Your financial advisor will be one of your key allies in moving your financial life forward. A bond of trust and mutual respect is absolutely essential: After all, this is someone with whom you’ll be sharing confidential – sometimes highly personal – aspects of your life. But how do you find a good financial advisor, someone who will always put your interests ahead of everything else?
We’ve identified six questions to ask a financial advisor to help you choose the right one for you. Even if you already have an advisor, consider asking them the following questions, too – to confirm you’ve made the right choice. And if you decide that you haven’t, remember that you can always change advisors at any time.
1. Are you a fiduciary?
Fiduciaries are required to place their customers’ best interests ahead of their own. Registered investment advisors and their representatives are required by law to adhere to a fiduciary standard. Stockbrokers and mutual fund salespeople, for example, (including those working in bank lobbies) may not be required to follow that standard.
Note: Some financial advisors are “dually registered,” meaning they can act as both stockbrokers and Investment Advisor Representatives. The problem is that when they make a recommendation, you may not know which hat they are wearing. If they are acting in a stockbroker capacity, they may be earning a commission on certain recommendations. That’s why we believe you should work with individuals who are solely registered as Investment Advisor Representatives who are always held to a fiduciary standard. However, you should keep in mind that SEC registration does not imply a certain level of skill or training, so continue to do your due diligence and ask additional questions.
2. What are the total costs I will pay to work with you?
Note the specific phrasing of this question.
Don’t simply ask an advisor what their fee is because what they earn is not the same as what you’ll pay. In addition to your advisor’s fee, you want to know the costs of buying the investments your advisor recommends to you to avoid getting a pricey bill for market transactions.
The advisor should provide you in writing with all information in advance about all fees and costs to help inform your decision. Do not consider any advisor who does not explain all expenses to you openly and clearly.
3. Why did you become a financial planner, and how long have you been doing this?
OK, that’s more than one question. And here are a few more related ones you may want to ask the financial advisor: How long have you been with this firm? How many other firms have you been with? What other career aspirations do you have?
Whichever way you choose to frame this line of questioning, your goal is to be assured you find an experienced advisor whose career is stable and is doing this job for the right reasons.
It is important to ask this question of a financial advisor rather than make assumptions about their experience. Remember, age can be misleading: Many advisors are career changers, and their age may be deceiving as they’ve actually been in the field for only a year or two. By the same token, someone who appears quite young can have nearly two decades of experience as a financial advisor because they are passionate about what they do and driven to help people.
Stability is equally important. Financial advisors are sometimes known to move from job to job, often because they’re offered a bonus from another firm –with the expectation they’ll bring their clients with them. You want stability from your advisor and to feel secure that he or she won’t leave any time soon.
Keep in mind that at many Wall Street companies, financial advisors are on a career track. They may be serving clients right now, but they might not have been in that role six months ago – and they might get promoted to another position in less than a year. Ask the candidate if they aspire to join the firm’s management team. While it is encouraging that this is a driven and capable individual, it means you’ll be assigned a new advisor when they advance in their career. Usually, this is someone you don’t get to choose and the timing is not of your own.
You want to hire a financial advisor who loves being a financial advisor. It’s their calling; their passion. That helps give you confidence that you’ll enjoy consistency and authenticity – and the longer you’re together, the better that advisor can serve you.
One related point: Be aware of the difference between investment managers and financial advisors. Investment managers limit their advice to investments; they don’t provide help with other aspects of your personal finances. Financial advisors, by contrast, can provide comprehensive advice in multiple areas – in addition to investments, they can help with tax planning, insurance needs, retirement planning, estate planning, Social Security, employee benefits, real estate and mortgages, leasing or buying cars, elder care issues and more.
Finding a good financial advisor means creating a comprehensive financial plan for you based on your goals, risk tolerance and circumstances – the same factors used to help determine the best investment strategy for you. Investment managers skip the other types of planning and immediately jump straight to investment ideas. We believe you are served best by creating a plan before choosing specific investments.
4. If something happens to you, what happens to me?
On occasion, your financial advisor will be on vacation. Worse, he or she might be hospitalized. And eventually, your planner will retire. Who will serve you when your financial advisor is not available or able to help you?
It’s not enough that someone else can return your phone call. You want to know that others in the firm are as familiar with your advisor’s recommendations and portfolio strategy as your advisor is. This can only occur if the firm operates as a team, with a firmwide approach adhered to by all the professionals in the organization.
In many firms, each advisor operates independently. In such places, no other advisor could explain the methodology or rationale your advisor used to manage your investments. You want to know that, even in the absence of your advisor, you and your money will be cared for seamlessly, with no disruption. And if he or she is a sole practitioner, you need to ask your financial advisor how you will be served during the inevitable occurrences when, literally, there is no one to answer the phone.
5. What kind of clients do you work with?
Before you describe yourself and your circumstances, ask the financial advisor to answer this question. If their typical client fits your description, the advisor could be a good fit for you. You want an advisor who has extensive experience working with people with similar circumstances and concerns.
For example, is this advisor well-versed with the tax treatment for clients in your wealth bracket? Do they have the resources to provide comprehensive wealth management services, including access to professional estate planning attorneys? Are they willing to coordinate with any other professionals you might have, such as tax planners?
Everyone’s financial needs are different, and we believe that everyone should be able to receive the financial advice that’s best suited for them. So continue to ask questions to be sure you find an advisor who can accommodate your unique situation.
6. What is your investment strategy?
As we noted above, financial advisors are not interchangeable with investment managers. A financial advisor must be able to clearly articulate a strong point of view regarding how money should be invested. An advisor who can’t describe this clearly and succinctly, or who says, “it depends on the client,” is likely not a person who serves as a true advisor. Instead, they may merely be an order taker – someone who just does what the client tells them to do, or they may offer up a one-size fits all solution. That’s not what you want from a financial advisor.
On a similar note, you may want to ask whether they were recommending their current strategy prior to the pandemic in 2020, or, if applicable, the global financial crisis of 2008. If not, why – and when – did they change their advice? It’s important to discuss this because advisors are unlikely to change their investment strategy unless that strategy isn’t working, and are more likely to respond emotionally to market events. If what they are recommending now is different than it was prior to the Covid-19 pandemic, and if the advice they were giving in 2019 was different from what they were recommending in 2007, that creates speculation about whether you can depend on what they’re telling you to do today. A financial advisor should be playing the long game and recommending personalized investment strategies, rather than trying to time the markets or get jittery when the markets suffer a correction. It is better to have a long-term growth plan, rather than having a list of investment questions to ask your financial advisor every time they adjust your portfolio when something happens in the markets, economy or political climate.
Of course, there’s nothing wrong with tweaking a portfolio – say, swapping out one investment for another. But simply diversifying a portfolio is very different from shifting from options trading to municipal bonds to mutual funds. An advisor whose advice lacks long-term consistency should be removed from your consideration.
Due diligence when choosing a financial advisor
These are just a few questions to ask a financial planner as you begin your search. Additionally, you can view the advisor’s regulatory history on the SEC.gov website.
We hope you’ll consider a planner with Edelman Financial Engines in your list of candidates. To get in touch with one of our fiduciary advisors, please contact us or call (833)-PLAN-EFE.