I’m a financial advisor who hired my own financial advisor — here’s the 10 questions I asked to interview them.  Now you can use them too.

Hiring a professional financial advisor can be a challenge.  After all, your advisor will know all about your finances and help you make big financial decisions.  You need someone to communicate clearly and consistently with you, thoroughly understand your goals for the future, and help you make wise choices that compound in value over time.

A decision that important is about more than just finances (even though money is a difficult/taboo topic for most people), it’s fundamentally about trust.  When clients are choosing a financial advisor, they are choosing more than someone who they hope can get them a good return on their money.  A good financial advisor is going to do more  than simply go over quarterly returns or discuss the latest economic predictions.  The discussions ought to go into deeper life issues, like  personal values, hopes and dreams, and deeply-held fears.  These type of real financial advisors are going to rejoice with the client in the good times and grieve in the challenging times.

In order for you to share that kind of intimate personal information and develop that level of relationship with an advisor, there has to be a relationship of trust.  Once the advisor-client relationship does reach these levels, it doesn’t make financial planning or investment management any less of a challenge – there is still much to work on together.  However, working with an advisor who you feel confident in, someone who you know is placing your interests above anyone else’s, will go a long way in helping to alleviate those fears.

10 Questions to Ask When Hiring a Financial Advisor

(I used them when I hired my own financial advisor and have given these to family and friends)

Curious about our approach to financial planning and advice?  Read Wise Stewardship’s answers to these 10 questions.

1. Are you a fiduciary 100% of the time?  Will you commit to that in writing?

This is one of the most (if not the most) important questions to ask when hiring a financial advisor.  Sadly, not all advisors will put your best interest first.  Only financial advisors who are fiduciaries are required to act in the best interests of their clients.

A fiduciary is a professional entrusted to offer planning and advice or manage assets or wealth while putting the client’s best interests first at all times.  Financial advisors who follow a fiduciary standard must disclose any conflict, or potential conflict, to their clients before and during the advisory engagement.  Fiduciaries will also adopt a code of ethics and fully disclose how they are compensated.

Registered Investment Advisors (RIAs) are legally held to that fiduciary standard of care.  By law, they must act solely in the best interest of their clients.  To ensure your advisor or potential advisor is following a fiduciary standard 100% of the time, request to see their ADV (form filed with the SEC), and ask them if they will sign a fiduciary oath.

It is important to note that non-fiduciary financial professionals can recommend products whose sales generate bonuses, commissions, or prizes for them, but can cost you significantly more in higher fees.  It’s estimated by NAPFA (National Association of Personal Financial Advisors) that non-fiduciary advice costs investors up to $17 billion a year.  I wouldn’t hire a non-fiduciary financial advisor nor would I recommend my friends or family do it.  Your financial future is too important to to trust to someone who isn’t working in your best interests 100% of the time.

2. How do you get paid?  Will you itemize all your fees and expenses in writing?

This is the second-most important questions to ask when hiring a financial advisor.  The way in which your financial planner is compensated can make all the difference in the recommendations they make for you.  That’s because some advisors work under a standard that requires only that their recommendations be suitable to your particular situation.  Other planners work under a fiduciary standard that requires advisors to consider what is in their client’s best interest.  You may be wondering why your advisor would make a recommendation that is not in your best interest.  That’s where the issue of compensation comes into play.

There are three basic ways in which financial advisors are compensated:

Through a commission-based model

Through a commission & fee model (often called fee-based)

Through a Fee-Only model

Commission-based Model

This type of advisor is paid a commission for recommending/selling certain investments or other products.  Most of the time, this commission is embedded within a product and not easily seen by a client, so unless an advisor is disclosing what the amount is, a client will likely never know.  This is by far the longest tenured business model, stretching back many decades to stock-brokers who were originally compensated by recommending (their mostly wealthy) clients buy or sell certain individual stocks.  Examples today of commissions that advisors receive include recommending A or C share mutual funds, placing a life, disability, or other insurance product, and transaction cost markups inside your brokerage accounts.  Typically an advisor who receives commission is a registered representative or broker for a certain company that disperses the compensation so they may say something like “you don’t pay me anything, big company X pays my salary.”  Push for more details in writing when you hear answers like that.

