When it comes to wealth building and retirement planning, you cannot overestimate the importance of having a great financial advisor.
Just as you’d vet someone you want to date, it’s wise to interview the person you’re trusting with your intimate money details.
The problem is that the financial-advice industry features a puzzling array of designations, titles, and compensation schemes. And despite the fact that advisors must pass tests, obtain licenses, and log work experience to earn certain credentials, there are no minimum standards in place.
This means someone who has sold insurance policies for years could call themselves a financial advisor, compete head-to-head with seasoned advisors, and prospective clients would not necessarily know the difference.
Whether you’ve been investing on your own for years or are just starting to invest, you should be diligent when signing on with a financial advisor and not just pick anyone.
Here are 6 key questions to ask when interviewing a financial advisor:
Many industries are filled with professional certifications and designations, and the financial advice industry is no different.
Right off the bat, you should know the designations your financial advisor has earned.
Do not be fooled by a long list of letters after the financial advisor’s name. Every designation can differ in both the difficulty of achieving it in the first place and the level of continuing education requirements that need to be maintained over time.
Look for designations that carry more heft, such as Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Registered Investment Advisor (RIA), and Chartered Financial Analyst (CFA).
In the financial advice industry, there are financial planners and investment advisors/wealth managers. Your ideal advisor is one whose proficiency lies in the areas in which you need the most help.
Investment advisors have a narrower purview than financial planners who consider all the major aspects of a financial plan: household budgeting, insurance, estate planning, etc.
This is not to say that wealth managers do not think holistically about the plans of their clients. Also, many financial planners have top-class investing acumen, meaning there’s no bright line, really.
If you’re looking for a financial planner, inquire about areas of special expertise and the investors they typically serve.
If you’re looking for an investment manager, inquire about the investment strategy and see if it matches your philosophy.
Also, ask whether the advisor is a fiduciary.
Being fiduciaries means that they must put the interests of their clients ahead of their own when consulting on plans and portfolios.
It may seem fairly obvious that a financial advisor should adhere to such a standard, but as things stand today, there’s no uniform standard.
Luckily, many financial advisors already follow a fiduciary standard. Certified financial planners are obligated to act as fiduciaries when giving financial advice.
This doesn’t mean that those financial professionals that aren’t fiduciaries are unethical. Most non-fiduciaries maintain high ethical standards and treat their clients with high regard, just as their fiduciary counterparts.
But working with a fiduciary gives you a higher level of legal protection.
This is where it starts to get messy.
No one likes to be asked to break down how they’re paid, but financial advisors are required to disclose this info.
Many advisors don’t divulge their fees through their site, so ask whether payment is commission-based, fee-based, or fee-only. This will help you identify the payment option that’s most suitable for you.
Just like the name suggests, fee-only advisors are compensated only by charging fees for specific services. Commission-based advisors receive commissions for recommending products. Fee-based advisors may charge fees for services offered and also accept commissions.
Next on questions to ask when interviewing a financial advisor is if you’ll be working directly with the advisor or with a third party.
It pays to evaluate your expectations around the relationship carefully.
It may happen that the financial advisor works with a team or another advisor. If that’s the case, it’s only right they tell you who else will have a hand in your finances.
You do not want to work with an advisor who only communicates when you reach out. Settle for a professional who proactively communicates and keeps you updated on your investment’s performance.
How often you communicate will depend on your unique circumstances, but most experts recommend once-a-quarter communication with a more formal check-in at least once a year.
Conclusion
Finding the right advisor can feel overwhelming, but if you know the right financial advisor questions interview, your job will be much easier.
Once you’ve asked these 6 questions, you should be able to tell whether or not the financial advisor has the professional capabilities to help you.