disclosed) and the company that owns the products pays the adviser. Not all products may be available to an adviser due to their affiliation with a particular company or broker. Also, not all products pay the same commission, so there can be an incentive to place you in products that may not necessarily be in your best interest, but instead pay the largest fee to the adviser. Conflicts of interest are not required to be disclosed. Commission-based advisers have a duty to their employer rather than to their client.

Fee-only financial advisers and planners are compensated directly by their clients and receive no commissions or referral fees. They can be paid hourly, as a retainer, a percentage of assets under management (AUM), or as a flat fee. The amount paid for services is spelled out, upfront, in a client agreement signed by both parties. This form of compensation is the most transparent and minimizes conflicts of interest. Fee-only advisers must also act as a fiduciary, putting their clients’ interests first.

Fee-based advisers are a mixture of Commission and Fee-Only. They can receive flat fees, but also receive commissions for the financial products they sell you.

5. What exactly will you do for me and what will our relationship look like?

Nearly all financial advisers say that they provide financial planning, but their definition of financial planning can be drastically different from the next adviser’s definition. Try to really drill down and see what they will help you with.

Most advisers will assist with investments, but what else will they do? For individuals still working, will they help you pick your employer benefits and investments in your employer retirement accounts? Will they help you make decisions about how to save for different priorities? For those retired, will they assist you with income and tax planning? Can they help you decide when to take Social Security and how to fund your medical expenses?

Also, determine how often you will meet and how you will communicate. Some advisers will meet with you once or twice a year and will predominately go over your investments. Others will be much more involved, helping you with any financial decision that arises and even attend meetings with other important financial partners, such as estate planning attorneys, accountants, and insurance providers.

6. How many clients do you work with? How many clients do you plan to take on?

This is a vital, but often missed, question to ask in order to determine the level of service that an adviser can provide to you and flesh out their capacity for providing financial planning. There are advisers that will work with upwards of 1,000 or more clients and are looking to add more. There are other advisers, who only have 40 to 60 clients. For advisers with high client numbers, there are only so many hours in the day, so the time they can devote to each client is limited.

7. Will you be able to help me with my particular issues?

In your initial conversation with the adviser, they should have asked questions to get to know you better and what you are needing assistance with. If they didn’t, that in and of itself is a red flag.

If you have a particular situation, make sure they have the ability to help you properly with those issues. For example, if you are a federal employee, do they understand the TSP and your pension? Will they advise on that? Do you have real estate or a business that you’d like help making decisions on? Maybe you have executive compensation or stock options. Do they have the expertise to advise on these investments and will they take the time to do that?

8. Will you be able to help me long-term if that is what I need?

When you find the right person to work with, you’d like to continue working with them for the long term.

At some larger institutions, it is not uncommon for the adviser on a client’s account to change every year or two. Are you okay with that?

If the adviser is nearing retirement, who will take over? Is there a plan in place? Do you like that plan?

It’s good to think about your needs in an adviser, not only now, but in the future.

Final Thoughts

After interviewing an adviser, ask yourself these final questions: Do I enjoy talking to this person? Do I feel comfortable with them? Do I think they will be able to help me with my goals?

You want to work with someone you like, trust, and who will be there for you when you most need it.

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Danielle Harrison, MBA, CFP®, CFT-I™ is the Founder and Lead Financial Advisor at Harrison Financial Planning a fee-only financial planning firm based in Columbia, MO.