Today I’m sharing the best questions to ask a financial advisor in 2021.
In fact, these are the exact questions I tell people to ask us when they are considering our firm.
So if you’re tired of seeing the same questions to ask a financial advisor (“How often will I hear from you?”), you’ll really enjoy this list.
The 7 Questions to Ask a Financial Advisor
There are over 10,000 San Diego financial advisors. And over 300,000 in the United States!
Unlike doctors and attorneys, advisors aren’t required to use a consistent title.
Here is a handful you might come across:
Financial Planner…Wealth Manager…Investment Advisor…Financial Consultant…Investment Manager…Wealth Advisor…
Knowing what questions to ask a financial advisor will ensure you’re hiring someone who has the right expertise to help with your situation.
To help get you started, here are the seven questions I think are most important.
1. Are you a Fiduciary…100% of the time?
A fiduciary financial advisor is legally required to put your interest first.
A fiduciary is also prohibited from selling you financial products (e.g., life insurance or annuities) in return for a one-time commission.
Their compensation can only come from you (the client) + it must be a transparent line item on your statement.
If you’re interested in working with a fiduciary (and I highly recommend this!), it’s critical to ask the following question:
“Are you a fiduciary 100% of the time?”
Unfortunately, most financial advisors have to answer…NO!
That’s because most advisors are “dually registered.”
A “dually registered” financial advisor can take their fiduciary hat on and off. They are not a fiduciary 100% of the time.
One day they are a fiduciary putting your interests first and the next they are trying to sell you an insurance product with hidden commissions.
When a financial advisor acts as a fiduciary 100% of the time, you don’t have to wonder if they are recommending an investment just to meet a sales quota.
When in doubt, ask your financial advisor – or one you are considering – to put their fiduciary status in writing.
2. Who do you specialize in working with and how many clients do you have?
It’s important to ask a financial advisor what type of clients they specialize in working with.
After all, you wouldn’t go to a personal injury attorney if you need help with a divorce.
Here are some examples of people advisors specialize in working with:
- Specific professions, such as doctors, teachers, or even speech-language pathologists.
- Employees of a major company, like Broadcom or Microsoft.
- Certain age groups, like millennials or baby boomers.
It’s critical your financial advisor has the right expertise to help with your specific situation. It’s also comforting to know they’ve helped other clients with similar needs successfully.
Speaking of other clients, asking a financial advisor how many clients they serve will help indicate two things:
- How much time they have to spend on your financial plan
- How personalized and customized their services are
“The average experienced lead advisor has 96 clients”, according to financial services guru Michael Kitces.
3. What is my total cost to work with you, how are you compensated, and where can I see this in writing?
Just because you work with a financial advisor who is a fiduciary 100% of the time doesn’t mean it’s easy to understand the all-in costs.
Here are some of the common fees you might incur when working with a fiduciary:
- Advice Fees. These can be in the form of hourly fees, one-time project fees, or a percentage of your investments.
- Transaction Fees. These are charged by the custodian (e.g. Fidelity, Schwab) when your advisor buys or sells investments on your behalf and can range from $0 to $50 per trade.
- Expense Ratio. This fee is charged by a mutual fund or exchange-traded fund (ETF) to cover operational expenses and can range from 0% to 3% (or more!) per year.
It’s important to note that a fiduciary financial advisor is only compensated by the advice fee.
While they don’t benefit from other fees, they still have a legal responsibility to keep those costs as low as possible.
For example, let’s say your fiduciary advisor recommends that you put $100,000 in the S&P 500. Here are two S&P 500 mutual funds and their expense ratios (as of 9/29/21):
- Rydex S&P 500 (RYSOX) = 1.65% or $1,680 per year
- Fidelity S&P 500 (FXAIX) = 0.015% or $15 per year
That’s a difference of $1,665 per year!
When two investments are identical – like the example above – your financial advisor is obligated to recommend the lower-cost option.
