A financial advisor can have a drastic impact on your finances, for better or worse. The best financial advisors can help you stick to a long-term investment plan that meets your investment goals over time, while the worst advisors are more likely to put you into investments that line their own pockets, potentially costing you tens of thousands of dollars may charge for advice that was supposedly free.
So when you hire a financial advisor, you essentially need to interview to make sure the potential advisor’s approach and incentives align with yours. Here are five key questions to ask financial advisors to see if they’re really a good fit for your needs.
The most important questions to ask your financial advisor
1. ‘Are you a confidential counselor?’
Many people assume that every financial advisor is a fiduciary. Unfortunately, many people can put up a sign saying they are a financial advisor without actually giving you good advice. In many cases, so-called advisors are actually just salespeople in disguise. So you need to determine whether they will work in your best interest.
Therefore, you should ask them if they are a fiduciary as this will help align their interests with yours. According to the Certified Financial Planning Board, a fiduciary must, among other things, “place the interests of the client above the interests of the … professional and the … office of the … professional” and “avoid conflicts of interest.”
In lieu of the fiduciary standard, many financial advisors are held to a lower suitability standard, which requires a financial advisor to check whether the investment is suitable, but not necessarily the best, for you. This lower standard means advisors can recommend investments that make them more money, even if they aren’t the best for you.
In the current system, it is not always easy to figure out when an advisor is truly a fiduciary or a salesperson. Ask your potential advisor if he or she is a fiduciary and if he or she is obligated to work in your best interest at all times. If you want to have a chance of getting the best advice, you need to hear that they are always a confidant on your behalf.
2. ‘How do you get paid?’
It is worth remembering the well-known expression: ‘He who pays the piper, determines the melody.’ It is essential that you apply this wisdom when choosing a financial advisor and ask your potential advisor, “How do you get paid?” If you don’t pay the advisor directly, you probably won’t get the best advice.
Many financial companies (insurance companies, brokers and others) can put you in touch with a financial advisor, but these individuals are typically paid by the company itself. They are compensated when individuals purchase their products and services, so they are incentivized to work in their best interests, not yours. That doesn’t necessarily mean you’re getting bad advice, but are you really getting the best advice?
So you need to know how advisors are paid if you want to know whether they are incentivized to act in your best interests. Look for a fee-only fiduciary advisor for the best chance of advice tailored to your goals, but expect to pay the advisor out of pocket, often on an hourly basis. Still, the advice can be much better than the free advice from an advisor who is a salesperson in disguise.
3. ‘How can you help me achieve my financial goals?’
One of the biggest ways a good advisor can add value to your life is by helping you stick to a solid financial plan. When the stock market falls, many customers become skittish. They tend to sell after prices fall and only buy back into the market when the situation feels safe, pushing themselves to sell low and buy high. A good advisor helps clients avoid this type of wealth-destroying behavior. So make sure you ask potential advisors how they can help you with that.
This aspect of a good advisor is highly underestimated, but is so valuable. A good advisor can help you calm down during a market crisis when stocks are plummeting. Then the advisor can help you understand how to make good financial decisions amid the panic. That can be especially valuable for your long-term retirement accounts, such as 401(k)s and IRAs.
The best financial advisors should be able to keep you on track, especially when times are tough. An advisor should be part psychologist to keep you on the path to financial success while ensuring you are following financial strategies that align with your goals.
4. ‘How does your company measure your performance as a financial advisor?’
How a company measures the success of its advisors should also give you a good idea of how the advisor is incentivized to work on your behalf. If you have a business that only prioritizes advisors who bring in more money, you can expect an advisor who will try to sell you products.
Success can be measured in different ways. Financial advisors should be judged on their ability to provide advice to their clients and create positive outcomes for them. Achievements may also focus on acquiring professional qualifications such as Certified Financial Planner (CFP), education or client investment performance. Because a financial advisor is supposed to provide advice, their performance measures should reflect that.
Ask potential advisors how their job performance is measured by their company. Are they measured by their ability to give advice and help people, or by their ability to generate revenue for their business?
5. ‘What happens if you change companies?’
At best, working with a consultant should be like working with any other professional, such as a doctor or dentist. You’ll get the best experience if you can find someone who wants to do the right thing for you for the long term. You can build trust and a strong working relationship for decades.
But like those other professionals, financial advisors sometimes change firms, and it may not be as easy to transfer your accounts and follow someone you trust. For example, many advisors have non-compete agreements with their companies that prevent them from soliciting clients if they change firms. In some cases, advisors may not even be able to contact you to say that they are working at a new company and that you can move your investments there. Your account can simply be reassigned to a new advisor who is not as familiar with you and your situation.
Some companies allow advisors to take some basic customer information with them when they leave the company, as part of what’s called broker protocol. Under this protocol, an advisor can collect important contact information from clients he has personally served. But not all companies are part of the protocol, so you want to see what happens if the broker changes companies by asking.
In short
Opening up your financial life to someone else can be difficult, leaving you feeling vulnerable. That is why it is important to hire an advisor who closely matches your interests. Look for advisors who are fiduciaries and are financially compensated and managed in a way that makes them more likely to align with your goals and needs. Finally, it is critical to understand that you are paying someone for an important task; so interview him carefully to make sure he will get it right.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
