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10 questions to ask a financial advisor
What questions should you not ask? Why?
The bottom line
Aug 31, 2022
7 min read
An advisor who shares a compatible investment philosophy can increase confidence levels and lessen doubts about goals and directions. Transparency is a difference maker.
When it comes to navigating the complexities of money management and investing, a financial advisor can help cut a path to your future financial goals. But finding the right financial advisor, one best-suited to your wealth management needs, may not be the easiest task. A careful vetting process may help investors assess prospective advisors, and begin to build a client-advisor relationship based on trust.
Questions to ask in the first meeting are about setting clear expectations and discovering how compatible the investor is with the advisor. Expect to cover essential ground including credentials, payment, investment philosophy, and communication preferences.
This key question may be among the most important because it assesses if an advisor is obliged to act in the client’s best interest. A fiduciary, unlike a non-fiduciary, has a legal responsibility to protect the client and disclose any conflicts of interest, financial incentives, or anything counter to the standards of fiduciary duty.
Some financial advisors are non-fiduciaries, meaning they work on commission for financial products recommended and sold to the client. The divide between fiduciary and non-fiduciary is not as clear cut as it seems, though. Advisors can act as fiduciaries some of the time but not all of the time, depending on the type of service provided. For instance, the advisor might be a fiduciary with respect to investment strategy (stocks, mutual funds), but a non-fiduciary when recommending insurance policies sold on commission. Clarifying questions may be needed. Consider asking:
Knowing how the financial advisor expects to be paid—and being comfortable with the fee structure—can potentially help reduce misunderstandings down the line. In some cases, fees may vary depending on the service. Retirement planning might be priced at one fee, and investment strategy another. And besides upfront costs, there might be hidden fees that could come as a surprise if they aren’t asked about early on. Typical responses to listen out for to this key question include:
. The financial advisor charges a percentage of assets being managed—1% is common. The percentage tends to go down the larger the client portfolio is, as in multi-million dollar accounts. The term assets under management, or AUM, is another way of saying fee-only. Consider asking for an annualized dollar estimate of services, including underlying investment fees (such as mutual fund fees), to get a more accurate picture of total costs.
. The financial advisor sets a predetermined price for services.
. The financial advisor charges an hourly rate for services rendered, ranging from $150 to $300 per hour. Getting estimates of how much time would be spent on each task can give a more accurate sense of how costs are likely to add up.
. The financial advisor charges a regular monthly rate or annual rate plus any investment-specific fees, regardless of how active or inactive they are in a given period.
. The advisor earns a commission on financial products. Since not all financial advisors are fiduciaries all the time, knowing when the commission hat is being worn may be important.
It can be inviting to entrust your finances to someone who shares a similar outlook on short-term and long-term investing. The investment philosophy question reviews the advisor’s preferred investment strategies—say, growth investing versus aggressive growth—as well as the advisor’s inclination for picking individual stocks versus mutual funds. Another potential indicator of a financial advisor’s investment philosophy is approach to portfolio diversification. Listening for whether the advisor is interested in finding investment strategies that are compatible with your personalized financial priorities and risk tolerance may help gauge client-advisor compatibility.
Does the advisor pick a mix of stocks and bonds, or only stocks? Do they work with alternative investments such as cryptocurrency or real estate investment funds? Is there a tendency to pick large company stocks or small to mid-cap stocks? Domestic or international stocks? Getting clarity on the approach to the distribution of assets across investment categories may be helpful in gaining an understanding — and level of comfort — with the advisor’s investment strategy tendencies.
Markets fluctuate, and how a financial advisor responds to market downturns can be revealing. How did the advisor adapt investment strategies during previous market drops? The answer might show the reaction to times of crisis, and give a window into whether short-term returns are prioritized over growth.
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If a financial advisor’s typical clientele closely matches the individual client’s profile and wealth bracket, the pairing might be a better match. For example, an advisor specializing in retirement planning may not be the best fit for a young client interested in saving for a first home.
The advisor-client relationship likely works best when both parties reach consensus over how to keep in touch and how often. Is the financial advisor willing to loop-in the client with updates and proactively express the need to rebalance finances? How often will updates occur—monthly, quarterly, or annual reviews?
Remember, communication is a two-way street: Is the advisor being forthright? Do they ask the client questions? Are they really listening? The advisor’s willingness to accommodate communication expectations can be a sign of whether the client will be kept well-informed or in the dark.
Typically, a financial advisor tracks portfolio performance with market trends, making adjustments in accordance with the client’s financial goals. Rate of return is the metric used to track such performance, but ask about other measurements. For instance, how does the advisor analyze diversification and investment strategy for financial situations such as unevenly performing stocks and mutual funds?
How the advisor answers this potentially challenging key question can be telling. If you notice patterns and the reasons why other clients ended the working relationship parallel your own concerns, it might be wise to look elsewhere. If the advisor acts evasive or defensive, this could indicate a lack of transparency.
It’s not uncommon for conflicts of interest to exist in financial advising. A non-fiduciary fee-based advisor, for instance, might steer a client towards financial products that earn them a higher fee. Minimizing the conflicts of interest, and being upfront about them if they exist, can help build trust between advisor and client.
Besides thinking about what to ask a financial advisor, it’s also important to consider what not to ask. Questions that put the advisor in the position of making unrealistic promises or invite an imprecise, ambiguous answer could be counter-productive.
This is oftentimes considered unrealistic because there are no guarantees.
Early retirement can be an attainable goal. But this question may open the door to a possible sales pitch that promises what you want to hear.
The advisor’s personalized financial goals are not going to match the client’s, so it may be unfair to compare personalized plans about money matters.
This might sound reasonable—maybe even useful—but likely won’t give a complete picture because the advisor will provide references that cast them in the best possible light. It could lead to an unbalanced view of the advisor’s qualities, which is why asking about the clients who stopped working with the advisor is an essential key question.
An investor interviewing potential financial advisors might want to consider someone with credentials as a fiduciary (with few or no conflicts of interest). An advisor who shares a compatible investment philosophy can increase confidence levels and lessen doubts about goals and directions. An open, candid communication style can make the client feel more comfortable and better informed. Transparency is a difference maker, too. The advisor’s willingness to be upfront about compensation and credentials can alleviate uncertainties.
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