Questions to Ask Your Financial Advisor

Searching for a financial advisor can be challenging. You may feel overwhelmed in trying to get the decision right, since the advisor you choose will be in charge of helping you grow and manage your finances. It is recommended that you find an advisor who you can trust to communicate consistently with you, one who understands your risk appetite, has a good handle on your financial goals for the future, and can help you make wise, informed financial decisions.

When it comes to wealth building, retirement planning, investment planning, estate planning, and more, having a suitable financial advisor can be essential. As per a recent study, 55% of investors who work with a financial advisor said they saved more money for their retirement due to having hired the services of a financial advisor. Moreover, according to the National Study of Millionaires, almost 7 out of 10 millionaires (68%) worked with an investment professional or financial advisor to build their wealth.

The numbers above show that if you hire a professional financial advisor, it can prove to be a wise decision. However, you shouldn’t just choose anyone. There are over 300,000 financial advisors in the United States and you want to be confident that you are working with a professional who has the right financial expertise and knowledge to help you achieve your goals.

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If you are going to be interviewing a financial advisor for the first time, reevaluating your current advisor, or simply want to know what to ask your advisor at your regular check-ins, this article will help you know what questions to ask a financial advisor. If you know the questions to ask a financial advisor before investing, it will help you hire someone who has the right expertise to help with your situation.

Here are 8 important questions to ask your financial advisor:

1. Are you a fiduciary?

A fiduciary financial advisor is someone who is legally bound to place your interests before their own. They are also barred from selling you financial products such as life insurance in exchange for a one-time commission. Their compensation can only be paid by you i.e. the client. If you wish to work with a fiduciary, you should ask them whether they are a fiduciary 100% of the time or not. Unfortunately, some advisors are “dually registered” and do not work as fiduciaries always, and they may sometimes engage in selling financial products for hidden commissions. To circumvent this, it is advisable to ask your financial advisor or the advisor you are thinking of hiring, to put their fiduciary status in writing.

Find Out: What Is A Fiduciary Financial Advisor?

2. How do you get paid?

There are several costs to understand when working with a financial advisor. These are:

• Advisory fees: These fees can be in the form of an hourly fee, a one-time project fee, or a percentage of your investments.
• Transaction fees: When an advisor buys or sells investments on your behalf, you have to pay a transaction fee to the custodian (a bank or a financial institution that holds financial assets for safekeeping to minimize the risk of theft or loss such as Fidelity or Charles Schwab). Transaction fees can range from $0 to $50 per trade.

• Expense ratio: Charged by a mutual fund or exchange-traded fund (ETF), the expense ratio fee is used for covering operational expenses and can range from 0% to 3% (sometimes even more) per year.

If you are working with a fiduciary financial advisor, then you will only incur the advisory fee. Even though a fiduciary may not benefit from other fees, they are still duty-bound to keep those costs as low as possible. For instance, say, your fiduciary financial advisor advises you to invest $100,000 in the S&P 500. The expense ratios of the following two S&P 500 mutual funds are as follows:

• Rydex S&P 500 (RYSOX) = 1.65% or $1,650 per year
• Fidelity S&P 500 (FXAIX) = 0.02% or $20 per year

That’s a difference of $1,630 per year!

When two investments are identical, as shown in the example above, then the fiduciary is bound to recommend the lower-cost option. This is why it is critical that you inquire about all of the fees that you may incur. Also, keep in mind that every SEC-registered advisor must share their Form ADV and Form CRS with you. These forms offer a detailed breakdown of an advisor’s services and fees.

Find Out: What is the cost of a financial advisors?

3. How many clients do you have?

Asking how many clients an advisor manages would help reveal two things:

• The amount of time can they invest in working on your customized financial plan
• How personalized and customized their services are

On average, an experienced lead advisor has 96 clients.

4. Do you specialize in working with a specific kind of clientele?

It is recommended to inquire about the kind of clients your financial advisor specializes in working with. This helps you assess whether the advisor is suited to your needs or not. For example, some advisors specialize in working with people belonging to specific professions such as doctors, athletes, lawyers, etc. While some specialize in working with employees of a major company such as Microsoft, Amazon, or Apple, you will also find certain advisors who are more adept at handling clients belonging to a particular age group such as millennials or baby boomers. Doing so would allow you to assess whether the advisor has the right expertise to help with your specific situation or not. Also, it is reassuring to know that the advisor has served other clients with similar needs.

