8 Questions to Ask When Interviewing Financial Advisors

Saving for retirement, buying a second property, selling a business, inheriting assets - these are all good reasons to seek advice from a professional financial advisor.

But not all financial advisors are created equal.

Unfortunately, like all industries, the financial advisory world has its share of bad actors (see: https://www.thinkadvisor.com/2023/12/18/10-worst-financial-advisors-in-america-2023/).

So before you commit to an advisor, you want to make sure you’re hiring the best person for you and your situation - and someone who is ethical, qualified and competent. Someone with solid credentials, a history of successful partnerships, and positive client feedback.

So here is a list of questions you should absolutely be asking your potential advisor.

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1.???? What are your qualifications, licenses and credentials?

There is an overwhelming number of financial advisor designations - a virtual alphabet soup. Today, the Financial Industry Regulatory Authority’s (FINRA) website lists a total of 235 credentials that you may find decorating the business card of a financial adviser. (By the way, FINRA doesn’t endorse any of them.)

The gold standard for financial advisors is the CFP designation: Certified Financial Planner. To add the ‘CFP’ letters after their name, advisors must complete two years of part-time study, pass a 10-hour exam and have several years of real-world experience working with clients, either independently or as an apprentice with someone who already has the CFP designation. Maintaining that CFP requires continuing education and compliance with ethical standards.

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2.???? What services do you offer?

Some financial advisors offer a range of services, while others specialize in niche aspects of financial management. Investment advice? Financial planning? Tax planning? Is the advisor qualified to offer these services? (See the ‘credentials’ question above)

Is he/she only qualified/licensed to sell insurance or annuities? Are they a ‘captive agent,’ only able to sell their own proprietary products? If they are only licensed to sell insurance, that will certainly dictate the ‘advice’ they give and limit the products they ‘sell’ you. If all you have is a hammer, the whole world looks like a nail. Turn and run.

You should look for the advisor who will create a comprehensive financial plan for you and offer advice based on your needs and not the limited scope of their product offerings. Also, ask if he or she will implement the plan and recommendations and/or work with other professionals to do so. In some instances, other professionals will implement the recommendations or you may want to implement them yourself.

Your focus should be on establishing a relationship with an advisor who is going to offer advice and invest for you – not someone who is trying to sell you a product because they earn a commission. And speaking of compensation…..

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3.???? How do you and your firm make money?

One of the most important questions to ask prospective advisors is how they get paid. There are generally two primary ways financial advisors make money: fees and commissions (or a combination of the two).

Many advisors are compensated from the fees they charge their clients. Fees are often based on a percentage of assets under management (AUM), with a common fee being about 1%. As a client, you see exactly how much money your advisor earns on your business - because you are paying him directly. Complete transparency.

The other way advisors can make money is through the commissions they earn when they recommend certain investment products. In this case, the money comes from the investment company, or mutual fund company, rather than you as the client. You can already see how this can create a conflict of interest. Does the advisor mention this, or any other conflicts they may have?

You should look to understand how the fees you pay are determined and if/how they might affect the recommendations that your advisor makes.

Focus on finding an advisor who is compensated on a fee-basis, transparent about their cost structure and provides advice based on your best interest. You’ll want to avoid the advisor who only uses a particular investment company or brand of mutual funds because they payout higher commissions to them.

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4.???? How will you choose investments to recommend to me?

See above on compensation. Transparency is key. If the advisor is compensated directly from the mutual fund company for investing your money in their fund, clearly a conflict exists. Move on.

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5.???? What type of clients do you typically work with?

Some financial advisors prefer to work with clients whose needs fit their expertise, so it’s important to make sure the advisor is a good fit for your individual financial situation.

If you have any unique circumstances, make sure to mention them to the advisor so that you are able to decide if the advisor is a good fit for your circumstances. Does the advisor specialize in a certain area, such as working with small business owners or corporate executives? Women going through divorce? High-net worth clients?

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6.???? What are your legal obligations to me when acting as my investment adviser?

This can be a tricky one. What you’re trying to find out is if the advisor is required to act in your best interest, rather than just offer you advice on investments that are “suitable.” This difference cannot be overlooked or understated.

You should look to establish a relationship with an advisor who is a fiduciary and who will always act in your best interest, and not in the best interest of the advisor or of the firm. Period. Full stop. Underline, bold and italics.

A fiduciary is someone who will put your interests ahead of theirs. This is important because there may be situations where the interests of the financial professional conflict with your interests. A fiduciary has an obligation to disclose the conflicts of interest and continue to put your interests first. You should look to understand and ask about these conflicts because they can affect the investment advice you receive. That may seem like common sense, but not all financial professionals have a fiduciary obligation.

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7.???? As a financial professional, do you have any disciplinary history? For what type of conduct?

This is all public information and can be verified on Broker Check (https://brokercheck.finra.org) as well as the Security and Exchange Commission's (SEC) site (www.adviserinfo.sec.gov).

I would also recommend you request from the advisor a copy of the following documents, publications required by the SEC:

• Form ADV Part 2A. This form details the advisory practice, the fee structure as well as the company’s ownership.
• Client Relationship Summary (Form CRS). This is an easy-to-read disclosure form regarding the nature of the advisor’s practice and service offerings.
• Privacy notice.

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8.???? Where will my money be held?

When you have a financial advisor managing your investments, it’s important to understand where your assets are being held. Just as you would if you were managing your own investment portfolio, your advisor is likely using a third-party custodian to manage your investments.

There are several reasons you may want your advisor to use a major custodian (Charles Schwab, Fidelity, etc.) to hold your assets. First, it makes it easy for them to share information about your account with you. These custodians issue statements; you can also call the custodian directly. Secondly, it provides an added layer of security for you and reduces the chance of fraud.

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So this is a pretty good start.

If you’ve read this far, you’re probably committed to the process of finding the right person to work with. (And if you want more questions for round 2, let me know….)

I get it – I went through this process, too, when I decided to change my career and become a financial advisor. I interviewed dozens of advisors and firms to decide with whom I wanted to partner.

Engaging in open and transparent communication with a potential advisor about how they conduct business is crucial for establishing a strong and effective working relationship. Understanding their approach, methodologies, and decision-making processes will not only enhance your overall comprehension of the business dynamics but also foster a collaborative environment; it will give you the confidence to proceed. Or not.

If you want some additional information, please visit the an investor bulletin published on the SEC’s website: https://www.sec.gov/resources-investors/investor-alerts-bulletins/top-tips-selecting-financial-professional

#CFP #financialplanning

Bill Davis is a CERTIFIED FINANCIAL PLANNER? and Managing Partner with Vericrest Private Wealth, LLC in Newtown, Pennsylvania.

https://vericrestprivatewealth.com