A lot of people want help managing their financial life, but hiring a financial advisor can be intimidating. What should you look for in a financial advisor? How can you be sure that your financial advisor will be worth the cost?
Oftentimes, finding the right financial advisor involves interviewing a few advisors, and finding the one that “clicks” with you. But you don’t want to meet a potential advisor unprepared. So before you interview a financial advisor, here are ten questions you can ask. These questions won’t just help you weed out a bad egg, they’ll help you clarify what you want from a financial advisor.
Do you have experience helping people like me?
Most financial advisors specialize in helping certain types of people. For example, some advisors help people as they approach retirement age. These advisors typically have in depth knowledge about social security, retirement budget planning, and retirement withdrawal strategies. Other financial advisors specialize in helping business owners create investment strategies after selling businesses. Still others work with clients in their 30s and 40s who are working to develop a nest egg.
An advisor who works with people like you, will generally be better suited to helping you achieve your personal goals.
How do you provide value to people like me?
Certain financial advisors focus on providing value through their asset management practice. Others focus on tax planning. Still others help you create and maintain financial plans in an ever-changing economy. Some financial advisors focus on risk mitigation through insurance and income planning.
The value an advisor provides should line up with your reason for hiring an advisor. If your goal is to plan for retirement, but the advisor helps with business tax planning, the relationship isn’t a great fit.
What are your credentials?
Almost all people who call themselves financial advisors have some sort of credentialing. However, the type of advice an advisor gives is likely to be heavily influenced by their credentials.
These are a few of the most common credentials, and what they mean for you.
Typical designations for financial advisors
Financial advisors can often list pages of letters after their name, but not all designations are created equally. If you’re looking for a long term relationship with a financial advisor, these are the certifications you should seek.
Certified financial planner (CFP). CFPs specialize in creating financial plans that help you to achieve your short and long term goals. All CFPs must work in the best interest of their clients, and they must have at least 2 years of experience (and have passed an exam). In addition to managing your investment portfolio, CFPs may make recommendations to buy certain types of insurance, to reduce your debt or to reduce your tax burden.
Chartered financial consultant (ChFC). Like CFPs, ChFCs focus on the essentials of financial planning (such as investing, saving, and risk management). ChFC’s must prove competence in fundamental financial planning, but they do not have to pass a board exam.
Retirement Income Certified Professional (RICP). This designation equips advisors with the knowledge to effectively manage the transition from asset accumulation during a client’s working years to asset decumulation in retirement. RICP® enables the advisor to demonstrate tremendous value by delivering smart strategies for creating secure, sustainable income for a client’s retirement. All RICPs must have 3 years of experience (and have passed an exam) and must obtain 15 hours of continuing education every two years.
Chartered financial analyst (CFA). CFAs specialize in portfolio management techniques and investment analysis. They must pass three exams, and have at least four years of professional experience to achieve this designation. By passing all three exams, CFAs also show competency of wealth planning techniques.
Other financial advisor designations
In addition to the typical financial advisor designations, these are a few designations that a financial advisor might have. It’s important to note that these designations demonstrate a proficiency in at least one area of financial planning. However, advisors with these designations may not be able to help you with comprehensive planning.
Certified public accountant (CPA). A CPA can provide tax advice (including tax planning advice) to you. They don’t just prepare your tax documents each April. Rather, CPAs can give advice about how to structure your business and your finances to minimize your tax burden. Even if your primary financial advisor isn’t a CPA, you’ll probably have some interactions with CPAs as you develop your financial roadmap.
Chartered life underwriter (CLU). A chartered life under water is someone who is licensed to sell life insurance products. These could include everything from simple term life insurance policies, to complex annuities with life insurance riders. Most people will need to buy life insurance at some point during their financial journey, so you’ll want advice from a CLU. However, a CLU that doesn’t have other credentials may not make the best long-term advisor for you.
