There are a lot of misconceptions of financial advisors and investment managers. That’s why it’s important to know what questions to ask when looking for a financial advisor.
Many people think you have to have millions of dollars in order to have a someone manage your investments. This is not the case. There are some advisors that have account minimums to work with them or their firm. However, there is an advisor out there for everyone.
Questions To Ask When Looking For A Financial Advisor
Looking for the right advisor that fits your needs and goals is vital to make sure you have the best fit for your financial situation. Here are some questions that you should be asking a financial advisor if you’re in the interview process. Additionally, there are answers to those questions that you should be looking to hear.
1. Does the advisor work as a Fiduciary for you at all times?
This is literally the first question I would ask a financial advisor. And here’s why. If the answer is “no” or “most of the time,” then you should walk away.
The reason you want a Fiduciary managing your money is because they are obligated to work solely in your best interest at all times. This means any recommendation they make, trades that are placed, or even just a suggestion all need to be in your best interest as a client.
2. Does the Financial Advisor work for a broker/dealer or a Registered Investment Advisor firm?
If they work for what’s called a broker/dealer, they have an imbedded conflict of interest. This is because of the type of firm they are employed through. You can find this simply by two ways. You can either look at the bottom of the broker/dealer or firm’s website or find it in their disclosures. If you see the words “brokers/dealer” anywhere in there, then that’s the sign to walk away.
Broker/dealers (referred to as BDs) are set up to be sales organizations of investment products. They’re not designed to work with clients from a purely advisory role, although they all offer that within part of their business. Registered Investment Advisory firms (referred to as RIAs) are set up to work with clients solely from an advisory role. They are not set up as sales organizations like a BD.
3. What does the ongoing relationship look like with the Financial Advisor?
I’d ask this because some advisors don’t actively have client reviews. If you want to set it and forget it, that may be fine with you. However, others may want an advisor that is more hands on and does periodic reviews. Either way, this is an important question to ask up front.
4. How does the Financial Advisor manage investments? What is their Investment Philosophy?
This is a great question because many financial advisors just stick clients in expensive mutual funds. Even worse, they stick them in index funds and just rebalance occasionally, while charging a fee for that service. Both of these investment options can be done on your own for free.
Since you’re reading this right now, you already know how to use Google. Don’t waste your hard earned savings on an advisor that sticks you in an expensive mutual fund. If they’re going to put you in a mutual fund, there is no reason to pay for them because you can invest your money in that fund and not pay the advisory fee. If they are going to stick you in an index fund, do the same thing.
Don’t waste your money on a fee for something you can do yourself. The only way you should be working with a financial advisor is if they are actively managing your investments and/or doing financial planning for you. This would be the only legitimate reason to pay an advisor a fee.
5. Does the Financial Advisor have credentials?
You should be able to easily find a Financial Advisor’s credentials. Usually you can see this by simply looking at their business card or their website. There is a lot of alphabet soup that often follows someone’s name. However, this is generally a sign that they take their career seriously. It shows that they are willing to go above and beyond to learn more about their craft.
As a whole, the fees for a credentialled financial advisor vs a non-credentialled advisor are generally the same, so you’re not paying more. The top credentials to look out for are:
CERTIFIED FINANCIAL PLANNER ™ or CFP®
A Certified Financial Planner™ (CFP®) are individuals that have earned the top designation for financial planning. The CFP® professionals take a holistic view of a client’s finances, considering all areas of the client’s life – not just investments. This is definitely something to look for within a Financial Advisor.
Chartered Financial Analysis or CFA®
The Chartered Financial Analysis (CFA®) is also a top designation for investment professionals. This is the highest designation for professional analysis. Many times, these are the people that head mutual funds’ portfolios.
Chief Market Technician or CMT®
A Chief Market Technician (CMT®) is a top designation for investment professionals that use charts and patterns to analyze investments positions.
Certified Fund Specialist or CFS®
A Certified Fund Specialist (CFS®) is another top designation for investments professionals that manage portfolios using funds as the primary investment. This includes mutual funds, ETFs, and REIT primarily.
6. How do they make their money as a Financial Advisor?
– Percentage Fee on Managed Investments
You want and advisor that is fee only! A percentage fee on managed investments means that they charge a percentage fee on the investments that they are managing. For example, 1% of the account balance ongoing. This aligns their goals and your goals directly together. You want to see your account grow and so do they. This is because they make more money too. You also don’t want to see your account go down and so do they because they make less money.
– Hourly Rates and Fees
Advisors can also charge an hourly rate or fee like an attorney. However, in this case, they likely are not actively managing the investments.
– Financial Planning Fees
Financial planning fees are typically a one time fee, if they aren’t changing or updating the plan ongoing. Or, if they are going to update the plan ongoing, it may be a smaller reoccurring fee vs the larger one time fee.
– Commission Based Financial Advisors
Avoid commission based financial advisors completely! If they make money from selling your investments that would mean they make money via commissions. They can’t work as a Fiduciary because they have a conflict of interest. This is because they make money from selling you an insurance product like an annuity or some investment product that pays them a commission.
These are the questions to ask when looking for a financial advisor. If I were interviewing financial advisors, this is the list of questions I’d use and answers I’d expect. If your current advisor doesn’t meet these criteria, contact an advisor, like Client Focused Financial, that does!