Three Pros of Commissions:

⇒ On the surface, it seems to be the cheapest option since you are not paying the advisor directly.
⇒ When it comes to insurance, very few insurance companies offer non-commission products, meaning more options, especially when it comes to annuities or variable/whole life insurance policies.  Thus, you may have to pay a commission to get access to certain investment products like these.
⇒ There is a direct correlation between an action being completed and compensation to the advisor.

Three Cons of Commissions:

⇒ These transactions do not have to be in the “best interest” of a client – only legally required to be a “suitable” recommendation.
⇒ It’s not very clear how the advisor is being paid as the costs are not transparent to the client.
⇒ This model introduces conflict of interest of selling products instead of giving conflict-free advice.  Because of the conflict of interest inherent in these transactions, these advisors may have difficulty putting the client’s interest above their own.  That has been a historical problem with many bad advisors over the years running up commissions and harming clients’ best interests.  (That does not mean that all commission-based advisors are bad people.)  It just means there are major challenges with the business model.

If the advisor is commission-based, here are some other followup questions to ask them:

⇒ Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?
⇒ Do you participate in any sales contests or award programs creating incentives to favor particular vendors?
⇒ Can you tell me about all of your conflicts of interest, verbally and in writing?

Fee-based Model

A fee-based advisor (sometimes called hybrid RIAs) is someone who can receive either commissions or fees from a client.  There is no criteria for how much of the business is commission or fee-derived, simply that the advisor can do either.  When using fee-deduction, typically an agreed upon percentage of managed assets is taken out of the accounts that the advisor is managing.

Three Pros of Fee-based:

⇒ This model has somewhat better transparency of advisor compensation when using fee-derived investments than a solely commission-based one.
⇒ The advisor may be able to offer lower-cost investment vehicles such as index funds within portfolios.
⇒ The advisor has the ability to place certain commission-only products such as annuities, variable/whole life policies at the same time he or she offers the advice to purchase them.

Three Cons of Fee-based:

⇒ The advisor still has potential conflict of interest with higher commission products.  Same as the commission-based model, because of the conflict of interest inherent in these transactions, these advisors may have difficulty putting the client’s interest above their own.
⇒ There is high probability of confusion on who and what is paying for advisor’s services.  Fees are still not completely transparent.
⇒ The “suitability” vs “best interest” determination is still applicable.  May be even more confusing as the advisor operates under different standards at different times when working with you.

Fee-only Model

A fee-only advisor is only compensated by the client – not through third-party commissions or kickbacks of any kind.  The exact means of compensation varies with each advisor, from retainer or subscriptions, to hourly, to percentage of assets (usually called AUM fee), or to other metrics such as a percentage of client income or net worth.  No matter how the fee is calculated, the delivery and compensation is what makes a fee-only advisor fee-only in that the client is the only one ever paying the advisor.  The CFP Board broadens the definition of fee-only to even excluding the ability to earn a commission, even through a related party (such as a separate insurance agency).

Three Pros of Fee-only:

⇒ The client’s compensation to the advisor is for giving advice, regardless of any recommendations or account size.
⇒ The client clearly understands what the compensation is to the advisor with complete fee transparency.
⇒ Helps reduce potential conflicts of interest as the advisor is not being incentivised to earn a commission.

Three Cons of Fee-only:

⇒ This model can seem to cost more out of pocket-expenses for client than commissions because of increased transparency.
⇒ There are not as many fee-only financial advisors in the US (most estimates only have about ~3K advisors out more than 200K in financial services)
⇒ Many of the older fee-only financial planning firms only charge assets under management (AUM) fees and have asset minimums meaning you have to have a fairly large amount of money to work with them.

Which Fee Model is Best?

