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SmartAsset: 10 Questions to Ask a Financial Advisor

The aid of a financial advisor can be helpful regardless of whether you’re young, retired or somewhere in between. There is a wide range of financial advisors you can work with, as they can specialize in taxes, retirement, financial planning, investing or any other topics. To weed out the financial advisors that aren’t best for you, there are a series of questions you should be sure to ask in each interview you go into. These include questions about certifications, disciplinary disclosures, available advisory services and more. SmartAsset’s free advisor matching tool can help you get your search started.

Question #1: Do You Abide by Fiduciary Duty?

All financial advisors who are registered with the SEC abide by fiduciary duty, meaning they must put their clients’ best interests ahead of their own. Fiduciaries are also supposed to use a duty of care and a duty of loyalty to their clients, which in turn means they are “held to the highest standard of conduct,” again according to the SEC. Furthermore, the SEC’s Reg BI under the Securities Exchange Act of 1934 sets a “best interest” standard of conduct that advisors and broker-dealers must abide by when making investment recommendations of any kind to their clients.

Despite these extensive regulations, questioning a potential advisor about the bounds of their fiduciary duty can still be a worthwhile thing to do during an interview. For instance, advisors may have potential conflicts of interest associated with their compensation model or other areas of their business, even if they are fiduciaries. This is completely allowed under the SEC’s rules as long as these conflicts of interest are disclosed. Therefore, asking and learning about your advisor’s arrangements will allow you to be fully educated before signing up with them.

Question #2: Do You Have Any Disclosures on Your Record?

Advisors should be able to tell you whether they or their firm have faced any past regulatory, criminal or disciplinary actions. It’s important to know whether an advisor or their firm has previously violated rules or misled consumers. A number of similar complaints filed against an advisor or firm’s track record may raise a red flag.

You can also find information on a firm’s disclosures in its Form ADV. You can find this paperwork online through the SEC’s Investment Advisor Search tool, or you can request the paperwork from an SEC branch. Details about a firm’s disclosures are listed under Item 11 of Part A. You can also visit the specific advisor’s profile on FINRA BrokerCheck for more information on their past.

Question #3: What Services Do You Provide?

Before choosing a financial advisor, it’s important to consider whether you simply want investment management or if you want more comprehensive financial planning and wealth management services. Financial advisors often offer a wide range of services in addition to portfolio management, such as:

  • Retirement planning
  • Trust and estate planning
  • Tax planning
  • Educational expense planning
  • Insurance planning
  • Cash flow planning
  • Charitable giving
  • Business succession planning

Some advisors may specialize in helping clients navigate the financial challenges of a divorce, while others focus on getting their clients’ retirement ready. Advisors who cater to high-net-worth individuals and their families may offer a suite of family office services that include comprehensive wealth management services in addition to various administrative services such as bill paying.

Question #4: What Types of Clients Do You Specialize in Serving?

It’s also helpful to ask whether an advisor specializes in working with any one type of client. Some financial advisors work exclusively with wealthy individuals and their families. Others may work specifically with business owners or people in certain professional fields, such as doctors or university employees. Choosing an advisor who works with clients whose situations are similar to yours means they’ll be better equipped to offer the type of guidance and advice you need.

Question #5: Do You Require a Specific Minimum Investment?

Financial advisors typically require clients to invest a certain level of assets in order to open or maintain an account. Asking a potential advisor what their minimum is could immediately tell you whether it’ll be a good fit or not. This minimum figure not only could dictate if you can even work with them, but also if you can, if they typically work with people of your asset level. Note that some advisors have no minimum at all, some use minimum fees and others have waivable minimums for those who may not meet it.

If you don’t have much to invest, you might consider working with a robo-advisor rather than a traditional advisor. While you won’t get the face-to-face time a human advisor offers, robo-advisors typically have lower account minimums and fees.

Question #6: What Advisory Certifications Do You Have?

SmartAsset: 10 Questions to Ask a Financial Advisor

A financial advisor’s certifications can be a good indicator of his or her level of experience and expertise. Two of the most notable designations are the certified financial planner (CFP) and chartered financial consultant (ChFC). Both require an advisor to have a certain level of experience, complete coursework, submit to a background check and abide by a set of ethical standards.

Certifications can also indicate an area of specialization, which may make an advisor better equipped to serve your particular set of needs. Advisors with tax expertise have designations such as certified public accountants (CPA) or personal financial specialists (PFS), which are CPAs who also offer more comprehensive planning. Advisors with insurance expertise may hold a chartered life underwriter (CLU) designation. Of course, not all certifications carry equal weight as some are much easier to earn than others.

Take a look at SmartAsset’s complete overview of the most popular financial certifications. In addition to these, ask how many years of experience each financial advisor has. Like any field, experience matters greatly, especially when they’ve invested through varying market conditions.

