Questions to Ask a Financial Advisor Before Hiring

I think almost everyone would benefit from some level of financial planning advice.  However, hiring a financial advisor can be intimidating and confusing.  While there are plenty of 'questions to ask a financial advisor before hiring' lists out there, often they are missing the 'why' of the questions.  It isn't enough to have the questions.  You also have to know what you are trying to learn when asking these questions.

These are the questions (with explanation) that I would want to know if I was sitting on the other side of the table:

What are the background and demographics of your typical client? (Profession, age, net worth, income, etc.)?

Ideally, your situation will be in the ball park of their typical client. Everyone is different and it doesn’t need to be exact. However, it might not be ideal to be the firm’s largest client. Conversely, if most clients are ultra-high net worth, and you are starting out in life, you may not fit with their planning process.

How long have you been advising clients like me?

A short tenure does not need to automatically exclude an advisor from consideration.

The important thing is do they have the education and background to give advice to people in your current financial situation? 

What is your investment philosophy?

Advisors will be split between active (choosing securities in an attempt to beat the market) and passive (earning the return of the market) strategies. Academic research and empirical evidence has strongly shown that passive investment strategies have lead to better outcomes in the past for investors.

I tend to think that simple is better than complex. That said, there could be good reasons to hold individual stocks and bonds for example (rather than index funds) and this is a matter of making sure your needs match up with the investment philosophy of the advisor.

Do you give specific tax advice and/or provide tax preparation services?

While financial planning will almost always touch on taxes, many financial advisors will not give specific, direct tax advice. This could be due to lack of knowledge, regulatory reasons, or the advisor’s employer’s policies.

Competent, forward-looking tax planning is a valuable service. An advisor who does not give specific tax advice may still be able to help you with strategy and point you in the right direction, often with a referral to a CPA or EA.

Knowing what to expect up front will help you evaluate if the advisor will meet your needs.

If you are looking for tax preparation services, some financial advisory firms will offer this service either as an add-on or as part of their relationship.

Do you manage my portfolio for me on an ongoing basis?

Most advisors will want to manage your portfolio on a discretionary basis and charge an ongoing fee to do so.

If you are comfortable managing you own portfolio there are a smaller number of advice-only planners if you want ‘just the advice’ and are comfortable with the logistics of managing your own portfolio (trading, account opening, transfers, etc.).

How often will we meet and what does a typical year look like for one of your clients?

For most investors it makes sense to meet with their financial advisor on a periodic basis. Financial plans are rarely static for long as goals, life situations, and tax laws change.

If you are seeking a second opinion, or one-time plan, ask if that is an available offering.

Do you act as a Fiduciary at all times when advising me and managing my investments?

There are many non-Fiduciary advisors out there doing a great job and giving objective advice to their clients. However, there are also many who are conflicted either due to their business model, parent company, or financial incentives.

Fiduciary financial advisors are abundant now and there is really no reason not to have that extra protection.

What is your financial advice educational background?

Designations such as a CFP® (financial planning), CFA (portfolio management), and CPA and EA (tax advice) can show you that the advisor has at least some background technical knowledge.  I don't think that an advisor not having one of these designations should be automatically ruled out (as I know some excellent advisors who do not have them), however, like fiduciaries, there are an abundant amount of Certified Financial Planners out there that one should be easy to find.

Do you have any minimum investment amount or fee minimums?

Most fee-only, fiduciary advisors who charge on an assets-under-management basis will have a minimum investment amount.

If you are not looking to turn over your portfolio, or don’t have the minimum investment, consider an advisor with an hourly or flat-fee business model.

Do you have any financial incentives to recommend a specific investment, financial product, or service provider?

Ideally the answer is no. If the answer is yes, ask follow-up questions. Similar to the Fiduciary question, most commission-based advisors are doing great work, however there are enough fee-only advisors out there that you may as well hire someone who is less conflicted.

How do you price your services? Please provide an estimate (in dollars, not percentages) of my total cost to work with you in the first year.

Financial Advisor fees can be divided into three buckets:

Commissions – The Advisor will earn a commission when you purchase an investment product. The only reason I can think of to work with a commission-based advisor today is if you are already in the market for a specific investment product (annuity, life insurance, structured note, mutual fund) and are shopping around for the best fit.

Fee-Only (Assets Under Management) – This is the most common way to work with a fiduciary, fee-only advisor if you would like your assets to be managed on an ongoing basis by your financial advisor.

This fee will be expressed as a percentage of the total account value being managed (usually around 1% or less for larger balances). It will increase if your accounts go up or you add more funds. Make sure to ask for this to be expressed as a dollar amount so you can best evaluate the cost vs. value.

Fee-Only (other) – This category includes flat annual fees (usually for portfolio management and financial planning), annual retainer fees (could include portfolio management or be advice-only), and hourly fees.

I founded an hourly financial planning firm because I think that business model is the most investor friendly for those who need financial planning, tax, and investment advice but are comfortable managing their own investment portfolios.

The key is to match the costs and pricing model to the service you need. A good financial advisor can charge in any of these ways and deliver great advice.

These questions are best used as a conversation guide while interviewing a potential advisor. The best financial advisors will be happy to answer all of these questions in a conversation, and most will be happy to answer in writing as a follow-up.  I do not recommend blast emailing these questions to a list of potential advisors as a part of your search.  The most professional, experienced, client-focused advisors (in other words, the ones you want) are less likely to take time away from their clients to answer long lists of emailed questions.

I hope this information is helpful in your financial planning journey!