As a fee-only firm, Wise Stewardship is clearly biased towards this approach.  After all, we could have set this business up as a commission or fee-based model.  While we do know good financial advisors doing commission work, fee-based work, and fee-only work, we strongly believe in the fee-only model and only send our friends and family to fee-only advisors.  Do your own research and we’re confident you’ll come to the same conclusion.  Learn more about the reason we operate our firm this way.

3. Do you have experience working with clients like us?

Every client’s situation is unique.  However, individual financial advisors often work with clientele who have similar situations and needs.  If you’re a widow or servicemember, you may not want to hire a financial advisor who works almost exclusively with couples who are in their 60s and almost ready to retire.  That advisor just might not have the same level of expertise or experience in the specific financial situations you face.

When looking for a financial advisor, be sure to ask questions about their experience, the types of clients they work with, and where you fit in terms of their client list.  There’s no guaranteed way to verify that a prospective financial advisor has the expertise and experience you need.  However, during the initial conversation you should ask questions that are specific to your situation.  Any prospective financial advisor should be prepared to answer any questions you have on the subjects that matter to you, whether it’s estate planning, college savings, or handling company stock options.  Don’t settle for general answers.  Ask them how they have helped other clients in your situation and listen carefully to what they say.

4. What experience, education, and credentials do you have?

It’s important to understand the financial advisor’s knowledge base to help you with your specific financial situations.  What is the advisor’s educational background?  Does the advisor have a degree in a related area and does he or she keep current in the field through continuing education?  How long has this person been providing financial advice to clients?  Ask about their professional designations and training in the industry.  No designation will guarantee that an advisor will give you the best possible advice, but asking these questions will give you a sense of the advisor’s commitment to their profession.

5. Do you have any disciplinary issues or complaints on your record?

You will want to know whether a financial advisor has ever been disciplined by a regulatory agency or had major compaints filed against them by a former client.  Every financial adviser who is properly licensed has a profile with detailed information on complaints and any other disclosures.  If the advisor isn’t forthcoming, you can do your own homework using FINRA’s Broker Check site, BrightScope0, or reading the ADV of the firm.

This background information can be accessed either through FINRA’s Broker Check or the SEC’s Investment Adviser Public Disclosure websites.  It’s a good idea to take a look before meeting with a financial adviser.  Keep in mind that not all complaints are created equal.  Some end up being unfounded, and others may be very minor or old.  There are also complaints that could’ve ended up being settled but since the adviser offered a “suitable” recommendation, they may not have ended up in the clients’ favor.  If for some reason there are complaints, the objective is to ask and get an idea of how this adviser might work for you.

6. Who is your custodian?

Ideally, your financial advisor uses an independent custodian, such as a brokerage, to hold your investments, rather than act as his or her own custodian — like Bernie Madoff, the notorious financial advisor who defrauded clients through a multibillion-dollar Ponzi scheme.  That provides an important safety check as the advisor does not have access to withdraw or use your funds when held at a qualified custodian.  Be very suspicious if an advisor is ever asking you to write a check or transfer funds to them or a company you’ve never heard of.  Do your research to help prevent any type of fraud.

7. How, and how often, will you communicate with us?

This might be one of the most overlooked questions to ask when hiring a financial advisor.  You don’t want to work with a financial advisor who only engages with you when you reach out.  Look for someone who proactively communicates with you.  For example, if you are comparing financial advisors primarily on cost you might see one advisor charging lower prices than others which might reflect that you only meet with him or her once a year and don’t really get get non-investment related questions answered.

The client experience can vary widely even between fee-only, fiduciary financial planners based on their business practices.  You’re hiring a financial advisor to provide advice, and you should know what to expect in terms of communication and accessibility before entering into a relationship.  Many financial advisors are primarily focused on investment management and may not want to meet regularly or not want to answer all of your ongoing financial questions,

Here are some good questions to ask yourself and the advisor:

⇒ How often should you expect to meet with the financial advisor?  Can you meet virtually or just in person?  What are the times and days for meetings typically?
⇒ How will the advisor communicate with you between meetings?  Can you call or email at any time with any financial questions or concerns?  How much will you have access to the advisor vs. an assistant or other members of the firm?
⇒ What resources or other tools will you have ongoing access to related to your finances?  Some advisors may offer financial planning software that helps you measure progress and model what-ifs about your financial future.

