Searching for a financial advisor can be overwhelming. Asking the right questions can help you find an excellent advisor, rather than one who might not meet your needs. Whether you are seeking to replace a current advisor or selecting your first one, this guide provides an overview of the most important questions you should ask. It is important to keep in mind that while all advisors have varying approaches, a competent and ethical advisor should be receptive to addressing any questions or concerns that you may have.
QUESTIONS TO ASK
1. ARE YOU A FIDUCIARY?
A fiduciary has a duty to provide you with advice that is objective, unbiased, and in your best interest. They must always put your interests ahead of their own.
DID YOU KNOW?
Not all financial advisors are required to act in your best interest? It's best to avoid advisors who are not held to the fiduciary standard.
This is in stark contrast to non-fiduciary advisors, who are held to a lower standard of care known as the suitability standard. Advisors who operate under the suitability standard only need to recommend investments based on your goals and risk tolerance. There is no requirement for their recommendations to be the best or most cost-effective option for you. At times, this can result in advisors making excessive trades (churning) or recommending products with high commissions.
METHODS OF ADVISOR COMPENSATION
Fee-Only. Nearly all fee-only advisors are fiduciaries. Being fee-only means the advisor charges a percentage of the assets they manage for you. This transparent form of compensation helps to align your interests with your advisor’s.
Commissions. Commission based advisors receive most of their compensation in the form of “kickbacks” from selling certain products, mutual funds, and annuities. This can lead to your advisor’s recommendations being influenced by their desire to earn a commission.
Fee-Based. Fee-based advisors are a blend of the above two options. Generally, their primary revenue source is derived from asset-based fees, however they may occasionally earn commissions from the sale of certain products.
Bottom Line: By working with a fiduciary advisor, you can have greater confidence that your advisor will act in your best interest and not be influenced by other financial incentives.
2. HOW WILL WE WORK TOGETHER?
While every firm is different, advisory services generally fit into the six categories below:
While many financial advisors may offer the above services, the key factor that sets them apart is their approach to delivering these services in a way that generates long-term value for their clients. A well-defined process is critical for advisors to meet the specific needs and goals of their clients.
Ask your advisor what services they can offer, and to provide specific examples of how they deliver those services. A quality advisor should be able to articulate exactly how they create value for their clients. If they can’t do that, it may be a sign to continue your search elsewhere.
For example, ask a potential advisor to describe their onboarding process. While every client situation is unique, having a consistently implemented process produces far superior results for clients.
Bottom Line: A good advisor should be able to clearly articulate their services and the process they use to implement those services.
3. WHAT QUALIFICATIONS DO YOU HAVE?
The number of credentials in the financial services sector is enormous. However, some are more helpful than others. Most credentials are a combination of letters forming an acronym you have never heard of, and there are so many of these that the industry is beginning to resemble alphabet soup.
Despite the complexity, we believe there are several important designations that you should be aware of when selecting an advisor.
Certified Financial Planner™, CFP®
Chartered Financial Analyst, CFA®
Certified Public Accountant, CPA
These three credentials are arguably the most sought after in the industry. However, finding an advisor that carries one of these credentials doesn’t mean you’ve found an automatic match. There is a high degree of variability in the quality of financial plans built by individuals with a CFP® designation. Finding an outstanding CFP® Professional can be hard.
At Selective, we implement a team-based approach to ensure consistent quality across all planning activities. At least twice a year a CFP® professional, CFA®, and CPA conduct a dedicated VIP Session together with the sole focus of capturing wealth-maximizing opportunities for you and your family. While each team member is individually talented, the combined effort of a dedicated session produces tremendous results that drive long-term value over the life of your plan.
Bottom Line: Look for a high-quality designation you understand. A team-based approach with multiple designations will often produce superior results.
4. HOW WILL MY ASSETS BE INVESTED?
A high-quality answer to this question should address creating a tailored portfolio that is unique to you. An experienced advisor should not immediately answer this question. If they do, it is possible that they might have a financial incentive in selling certain commissioned products.
Before making any investment recommendations, it’s crucial to consider a client’s existing holdings, tax bracket, risk tolerance, and time horizon. Having constructed hundreds of portfolios on behalf of clients over the years, we can attest that in general, no two portfolio recommendations are the same.
While you should not expect an immediate answer to what your exact portfolio will look like, it is important that an advisor can clearly speak to their guiding
investment principles. For example, at Selective we believe in investments that are easily understood, transparent, diversified, and tax efficient. Every advisor will have different principles by which they select their investments, and we recommend finding one that resonates with you. You can read more about Selective’s investment principles here.
Bottom line: There is no quick and easy answer to this question. An experience advisor will collect detailed information about your financial picture. Avoid advisors with a dogmatic one-size-fits-all approach to your portfolio. A good answer would be “it depends” followed by sound principles for investment selection.
ADDITIONAL IMPORTANT QUESTIONS TO ASK
Below are some additional questions to ask as you interview potential advisors. While every advisor will answer slightly different, below are examples of answers that are free from biases and conflicts of interest.
How are you compensated?
We are a fee only advisor. We do not collect commissions or charge hidden fees. Our interests are aligned.
Can I comfortably retire?
Every client situation is unique. A personalized financial plan is necessary to properly assess your retirement readiness.
What experience do you have to navigate the complex world of financial planning?
Designations and years of experience are not all that matters. Your advisor should be able to talk through specific scenarios where they have created value for clients.
How can you help minimize my taxes?
A team-based approach that includes a CPA is essential to tax minimization.
Do you have a local office presence?
Building a relationship with your advisor can be critical to financial success. If in-person meetings is important to you in this process, find an advisor who can meet face-to-face.
Are you a fiduciary 100% of the time?
Yes – I am not able to collect commissions on the sale of mutual funds and other financial products nor am I dually registered (some advisors can take their fiduciary hat on and off).