Questions to Ask a Financial Advisor
You’ve decided you need a financial advisor. ✅
You’ve figured out which type of financial advisor is right for you. ✅
Maybe you’ve even gathered a list of three or so advisors who might be a good fit. ✅
Next step? Set up some interviews.
Yep, ‘fraid so. No doubt adding another step to this process isn’t on the top 10 list of things you want to do today. But hiring a financial advisor to manage your money means finding one who’s really right for you. That means someone who:
- has the experience you need.
- has an investment philosophy that works for you.
- and answers your questions in a way you understand.
You also want to have a clear understanding of how they get paid, what your costs will be, and how often you’ll have access to the advisor.
By asking questions upfront, you’ll find the best match for you. Ultimately, that’s going to save you time, and possibly money too.
Here are six questions to ask a financial advisor before you hire one.
1. Are you the right advisor for my situation?
You want an advisor who’s ready and willing to help you with your specific needs. That means this advisor needs to have experience and interest in your situation and your goals.
Let’s say you need help figuring out how much you can afford to set aside for your kid’s college education. If that’s the case, then an investment manager focused mainly on how to invest your money may not be right for you. A Certified Financial Planner or a financial coach might be a better fit, because they’ll take a look at your overall money situation, rather than just focusing on investments.
On the other hand, if all you want to do is start investing for retirement, then a robo-advisor might be all you need — and generally will be way cheaper than meeting with a human advisor.
2. Are you a fiduciary?
This is one of the most important questions to ask. Seriously. Absolutely do not skip this question. A fiduciary must work in your best interests at all times. A non-fiduciary does not. A non-fiduciary can sell you products that cost you more than equally great, cheaper products.
A fiduciary must work in your best interests at all times. A non-fiduciary does not. A non-fiduciary can sell you products that cost you more than equally great, cheaper products.
To make things annoyingly complicated, there are advisors who are fiduciaries some — but not all! — of the time. Be sure to find an advisor who is a fiduciary in all of their dealings with you.
Here’s more on what a fiduciary is and why it matters so much.
3. What’s your investment philosophy?
There are different strategies for investing money. For example, when investing for a long-term goal like retirement, passive investing in the entire stock market can be a great way to grow your money over time. Yet some advisors believe active management — picking stocks they believe are on an upswing, selling those they see as headed for a fall — is the path to success. Is it, though? Active investing tends to underperform passive investing, and you’ll generally pay much higher fees for active management.
Make sure the advisor can explain their philosophy to you in plain language. To cut through an advisor’s high-flown talk about modern portfolio theory or mean reversion, ask: “Can you give me some examples of how you currently invest clients’ money, and the reasoning behind those decisions?”
4. How do you get paid?
Advisors get paid in a lot of different ways, and some of those ways will make your wallet considerably thinner than necessary. Check out our article on how much a financial advisor costs.
Big picture: Generally, it’s best to work with a fee-only fiduciary financial advisor, not a fee-based non-fiduciary advisor.
With a fee-only advisor, you know that the advisor is getting paid solely by you. That goes a long way to eliminate conflicts and bias. In contrast, fee-based advisors will collect a fee from you as well as commissions or other payments from companies that sell products. It’s not a good look. And a fiduciary advisor must always put your best interests first; that’s not the case with non-fiduciaries.
5. What will my total costs be?
Investments come with fees. Same with insurance products. And you’ll definitely be paying for advisory services. Be sure to ask this “total costs” question so you know exactly what your all-in costs will add up to. That way, you can compare different financial advisors accurately.
It might be hard for the advisor to tell you what your investment portfolio will cost, since you’re not yet a client. OK, no problem. Here’s the question: Assuming a hypothetical investment portfolio, what would my all-in costs be for your services?
6. Do you use an independent custodian?
You’re asking this question to make sure your advisor uses an outside brokerage for clients’ invested money. Advisors may use Charles Schwab, Fidelity or any number of other companies that offer this service to advisors. One benefit? You get a statement from that third-party company and you can see exactly what’s going in and, more importantly, what’s coming out of your account.
The Bernie Madoffs of the world don’t use independent, third-party custodians. Enough said?
One more thing...
OK, you’re ready to interview some financial advisors. One last thing: Be sure to check if the advisor has any disciplinary marks against them. You can do this in a few different ways:
- Enter the advisory firm's name into our own financial advisor search tool to see if any conflicts of interest or disciplinary actions pop up.
- If the advisor has a CFP designation, enter the advisor’s name into the CFP Board’s Verify a CFP Professional tool.
- Use Finra’s Broker Check tool to check up on any disciplinary actions against the advisor. You can search by the advisor’s name as well as by the firm’s name — may as well check both! (If the advisor or firm is solely an investment advisor or RIA, rather than a broker-dealer or a dually registered broker/advisor, the Finra tool will provide a link to an SEC page with information about that advisor or firm.)
Our study shows that conflicts of interest and disciplinary actions are more common at hybrid financial advisor firms — those that operate as broker-dealers and are not held to a fiduciary standard. Learn more about this type of firm and what to look for when working with one.
What does fee-only advisor mean?
Fee-only advisors are paid solely by the client and do not accept any fees or compensation based on products that they sell.
What is AUM?
Assets under management, or AUM, is the total value of assets being managed by a firm. AUM is also shorthand for one type of payment structure, in which advisors charge clients a percentage of the money that the advisor manages for the client.
How do blended rates work?
Blended rates refer to a payment model where the advisor charges fees on a tiered basis, with the tiered fee decreasing as the value of the account increases. For instance, an advisor may charge 1.5% on the first $500,000 invested, 1% on the next $500,000, then 0.5% on anything above $1 million. In this example, the blended rate for a $2 million portfolio would be 0.875%. Each tier has a unique fee that's blended into the total fee charged.
What’s a custodian?
A custodian is a financial institution that provides account administration, facilitates trading, and physically holds investor assets for financial advisors. For example, Charles Schwab and Fidelity are two brokerages that offer custodian services for financial advisor companies.
What are 12b-1 fees?
A 12b-1 fee is an annual marketing or distribution fee on a mutual fund that pays ongoing commissions to financial advisors for recommending the fund to clients. If your financial advisor sells mutual funds with 12b-1 fees, be wary (fund “loads” are another fee to steer clear of). SEC research has shown there are no performance improvements associated with purchasing higher-cost funds over their lower-cost equivalents. If you’re searching for a financial advisor, consider asking if they accept 12b-1 fees. If they do, it’s a warning sign that you may end up paying unnecessary fees.
What is a hybrid advisor?
A hybrid advisor is an advisory firm or individual person who is dually registered as both an advisor and a broker; they’re also known as dually registered advisors. Hybrid advisors can switch at any time from being a fiduciary, with a legal obligation to serve your best interests at all times, to a non-fiduciary, eager to sell you a product. Before you hire a financial advisor, ask if they are a fiduciary in all of their interactions with you.