This is why it’s so important to ask about all of the fees you might incur, in addition to advice fees charged by your advisor.
Every SEC Registered financial advisor is required to give you their Form ADV and Form CRS. These documents will give you a detailed breakdown of their services and fees.
4. What experience do you have to navigate the complex world of financial planning?
When interviewing an advisor, you probably want to know more about their experience.
However, experience is more than just the number of years they’ve worked in the profession.
What’s likely more important is the type of experience they have solving particular problems. Some examples include:
- Financial planning
- Tax planning
- Retirement income
- Investment management
- Insurance optimization
- Charitable giving
Another important question is:
“Does your firm have a process for providing financial planning services and investment advice?”
This process should include how they gather the data from you, how they analyze your unique situation, and how they arrive at their recommendations. The process should also include a methodology for implementing this advice and monitoring it.
One way to gauge a financial advisor’s experience is to ask about professional designations.
The most prominent designation is the CERTIFIED FINANCIAL PLANNER™ or CFP® certification.
Additionally, a CFP® Professional must have at least three years of financial advisory experience and a four-year college degree. They are also required to take continuing education classes each year to keep up with the ever-changing world of financial planning.
5. Please provide me a list of all the services you provide.
The purpose of this request is to understand if their services are focused on one area (i.e., investment management) or comprehensive in nature.
Typical services might include general financial planning and investment management. However, many people have needs that go beyond the basics.
One example of an important financial advisor service is tax planning. Believe it or not, your tax bill could be higher in retirement than as a working professional.
If you are a high-earner or diligent saver, hiring a financial planner who has the expertise to lower your tax bill each year is wildly important.
It should be easy for an advisor to provide a list of the services they provide. If their answer is vague or confusing, that might be a red flag.
6. Where do you keep my money and how can I see it?
If there is one thing on this list of questions you don’t want to overlook, it’s this one.
Please confirm that your financial advisor is using a major third-party custodian to hold your investment/retirement accounts.
Well-known custodians include Fidelity, Schwab, and TD Ameritrade.
When your advisor works with a trustworthy third-party custodian, they can’t go rogue with your money. They have limited authority to manage your investments and oversee your accounts.
Hint hint: Bernie Madoff was NOT using a third-party custodian
A third-party custodian also provides investors with FDIC and SIPC insurance.
“Helping protect our customers’ assets is an important part of our commitment to providing the best service possible”, says Fidelity.
Every third-party custodian provides online access for you to see your accounts. Many of them also have physical branches across the U.S. for you to visit.
7. What is your investment philosophy and how do you manage investments?
While investments are just one piece of financial planning, it’s helpful to understand an advisor’s philosophy and approach before hiring them.
Does the advisor use low-cost index funds? Do they actively trade individual stocks? What about investing in gold, hedge funds, and other alternative investments?
Additional questions to consider asking:
- How do they incorporate investments held in a workplace retirement plan like a 401(k)?
- How many positions do they include in each portfolio?
- Can they incorporate individual stock positions that you don’t want to sell?
- What about tax-loss harvesting?
- Or, tax gain harvesting?
In addition to getting answers to these questions and more, you might ask for a sample portfolio so you can look under the hood and see things for yourself. While you’re at it, check on those expense ratios!
Additional Free Resources for Investors
In addition to these questions, here are a few more helpful resources to consider using:
- Questions to ask a CFP® Professional [Financial Planning Association]
- Investor Resources and Checklists [NAPFA]
- Financial Advisor Interview Questionnaire [Garrett Planning Network]
Final Thoughts on Questions to Ask Advisors in 2021
Choosing a financial advisor is one of the most important decisions you will make.
Working with the right advisor for your unique situation can be the difference between a carefree retirement and a stressful one.
When meeting with a financial advisor, don’t be afraid to ask tough questions. Like any other professional, they are there to serve the needs of their clients. A good advisor will welcome any and all questions you ask.