8. How do you use technology to benefit your clients?

Not surprisingly, technology has changed the financial industry – but some advisors are still living in the past with paper questionnaires and legacy strategies.  Automation is key in the 21st century, so it’s important to ask a potential financial advisor how he or she uses technology and tech-driven tools to stay apprised of the marketplace and efficiently work on your behalf.  In order to see the big financial picture, and effectively manage it in today’s data-driven world, advisors need to be savvy with modern financial technology.  You as the client ultimately can benefit with tools like virtual meetings with tools like Zoom, tax-efficient models, linked accounts for real-time budgeting, interactive retirement analysis, and more.

The technology the advisor uses should be taking in new financial information daily, as well as tracking changes in your account balances, transactions and holdings.  Managing five to twenty financial accounts per client—including investments, credit cards, checking accounts and more—adds up.  Modern technology can help a good advisor see how these pieces fit together to build a truly diverse financial portfolio that achieves your financial goals and evolves as your life changes.

9. What options do you have to work together and what specific services do you offer?

Given that we all have unique financial situations, this is one of the most important questions to ask when hiring a financial advisor.  There’s not a one-size-fits-all approach so you should find what is best in your financial situation.  For a fee-only advisor, can he or she charge by the hour or retainer instead of an annual management fee (AUM) based on your assets?  What about project work for more specific questions?  What does a comprehensive financial planning arrangement look like?  What are the products, checklists, or tools that you will get working together?  Are the advisor fees negotiable?  How can you terminate the advisor relationship and what does that look like?

There are other related investment questions you should ask like what is the advisor’s investment philosophy?  Does the advisor believe in technical analysis, market timing, or active manamgent that can beat the market?  How often does the advisor trade in accounts he or she manages?  How does the advisor report investment performance and what benchmark is used?  After inflation, taxes and fees, what does the advisor think is a reasonable estimated return on your diversified portfolio over the long term? (If you are told you anything over 3% to 5% annually, I wouldn’t really believe them so be careful about over-promises here.)

Don’t feel bad about asking hard questions and expecting complete answers when it comes to these topics.  A good financial advisor will welcome these types of questions and be glad to know you are doing your due diligence.  If you interview an advisor and find them not giving clear answers or redirecting the topic away when you ask these followups, that’s probably an indication all by itself.  Just like with the questions about how the advisor gets paid, your financial life and a relationship with an advisor is too important to entrust to someone who won’t thoroughly answer all of your questions and build that bond of trust from the beginning.

10. What do you love about your job?

You want a financial advisor who is passionate about what they do, not someone who dreads going to work every day.  Not only will this question help you get to know a real financial advisor, but it should also clearly reveal their why.  Do they have a sincere desire to help people?  Do they care about the whole financial picture: paying off debt, having emergency savings, mitigating risk, estate planning and insurance review, making sure tax-efficient issues are covered, and building wealth for the long term?  What’s their story of how they got into the business?  Going back to the idea of trust, a relationship with a financial advisor is more than just talking about math.  It’s getting to the heart of emotions, hopes, and dreams.

You’ll see what a financial advisor is all about by their response to this question.  You’ll also know very quickly if they’re just punching a clock.  Don’t settle for just anyone.  You should be inspired and motivated to work with a financial advisor just like they should feel that way about you.

You should only look to hire a financial advisor that is excited to to empower his or her clients with clarity and confidence around their financial lives.  A passionate financial advisor will want to inspire you to become fully engaged in your financial affairs, naturally leading to feelings of power and strength over other parts of your lives and optimism about your future.

What do you think?  What other questions would you want to ask when hiring a financial advisor?

I’d love to hear your suggestions so send me an email (Daniel@WiseStewardshipFP.com)  Curious to learn what my answers to these questions are?  I wrote another post with all the details and my thought process behind them.  

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