Juris doctor (JD). A JD indicates that a person has a law degree. If they’ve passed the Bar Exam in your state, they can also practice law. Estate planning lawyers, some small business financial advisors, bankruptcy lawyers and other debt relief lawyers will have a JD. When you need someone to help you through the legal parts of a financial issue, you’ll definitely want to enlist the help of someone with a JD (and experience giving financial advice).
Series 3, 6, 7, 24, 51, 63, 65 and 66 licenses. The Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA) issue licenses for professionals that want to buy and sell stocks, bonds and other commodities. Almost anyone that wants to provide investment advice must have this licensing, so any financial advisor should have one or more of these licenses. However, most financial advisors will also have other designations to show their competence as an advisor.
Are you a fiduciary?
A fiduciary financial adviser is someone who is legally obligated to work in your best interest. If a financial adviser isn’t a fiduciary, they only need to meet a suitability standard. A suitability standard means that the advisor will only make recommendations that are suitable for you, even if the advisor knows of better alternatives.
If you intend to have an ongoing relationship with a financial adviser, you generally want that adviser to meet a fiduciary standard.
How do you get paid?
Generally, when we hire someone, we know exactly how they get paid. We pay the plumber $150 to fix a leaky pipe. You’ll pay a tutor $25 per hour to teach you Spanish. But in the financial advice industry, payments aren’t always perfectly clear.
Financial advisors can get paid through fees (including a portfolio management fee or an hourly fee), or through commissions (earning money based on the products they sell).
Some advisors are paid using both methods. If that’s the case, it’s helpful to clarify which products they earn commissions on (often on insurance products), and which products they do not earn commissions for selling.
Do you ever get paid to recommend certain products over others?
Certain investment advisors, especially those with just broker designations, might recommend products based on the commission that they earn. While earning a commission on a product is a fine way for financial advisors to earn money, it’s important for customers to understand that the commission may be part of the reason an advisor is recommending a product to you.
If you know a financial advisor earns a commission by selling your certain products or investments, you should always take those recommendations with a grain of salt. Ask for a day or two to think about any new proposals, so you can weigh the pros and cons before getting into a bad investment.
Do you have any complaints against you? What were the results?
Properly licensed financial advisors have a profile that includes complaints against the advisor. You can check on their profile through FINRA’s Broker Check or the SEC’s Investment Adviser Public Disclosure. A complaint against an advisor may be a red flag, but it shouldn’t necessarily disqualify an advisor from your consideration. Some of the complaints that make the record could have been completely unfounded, and the advisor can easily explain the situation.
How often can we expect to meet if I hire you?
Sometimes financial advisors will meet you just a few times. For example, estate planning lawyers, may only meet once to create an estate plan, and again to a review it. After that, you’re only meetings will be to update it.
Other financial advisors will meet as often as once per month or once per quarter. These advisors typically want to stay in the loop, and help you as you make big spending decisions (such as buying a house or a car).
Where can I see my information?
If you’re hiring someone who will manage your assets, you should be able to easily access your personal information (such as account balances, and your investment allocation).
In particular, if you should know the status of your investment portfolio, and the beneficiaries on your accounts or insurance policies. Many advisors offer information through a website or online portal, but some may send monthly or quarterly statements instead.
If you’re investing in proprietary investments such as Master Limited Partnerships, Non-Traded Real Estate Investment Trusts or other similar investments, you should expect to get regular financial updates (quarterly) from the investment company. If your advisor cannot clearly explain how you’ll get access to your investment information, this should be a huge red flag for you. The so-called advisor may actually be selling you a fraudulent product.
Do you work with a team?
No financial advisor can be an expert in every aspect of financial planning, but that doesn’t mean a financial advisor will leave you without a solution. Some advisors will help you by referring you to specialists to give you help in areas such as estate planning or tax preparation. Others will have an in-house team to cover these needs. It can be important to clarify what a financial advisor refers to an out-of-house team, since you may pay additional fees for those services as well.