5. How much experience do you have?

One essential aspect of interviewing a financial advisor pertains to the experience they hold in the field. This goes beyond the number of years they have worked in the profession but rather the kind of experience they hold with respect to solving problems related to financial planning, tax planning, retirement planning, investment management, insurance optimization, charitable donation, etc.

You should also question your advisor on his firm’s process for offering financial planning services and investment advice. It can include how data is gathered from you, their method of analyzing your unique financial situation, and how they reach the recommendations that they offer you. Moreover, the process should also involve a methodology for executing this advice and monitoring it.

You can also assess an advisor’s experience by asking them about their credentials. For example, a certified financial planner or CFP mandates that an advisor must have at least 3 years of financial advisory experience and a four-year college degree. They are held to strict ethical standards and need to continue taking education classes each year to stay in line with the constantly changing world of financial planning.

6. What services do you provide to your clients?

This question allows you to understand if the advisor specializes in one area, such as retirement planning, or if their expertise lies in more varied roles. The advisor may offer services such as regular financial planning or investment management, but most people require a range of financial services. You may need help with creating a long-term investing strategy, weighing the pros and cons of retirement accounts such as a 401 (k) or a Roth IRA, selecting mutual funds to invest in, rebalancing your portfolio, or reviewing your savings goals to meet your long-term financial goals. Ideally, you should look for someone who understands your entire financial scenario, including your goals, current tax situation, insurance coverage, as well as inclination to invest in alternative assets. Financial advisors also have access to great online tools through which you can track your investment account performance, to check if you are on speed for achieving your savings goals, or to estimate whether you will have enough funds saved for your retirement. It should be easy enough for an advisor to furnish you with a list of the services they provide. If they answer in the negative or provide a vague answer, it may be a red flag.

7. Where do you keep my money?

If there is one question that you must not skip when asking your financial advisor,  it’s this one. It is good practice to find out whether your financial advisor is using a major third-party custodian (Fidelity, Charles Schwab, or TD Ameritrade) to hold your investments and/or retirement accounts. On one hand, using a third-party custodian could indicate that your advisor has limited capacity to manage your investments and oversee your accounts.

On the other hand, it could also act as a deterrent and a safeguard against your advisor using your funds for their own personal benefits. Bernie Madoff, who ran the largest Ponzi scheme in history, worth about $64.8 billion, was not using a third-party custodian.

Having a third-party custodian also provides investors with access to FDIC and SIPC insurance. This helps ensure that your assets are protected whether they are in your bank account or in a brokerage account. You can access your funds by checking your accounts online whenever you wish to or visiting any of the physical branches of the third-party custodian spread across the country.

8. What is your investment philosophy?

Understanding an advisor’s investment philosophy and approach before you decide to hire them is highly recommended. Doing so would help you assess whether both you and the advisor are on the same page or not. It would also serve you better if you asked them questions pertaining to their long-term investment strategy and thinking. Some questions that you can consider asking your potential advisor are:

• Do you use low-cost index funds?
• Do you actively trade individual stocks?
• Do you invest in gold, hedge funds, or alternative investments such as hedge funds, commodities, art and antiques?
• What is your investment mix for a retirement plan like a 401(k)?
• How many positions do you include in each portfolio?
• How would you incorporate tax-loss harvesting or tax gain harvesting?

Apart from getting the answers to these questions from the advisor, you can also ask for a sample portfolio to have a better look at how he invests funds. 

Read More: Questions to ask a financial advisor about your portfolio

To conclude

Choosing a financial advisor can be one of the most important financial decisions you will make. Not only can hiring a financial advisor help you reach your financial goals, but it can also help ensure that you have a large enough corpus for retirement to live a stress-free life. Do not hesitate when it comes to asking important questions to your financial advisor as, like any professional, they are there to serve your needs as their client. A good advisor would welcome any and all kinds of questions that would help you to make your decision.

Knowing what questions to ask a financial advisor is important as it helps you narrow down the list of potential advisors who you may be considering hiring. If you are looking for advisors near you, use WiserAdvisor’s free advisor match service to find highly qualified and vetted fiduciary advisors. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.