A financial advisor could be one of the most lucrative investments you make. They can help you plan, and grow your resources.
If you feel that you are a financial savvy individual, capable of managing your own assets, unless you are an experienced professional, you can benefit from the guidance of someone who has dedicated her life to managing money. The question is, will the cost of such guidance be worth it?
Yes, financial advisors cost money. So do doctors, dentists, car mechanics, plumbers, hair stylists. Hopefully, you don’t pull your own teeth. It’s just better to leave some things to professionals. Is managing your money one of those things?
Perhaps, yes. In the best situations, the money gained from hiring a financial advisor will cover the costs of the advisor many times over. But, as with all things, there’s a risk. With bad advice, not only are you out the money you paid the advisor, but you could be out much more.
That’s why it’s important to work with a financial advisor who’s highly skilled and experienced, and is willing to commit the time and dedication necessary to ensure you achieve your financial goals. So what should you look for? These 5 financial questions to ask your potential advisor will help you figure out if you’ve found the one before you ever have to hire.
Know Your Needs – Financial Questions to Ask Yourself
Before asking your future advisor any questions, you have to ask yourself a few questions.
What are your own financial goals? Do you have a short-term goal, i.e., save for a down payment on a business you’d like to purchase, go back to school? Do you want to establish a retirement plan, or an estate for your children?
Are you looking for advising or whether you want someone who can broker financial products as well, e.g., life insurance. What sort of relationship are you looking for? Do you want someone to take complete responsibility for all of your resources, or are you just looking for someone to give you a bit of guidance from time to time?
How much confidence do you have in yourself to make financial decisions? Are you willing to expend your own time staying abreast of market trends? Whatever your answers are, they are apt to change over time.
Ultimately, your relationship with your advisor should be collaborative. While some advisors are unwilling to consider your input as valid, it’s your money. You should have more than a say in how it is managed. But there may come a time when you feel so much confidence in your advisor that you will be willing to rely on her to make even the most important decisions. But that kind of trust should be earned. It should be based on a number of good decisions made over a period of not months, but years.
Having a clear idea of what your financial goals are, and what you expect from an advisor will let both you and your potential advisor know if there’s a good mutual fit.
It’s likely that an advisor will be willing to sit down with you and give you an opportunity to ask questions prior to committing to hiring him. If not, that’s a sign to head for the door. But now that you’re having your first meeting, what do you need to know?
What’s your education and certifications?
No matter how much confidence a financial advisor inspires, it’s essential that you first make sure the advisor possesses the basic qualifications to be a competent financial advisor. Find out where he went to school, what he studied, what relevant honors he received.
Ask the advisor about her certifications. There a number of types of certifications, including those described in this article about financial certifications.
Ask a few friendly questions about the advisor’s experience, where they worked, what they did, who influenced them, why they work as a financial advisor. These are questions you’d hear at a job interview – because that’s what this is: You’re deciding whether to hire this person and you need to know about their work history.
What services do you provide?
Perhaps this question is often overlooked because we assume that all advisors can do all things. But e
even if the personal advisor is qualified to perform a certain service, that doesn’t mean it’s a service that she offers. Some advisors offer services for a particular type of client. This could be appealing if you fall into that specific group, but if not, you might need to go elsewhere for your particular needs to be met. For example, if your resources are much smaller — or much greater — than the bulk of the clientele at a particular organization, the services offered there might not be ideal for your particular circumstances.
If you fit into a unique market, an individual advisor or boutique firm that specializes in serving clients in circumstances similar to yours, that might be your best option. But if you’re not sure what kind of services you need, or you anticipate your needs changing in the future, you might look for an advisor that works in a larger organization that with a broad range of services.
Do you have any client references?
Of all the financial questions to ask on a first meeting with your advisor, this is one that absolutely should not be missed. And you need to check with the references because clients will tell you more than the advisor ever will.
You’ll have a separate set of financial questions to ask references, some of which will be based on your specific concerns regarding the advisor. There are a few basics, though, that should be included to indicate a level of trust and performance ability, including:
- How did they know the advice and services were working?
- Do the company and the advisor both seem to operate ethically and transparently?
- What lines of communication exist between the advisor and their clients?
- What are the advisor’s biggest strengths and greatest weaknesses?
- Why do they choose to continue working with this advisor?
- What would they suggest as financial questions to ask the advisor?
Reference calls don’t need to be long to be telling. These are generally going to be trusted clients, ones that the company is proud to work with and ones that the company does not mind putting out there as examples of the best they can offer.
