What to ask a financial advisor in your first meeting.
When you turn your hard-earned money over to a financial advisor, you're putting your financial life in their hands. They should be there to guide you, to reassure you "when the ship is sailing smoothly, let you know when you hit some rough waters, and speak up when you need to change direction," says Tom Halloran, president of Voya Financial Advisors. It behooves you to make sure any advisor you partner with is up to the task. To that end, here are the 10 questions to ask a financial advisor before you hire them. Some of these questions may feel uncomfortable to ask, but remember: It's your financial future on the line here. You deserve to know what you're getting into, and with whom.
What are your qualifications, and how do these qualifications benefit me?
Anyone can call themself a financial advisor or planner. A key question to ask a financial advisor is what are their exact qualifications. You can verify their claim on BrokerCheck, an online tool provided by the Financial Industry Regulatory Authority (FINRA), which allows you to view the background and current registration of any FINRA-registered advisor. Make sure you follow up by asking how the advisor's qualifications will benefit you as their client. "A designation is just letters until it's put into use, so a good way to sort through the noise is to ask an advisor what they value about the designations they have," says Tyler Landes, a fee-only financial planner at Tandem Financial Guidance in Kansas City, Missouri. "How has that training helped them to serve clients better?"
What exactly do you do for your clients?
Someone trying to earn your business would often rather talk about you and your needs first so they can tailor their sales pitch to your problems, but you'd be better served by asking them what they provide their clients first, says David Ning, founder of the personal finance site MoneyNing.com. "By inquiring about the service they provide, you can more accurately gauge whether they are likely to be able to help you reach your goals." Does the advisor focus on managing investments or creating holistic financial plans? Do they place trades for their clients, or do they only provide a recommendation that you then have to follow through on?
Is there a team supporting you? If so, who will be my primary point of contact?
Advisors seldom work in isolation. They'll probably have a staff of people to support them, from client-relationship managers to investment managers. Your primary point of contact may not be the advisor sitting across from you at your first meeting. "It's important to ask about how often an advisor will meet with you (in person or over the phone) and how much you will deal with the advisor versus other team members," Halloran says. "When creating a personalized, holistic and actionable financial plan, you want to be sure you're working with a consistent individual who can help you adapt your plan to life's changes along the way as needed."
How long have you been helping clients?
Look for an advisor with experience helping clients through market volatility and uncertainty. It's easy to do well for your clients when the stock market is on an upward trend; the real merit of an advisor is tested during bear markets (like the current one). Ask the advisor how long they've been helping clients and in what capacity. Financial advisors commonly transition into the industry after having worked in other areas of finance such as tax preparation or banking. You should look for an advisor who has at least four years of experience in the areas of financial planning in which you're looking for help. You can review their background for yourself on BrokerCheck.
Who is your typical client?
You want an advisor who has experience working with people in situations similar to yours. "If you're young and starting a family, you wouldn't go to an advisor who specializes in retirement distribution planning," Landes says. "If you need help with cash flow and budgeting, it doesn't make sense to use an advisor who specializes in portfolio management. You are some advisor's ideal client, and they are looking for you, too." Ask a financial advisor who their ideal client is and who they typically work with to get a sense of whether their expertise is a good fit for your needs.
How are you compensated?
Compensation can be an uncomfortable subject to discuss with a financial advisor, but don't be afraid to come right out and say it: How are you paid? You deserve to know how an advisor will make money off of your account. And chances are they've been asked before. "Conflicts of interest are one of the biggest problems in the industry because many advisors and planners line their own pockets at the expense of their client's financial well-being," Ning says. "That's why it's important to find out if there are any other ways the planner will make money from his relationship with you." Ning likes fee-only advisors who don't receive any fees or compensation from investment products they recommend.
Do you operate as a fiduciary all of the time?
A fiduciary is a financial advisor who is required to act in your best interest at all times. A fiduciary cannot recommend a strategy or investment unless it is the best available option for you. Non-fiduciary advisors, on the other hand, need only provide recommendations that are "suitable" for your situation. A non-fiduciary advisor could recommend a more expensive product because the advisor gets a commission for it. The tricky part here is that some advisors can put their fiduciary hat on and off depending on what they're doing. If working with a fiduciary is important to you, ask a financial advisor if they're a fiduciary at all times.
Can you explain a financial concept to me?
"One of the key services a financial advisor provides is education," says Dana Anspach, founder and CEO of Sensible Money LLC. "They help you sort through the vast amount of information out there and figure out what applies to you and what doesn't. That means it is critical your advisor communicates in a way that resonates with you." To this end, she suggests asking an advisor to explain a financial concept to you, such as what a bond is or how an index fund works. "What you are looking for is an answer that you can understand," she says. "If an explanation is filled with jargon and hard to follow, maybe that isn't the right advisor for you."
What types of investments do you use in your clients' accounts?
If this is your first meeting with an advisor, it'll probably be too soon for them to tell you definitively what your account would be invested in. A good advisor should need to complete a thorough review of your financial situation before discussing an investment strategy. To get an idea of what that strategy may include, however, ask the advisor what types of investments they use with their clients in general. This way you may be able to discover if they favor funds over individual securities, or if they like to use more exotic investments that could be riskier.
What's important to you?
Your relationship with your financial advisor is likely to be one of the most important and longest-lasting financial relationships you have. Your advisor will likely be involved in many of your most personal decisions, says Jesse Abercrombie, an Edward Jones financial advisor in Dallas. As such, you'll want to work with someone you connect with on a personal and professional level. An advisor with whom you have a good rapport and who seems to share your values could be a positive sign for the future, he says.
10 questions to ask a financial advisor:
-- What are your qualifications, and how do these qualifications benefit me?
-- What exactly do you do for your clients?
-- Is there a team supporting you? If so, who will be my primary point of contact?
-- How long have you been helping clients?
-- Who is your typical client?
-- How are you compensated?
-- Do you operate as a fiduciary all of the time?
-- Can you explain a financial concept to me?
-- What types of investments do you use in your clients' accounts?
-- What's important to you?
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