12 Questions to Ask When Hiring a Financial Advisor

By James M. Dahle, MD
The White Coat Investor

Editor: Have you thought about hiring a financial advisor. If so, this is the post for you! In this Saturday Selection, WCI talks all about the questions you need to be asking when you hire a financial advisor. This post was originally posted on the White Coat Investor.

This post is a continuation of a post, 12 Things You Should Know About Choosing an Advisor.  You’ll be paying a financial advisor a great deal of money over the years, so you should interview several before choosing one.  Don’t feel guilty about being assertive when establishing this business relationship.  You want someone you’ll be happy with for years to come.  Consider asking these questions to a financial advisor before hiring them to manage your finances:

12 Questions to Ask a Financial Advisor

#1 How Do You Get Paid?

This question is essential to knowing the advisor’s conflicts of interest.  I’m all for someone hiring a good financial advisor as long as they are giving good advice for a fair price.  You need to know how you will pay them and what other sources of income they have other than client’s fees, ie. soft-dollar arrangements, loads, and commissions.

#2 What Do You Do and What Don’t You Do?

You can show him a list of your financial needs and he can then show you what he is qualified to take care of and what is covered by his fees.  Consider having these on your list:

  1. Developing a comprehensive saving/spending plan
  2. Developing an investment plan
  3. Maintaining the investment plan through investing new funds, tax loss harvesting, rebalancing, calculation of returns and comparisons to benchmarks, etc.
  4. Life insurance
  5. Disability insurance
  6. Property insurance
  7. Liability insurance
  8. Tax planning
  9. Tax preparation
  10. Estate planning including preparation of wills and trusts

#3 What Designations Do You Hold?

You should check out a financial advisor’s professional designation before you hire them.  Look them up here.  I recommend the higher level designations such as the Chartered Financial Analyst (CFA), although that is relatively rare among advisors.  The Certified Financial Planner (CFP), however, is not.  Those coming into financial planning from the insurance industry often get the similar Chartered Financial Consult (ChFC) designation and those coming from the accounting industry often get the Personal Financial Specialist (CPA/PFS) designation.  There are hundreds more, some of which are little more than a weekend course.  It’s a real alphabet soup, so look for one of the above four designations to demonstrate a commitment to the field by your advisor.  Just be aware that the designation is just a minimum, and not a guarantee that you will get good advice at a fair price.  There are plenty of salesmen masquerading as advisors who have a CFP.

#4 What Kind of Annual Returns Can I Expect After Taxes and Fees by Investing with You?

The key here is not what the number is, but the explanation that comes with it.  You certainly aren’t looking for the person that quotes the highest number, in fact, the lowest might be preferable.  You can definitely cross off your list anyone promising you average returns over 10%.  Ideally, the advisor will go into a long explanation about where returns come from and discuss the concept of long-term expected returns.  Remember, the role of an advisor isn’t to generate excess returns through market timing and security selection.  A good financial advisor knows this and will explain this to you.

#5 May I See the Sample Portfolios of a Couple of Your Clients, Preferably One from 5 Years Ago and One for the Same Client from Now?

You’re looking for a roughly similar portfolio.  If there have been huge changes your advisor either gives inconsistent advice or is guilty of market timing.

#6 May I See Your Personal Portfolio and Performance?

Does it look like the client’s portfolios?  You want an advisor that eats his own cooking.  If the advisor’s portfolio is only $20,000, do you really want someone this inexperienced managing your money?

#7 What Is Your Investment Philosophy?

This question will tell you how up-to-date the financial advisor is on investment theory.  You can follow it up with, “What do you think about timing the market?” and “What do you think about using mostly index funds in a portfolio?”

#8 Do You Recommend Variable Annuities or Cash Value Life Insurance to Many of Your Clients?

A “Yes” answer should disqualify the financial advisor from your consideration.

#9 Have You Ever Had Any Disciplinary Action from Regulatory Authorities?

This is the time to ask about any complaints you found about the firm or the advisor on the FINRA website, the SEC website, or the Better Business Bureau.

#10 Will You Have a Fiduciary Requirement Toward Me?

This refers to whether the advisor is legally obligated to put your financial interests first, or if his first allegiance is to a firm.

#11 How Often Will We Meet and What Reports Will I Receive from You?

The more you’re paying, the more face-to-face time you should expect.

#12 Why Did the Last Two Clients That Left You Leave?  What About the Last One You Dismissed from Your Practice?  Would You Mind Giving Me Contact Information to Talk to Them?

An advisor might not give you this information (citing privacy issues mostly likely), but if they do, it may be the most helpful thing you do.

The best way to establish a long-term relationship is going in with your eyes wide open.  Make sure you hire right or you’ll be doing the whole thing again in a year or two.  Also, don’t feel obligated to hire someone who lives in your town.  Most financial advising can easily occur by email or phone.  I’d rather have a great advisor who lives across the country than a mediocre one who lives next door.

What questions would you ask a financial advisor before hiring one?  Comment below!



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