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.
You’d think there’d be an app for that, right? Until there is, asking a few key questions can help you find the best match.
» Unsure what kind of 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. “Absolutely,” says Marianela Collado, a certified financial planner and CEO at Tobias Financial Advisors in Plantation, Florida. “At the end of the day, it’s a relationship you’re building with someone.”
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.
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.
Ready to start interviewing? Ask these 10 questions to start.
1. Are you a fiduciary?
Fiduciaries work in the best interest of the client, while non-fiduciaries 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.
Say you have $100,000 to invest. That advisor would get $7,000 to invest that money in a nontraded REIT, “probably within two to four weeks of that sale,” Mast says. In contrast, a fee-only advisor may get paid only $1,000 per client each year. “To make $7,000, they have to keep that client on for seven years,” Mast says. That encourages relationship-building and a sense of responsibility to the client, he says.
2. How do you get paid?
The fiduciary question touches on how the advisor is paid, but it makes sense to ask this question directly.
“The financial industry is this weird meld of commission and hourly and percentage of assets,” Mast says. “It’s really hard for the average consumer to dig in and ask.”
But ask you must. To keep it simple, consider interviewing solely 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.)
Also, review the advisors’ websites, because some advisors, including Collado and Mast, post their fee structure there.
Make sure it’s fee-only. Otherwise, it’s probably a hybrid model, which means you don’t really know what you’re getting.
If the advisor’s response is “fee-based” or anything else, ask about all the ways the advisor is getting paid. If you don’t understand the advisor’s response? Head for the exit.
There’s another side to this question: The advisor may ask about your net worth, because some advisors require a minimum amount of investable assets. If you don’t meet that minimum, don’t worry. There are fee-for-service advisors; resources for finding one include Garrett Planning Network, Alliance of Comprehensive Planners and the National Association of Personal Financial Advisors.
Alternatively, a low-cost online advisor, aka robo-advisor, might make sense for you. Here’s 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, you might owe fees on the underlying investments the advisor picks for you. The good news is that many advisors focus on low-cost index mutual funds, the fees for which are extremely low — think 0.2% or less. If the advisor uses high-cost investments, consider another advisor.
Ask about any other fees, including the costs of any outside managers and any mutual fund sales loads or front-end charges. “Nobody should be paying any kind of load to buy a mutual fund,” Finn says.
4. What services are included?
Before asking this question, 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? Some advisors might include your teenage or young adult children in the planning, others not so much.
Also, ask the advisor: 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 I have to you? You want to know how often you’ll meet with the advisor and whether he’s available for phone calls or emails outside of scheduled appointments.
For example, Mast says, “We’re going to meet once a year, and this is the amount of hours we can do for emails and phone calls.”
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.
Collado agrees this is a crucial question. “Do you want someone who is going to be more like a day trader?” she says. Her team focuses on “investing for a goal, not investing just to make a quick buck.”
7. What asset allocation will you use for my portfolio?
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.
» Unsure about this term? Here’s what asset allocation is.
“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 acting as his or her own custodian, a 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 benchmarks do you use for investment performance?
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.
For example, the MSCI Emerging Markets Index might be appropriate to compare against your emerging market investments. For her part, Finn offers clients a list of benchmarks appropriate for each asset class in which their money is invested.
10. What tax consequences do I face when investing my money 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?
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.”