That means that if these clients have concerns that are of any worry to you, that’s something to seriously consider. As a new client, you won’t be getting the same level of service as long-term, trusted relationships. Any concerns coming from the top are going to be magnified moving down.
What protection will I have with you and your company?
You’re going to be trusting a lot of very personal, very valuable information to your advisor, so one of the most important financial questions to ask them isn’t about what they can do right, but what they can do if something goes wrong.
A financial advisor shouldn’t be able to get their hands on money in most cases. Provided your account is set up properly, protection should be inherent in their service. Your advisor will be able to handle your investments, but the account, itself, should be held by an independent custodian.
A custodian is a specialized financial institution responsible for safeguarding financial assets that aren’t engaged in traditional banking. That means that accounts held in branch banks or personal accounts, along with investments such as your mortgage, won’t fall under the custodian. Only active investments that are represented by the services offered by your advisor would fall under this account.
Ask your advisor what custodian will host your account, and if you’re not super investment savvy yourself, ask them to break down the nature of the account in plain English. You want to make sure that you understand the nature of your set-up, and if your advisor can’t give that to you in a way that makes you feel comfortable, the only financial questions to ask at that point are is there someone in the company that can help you understand and can you get a meeting with them, instead.
Additionally, a proper custodian should be set up with insurance that protects your investments should the custodian close due to bankruptcy and financial difficulties. Ask about the coverage your custodian would carry, including SIPC insurance which offers $500,000 of net equity protection, and CAPCO, which covers the balance of your account in the event of financial failure.
While you’re talking security, don’t forget that that there are more than financial questions to ask when you’re working with your advisor, there are broader concerns, as well. Just like your investments should be secured properly with the custodian, your personal information should be secured by the company.
Ask about what system security measures are in place – both digital and hard copy. Take the time to look at the security vendor’s track record and really assess. As good as an individual advisor may be, if the company as a whole contracts with a substandard vendor, you’re at risk for a losing a lot more than dollars and cents.
How will I pay you?
Advisors can get paid in a lot of ways, and they can make money even if you’re not. That’s why it’s important to understand their fee structures before you begin working with them. The bulk of their pay should be coming directly from you as the client.
The exact means of client charges will vary from company to company, but more likely than not, you’ll either be charged a flat monthly fee, or an hourly rate. They may also charge a small percentage of assets managed, which generally doesn’t top around 2%.
If you’re dealing with a fee-only advisor, this is about all that should come with the territory. Other advisors may charge commission on financial products bought or sold, or may work with a combination of payment methods.
Something like commission might have a sale-sounding incentive behind it, but it’s not inherently detrimental to you as the client. As part of your list of financial questions to ask during that first meeting, if you find you’re dealing with a commission or combination payment plan, there’s one more question you probably want to add to your list.
Ask your advisor if they’re legally bound to act in your best interest. It’s their fiduciary duty, and if you’re able to get it in writing, you’re also able to take them to court if they don’t follow through later on. Making sure your advisor is a true fiduciary will ensure that their advice isn’t being given with their ability to profit from it in mind.
In fact, it ensures that your money is working for you, even if it’s going against what you originally envisioned. An advisor that’s not obligated to act in a fiduciary capacity is free to make investments at your command that may be unwise or have an inherent risk to them with which you are unfamiliar.
An advisor that’s obligated to act as a fiduciary will steer you away from these investments, even if they represent short-term profitability for them. Along with all the other financial questions to ask during your meeting with any potential advisor, finding out how they’re legally obligated to act regarding your money will help you put everything in context. If they aren’t there to act in your best interest, they aren’t the advisor for you.
Making The Choice
Once you’ve gone through your list of crucial financial questions to ask with all the advisors you’re considering, you’ll be much better equipped to make a decision that will get you someone who is really going to help you grow.
As long as they are bound to have your best interest at heart, and you can get verification of that before you buy in, you’ve got a good head start. It won’t be the end, and there will be multitude of financial questions to ask them before they start making any significant investments on your behalf.
These five crucial questions, though, will let you know something that projections and service menus alone won’t. These financial questions to ask before hiring will let you know right from the start if they’re the type of advisor you want to work with, one that’s worth your trust.
Bottom lines may be attractive, but they’re only part of the equation. These financial questions to ask will let you see the other part. Ultimately, the right advisor will be the one who answers these in a way that’s meaningful and understandable to you as a potential client. Anything shy of that isn’t an advisor that has your best interest at heart.
