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10 Questions to Ask a Financial Advisor

Ask financial advisors about their fee structure to help you find your best match, but remember that a digital advisor is more cost-effective for most consumers.
April 4, 2018
Financial Planning, Investing, Retirement Planning

When you hire a financial advisor, you’re entering a long-term relationship with someone who will know most everything about your financial life. It’s not unlike dating in that you want to find someone you click with.

Before you commit to an advisor, though, make sure you understand the associated costs, because hidden fees can pile up. Unless you have a complex financial situation — for example, more than about $250,000 in assets or questions that go beyond investing — you may not need a human financial advisor.

Digital financial advisors, commonly called robo-advisors, are computer-based services that help you choose and manage investments for a fraction of the cost and also offer varying degrees of access to human advisors.

Robo-advisor fees are typically between 0.25% and 0.89% of your assets, while human financial advisor fees can be as much as 2%.

If you’re unsure what kind of financial advisor is right for you, check out our cheat sheet for choosing a financial advisor.

If you are ready to find the best financial advisor for your situation, here’s our guide to the best financial advisors.

If you think exploring a relationship with a human financial advisor is the right move for you, be sure to ask these 10 questions during the interview process.

1. Are you a fiduciary?

Fiduciaries work in the best interest of the client, while nonfiduciaries need only recommend products that are “suitable.” If the advisor makes more money for recommending some products over others, then she’s not a fiduciary, and the potential exists for conflicts of interest.

Consider this: An advisor who earns commissions might get as much as 7% for investing a client’s money in a nontraded real estate investment trust, says Kyle Mast, a CFP and founder of Clarity Financial in Wilsonville, Oregon.

That’s $7,000 if you’re investing $100,000. In contrast, a fee-only advisor may get paid only $1,000 per client each year, encouraging relationship-building and a sense of responsibility to the client, he says.

2. How do you get paid?

“The financial industry is this weird meld of commission and hourly, and percentage of assets,” Mast says. “It’s really hard,” he says, for consumers to ask advisors how they’re paid.

But ask you must. To keep it simple, focus on fee-only advisors because they don’t get commissions for selling products. They might charge a percentage of your assets (1% is common), a flat fee for services or an hourly fee.

“Make sure it’s fee-only — those particular words. Otherwise, it’s probably a hybrid model, which means you don’t really know what you’re getting,” says Alice Finn, founder of PowerHouse Assets and author of “Smart Women Love Money,” a guide to investing. (Some of the questions here are from her book.)

Make sure it’s fee-only — those particular words.

Alice Finn, Founder, PowerHouse Assets

If the advisor says “fee-based,” ask about all the ways the advisor is getting paid. If you don’t understand the advisor’s response? Head for the exit.

Also, the advisor may ask you how much you have to invest because some advisors require a minimum amount. If you don’t meet that minimum, try looking for an advisor via the Garrett Planning Network  — if you pay by the hour, members of that group require no minimum. Another resource for finding fee-only advisors is the National Association of Personal Financial Advisors.

Alternatively, a low-cost digital advisor, aka robo-advisor, might make sense for you. Read more on how robo-advisors work.

3. What are my all-in costs?

In addition to paying the advisor, you’ll face other fees, and you’ll want to know what they are. Fees can decimate your savings. A NerdWallet analysis found that a 1% mutual-fund fee could cost millennials $590,000 in retirement savings.

“You can lose half your net worth without even knowing it,” Finn says. “You want to be vigilant.” For example, don’t pay any sales loads on mutual funds.

4. What services are included?

Consider what you’re looking for. Then make sure the planner aligns with your needs.

For example, do you want holistic financial planning services, including tax and retirement planning, or are you looking for an advisor whose main focus is managing your investment portfolio?

Also ask: Who are your typical clients? Find an advisor who is used to a situation like yours and able to help you meet your goals.

5. How will our relationship work?

Put another way: How much access will you have to the advisor? You want to know how often you’ll meet and whether he’s available for phone calls or emails outside of scheduled appointments.

6. What’s your investment philosophy?

It’s important to ensure you have the same investment philosophy. Here’s why: “You have to believe in what they’re doing to stick with it,” Finn says.

“When financial advisors really do their job is when the market is down and they can convince you to stick to the same page,” she says, so you don’t sell at the bottom of a market cycle.

7. What asset allocation will you use?

You’ve heard how important it is to be diversified, right? Your asset allocation is how you create a diversified portfolio. “It drives most of your returns,” Finn says.

“You don’t want someone who is just going to pick U.S. large-company stocks,” Finn says. Your portfolio should include domestic and international stocks, and small-, mid- and large-cap companies.

8. Who is your custodian?

Ideally, your financial advisor has hired an independent custodian, such as a brokerage, to hold your investments, rather than act as his or her own custodian — à la Bernie Madoff, the notorious financial advisor who defrauded clients through a multibillion-dollar Ponzi scheme.

That provides an important safety check. “If I send my clients performance information … and it tells them how much I say is in their account, they can go online any minute and double-check against their Fidelity statement,” Finn says.

9. What investment benchmarks do you use?

Advisors should use benchmarks that directly relate to what they’re invested in, or be able to explain why they don’t.

Some managers will use a “straw-man benchmark,” Finn says. For example, the advisor says: “My goal is to beat the Standard & Poor’s 500.”

But if that advisor is investing in a diversified portfolio — including, say, emerging markets and small-cap stocks — beyond simply large-cap U.S. companies, that benchmark is a mismatch. “Over time they should beat the S&P 500, because they’re taking on more risk,” Finn says.

10. What tax hit do I face if I invest with you?

Asking this question is a way of ensuring the advisor has your tax bill in mind when making financial decisions on your behalf.

What you want to know is: What do you get to keep after fees and after taxes?

Alice Finn, Founder, PowerHouse Assets

Ultimately, asking about taxes and fees is a way to delve into what your estimated net return might be. “What you want to know is: What do you get to keep after fees and after taxes?” Finn says.

Finally, don’t forget that you’re paying for someone to clarify your financial life, not make it more confusing. If an advisor makes you feel dumb, walk away.

Says Mast: “Make the planner or advisor answer every question you have.”

» Unsure what kind of financial help you need? See our guide to finding the right financial advice.

Why your questions matter

If the idea of interviewing advisors makes you nervous, keep in mind that even they think it’s important to do interviews. “At the end of the day, it’s a relationship you’re building with someone,” says Marianela Collado, a certified financial planner and CEO at Tobias Financial Advisors in Plantation, Florida.

Be sure to tell advisors that you’re interviewing others, so they know you’re not making an immediate decision, says Brad Klontz, a CFP and associate professor of practice in financial psychology at Creighton University in Omaha, Nebraska.

Focusing on the idea of interviews might help you feel more confident, he adds. Money is a taboo topic, so “we don’t really have a lot of reference points,” Klontz says. “That creates anxiety.”

You may lack confidence around the details of your financial life, but you certainly are quite able to interview three different people for a job.

Brad Klontz, CFP and financial psychologist

Approaching the process like you’re hiring someone can ease apprehension. “You may lack confidence around the details of your financial life, but you certainly are quite able to interview three different people for a job,” Klontz says.

 

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