Question #7: How Do You Make Money?

You need to know how much your financial advisor will charge for their services. Depending on the service, an advisor may charge a flat fee, an hourly fee or an asset-based fee. Typically, advisors charge a flat fee or hourly fee for financial planning services and an asset-based fee for portfolio management. Some advisors can also earn commissions for selling financial products or trading securities, though they must disclose this.

A big difference to note is between fee-only and fee-based financial advisors. Basically all financial advisors charge their clients some type of management fee or otherwise, as is referenced above. Fee-only and fee-based advisors, however, differ in the further compensation they receive.

A fee-based advisor has the ability to earn third-party commissions or other forms of compensation, so long as they are dually registered as an insurance agent and/or broker-dealer representative and disclose the arrangement. These commissions are typically earned in these roles by selling specific insurance policies, securities or other financial products. This can create a potential conflict of interest, though fee-based advisors still abide by the same fiduciary legal standard of working in clients’ best interests.

Fee-only advisors, on the other hand, earn their compensation entirely from the fees their clients pay them. In turn, if you buy securities or other financial products as a client, your advisor will not earn compensation for facilitating it or otherwise. For the most part, this removes advisors’ incentives for selling specific financial products, helping to ensure their advice is as unaffected as possible.

Question #8: What Extra Costs Should I Be Aware Of?

The fee an advisor charges for their services may not include all costs. Advisors may charge additional fees for services that are more complex or that they consider to be extra. For example, an advisor may create a financial plan for you, but then charge extra for implementing that plan.

You’ll also be responsible for trading and brokerage costs, as well as fund fees. These additional costs can add up, so be sure you’re aware of all of the fees you’ll be responsible for paying before deciding to work with an advisor.

Question #9: What Is Your Investment Philosophy?

You should also ask advisors to describe their investing approach. Some advisors customize portfolios according to clients’ needs, while others offer a selection of model portfolios that they assign to clients based on their needs. Advisors often offer a range of risk levels and asset allocations. However, some advisors may prefer asset preservation over aggressive growth. If you’re not comfortable taking on a lot of risks, you’ll want a financial advisor who advocates a more conservative strategy. Knowing whether or not their investment style aligns with your personal investing philosophy beforehand can save you a lot of headaches in the long run.

Advisors’ investing approaches may be driven by different philosophies, such as value investing, which seeks relatively undervalued stocks with the hope they’ll eventually produce strong returns, or contrarian investing, which espouses investing in opposition to the market majority. If investing for the greater social good is important to you then you may want to seek out an advisor who offers socially responsible investing.

Other key questions to ask about an advisor’s investment approach are how they measure success and what the tax implications of their investment strategy are. Advisors should ideally be measuring progress against your defined financial goals within your timeline and risk tolerance rather than trying to beat the market. It’s important to ask an advisor whether they’re explicitly taking taxes into account when they’re investing your assets as this could significantly impact your net returns.

Question #10: How Often Do You Communicate With Your Clients?

SmartAsset: 10 Questions to Ask a Financial Advisor

This question can you give you a glimpse into a typical client experience with an advisor. By finding out how often an advisor is in touch with his or her clients, you can get a sense of whether there will be an open line of communication or simply quarterly updates.

Some advisors may prefer frequent face-to-face meetings, while others may primarily work over the phone or via email. Some may be open to phone calls whenever a question arises, while others may prefer to stick to scheduled communications. It’s up to you which communication style better suits your needs.

Bottom Line

You should interview at least a few financial advisors before settling on one. It’s important to find one who aligns with your preferences and who you feel like you can trust. Don’t take shortcuts during this process, as you’ll want to explicitly trust your advisor before signing on with them.

In addition to thoroughly interviewing a financial advisor, you should also do your own research. An SEC-filed Form ADV, among other things, is a good place to start. Form ADV will also provide an overview of a firm’s fees, investing approach and offered services.

If you’re not completely satisfied with the answers you got, don’t hesitate to keep searching. Ask friends and family members in similar financial circumstances for recommendations.

Tips for Choosing a Financial Advisor

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Try to boil down the financial areas you need help with the most when looking for a financial advisor. For example, if you’re struggling to manage your taxes, consider going with an advisor that focuses on tax planning.

Photo credit: ©iStock.com/PeopleImages, ©iStock.com/SDI Productions, ©iStock.com/monkeybusinessimages

Becca Stanek, CEPF® Becca Stanek is a graduate of DePauw University. Becca is an experienced writer/editor who serves as a retirement expert for SmartAsset. She's passionate about helping people understand the sometimes daunting ins and outs of personal finance. Becca is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Her work has also appeared at Time, The Week, Mic and The Washington Monthly. Becca grew up in the Midwest and now lives in New York City.
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