One of the most important decisions you will make is choosing your financial advisor. A financial advisor generally manages your money and provides financial guidance at critical life moments, so they can help shape your life situation.
Identifying the right advisor combines elements of relationship chemistry and technical skills related to your specific life circumstances. Below are the five most important questions to ask the financial advisors you interview:
Most advisors have good intentions to help people reach their financial goals, but an alignment of interests between you and your advisor serves as the foundation of the relationship. People tend to behave based on how they are paid.
The legendary investor and co-Chairman of Berkshire Hathaway, Charlie Munger, said, “Show me the incentive and I will show you the outcome.” You need to understand whether the relationship you are entering is one where you will pay your advisor a fee, a commission, or both.
When you pay only a fee, the advisor must serve as a fiduciary. When they are paid a commission, they only must recommend a product that is suitable.
Financial planning guru, Michael Kitces, described the difference between a fiduciary status and suitability well: “Suitability means selling a suit that fits you. Fiduciary duty means it actually has to look good on you, too.”
Make sure you understand how your advisor will get paid throughout the relationship and what services you receive for that compensation.
People rarely ask this question, but it gets at the heart of the level of service you can anticipate. Advisors who are the primary relationship point for more than 80 to 100 clients simply can not service those clients appropriately.
If the advisor has a lower ratio, you should still ask at what point they would cut off the number of clients they take on or bring on another advisor to service a section of the clients.
This question can also give you insight as to whether the advisor who is onboarding you will eventually ‘pass you on’ to another junior advisor at some point in the future. That may be fine if the proper systems are in place, but you should be aware at the outset.
This question reveals the advisor or firm’s competitive advantage and focus. A firm that only works with physicians is going to have a high degree of specialization around the needs of physicians. Another attribute than can make a firm unique is how they work with their clients.
Does the entire team work with and service the client or is each advisor operating in a silo? Usually, there are multiple firms that have similar focuses, but this question can help narrow down your selection quickly.
The best advice is comprehensive. The particular problem that brought you to the advisor may only be part of a larger problem. Most financial planning issues touch on multiple matters at the same time.
For example, an advisor helping a client with their asset allocation should evaluate the client’s portfolio income needs and ongoing living expenses, time horizon, and tax consequences of making changes to the portfolio.
An insufficient analysis might look at a 60-year-old with an 80% stock/20% bond allocation and conclude the asset mix is too risky. However, imagine that same client has pension income that covers their living expenses. In such a case, that allocation could be appropriate. It depends on the holistic picture.
This question will help you understand how open-minded your advisor is and whether they are a lifelong learner. Ask for specific examples. No matter how skillful or technical their expertise, there is always room for improvement.
It will also signal whether they have some level of humility and introspection. Arrogant investors are often blind to their shortcomings which can bleed into their investment selection and recommendations to clients.
An advisor’s personal experience, such as losing a parent or spouse, can bring helpful perspective to the advice they give to clients.
Receiving answers to these five questions should narrow your advisor selection considerably. Throughout the conversation, pay attention to the chemistry between you and the advisor.
Do you feel comfortable and listened to? It is important to feel some connection with your advisor if you want a long-term relationship.
You probably will not receive perfect answers to all your questions. Do not let perfect be the enemy of good. An advisor who you feel comfortable with and meets most of your expectations could potentially add huge value to your life. Once you find one, make sure to act.
Are you using the services of a financial advisor? How did you go about making your choice about whom to employ? Did you ask them any particular questions at the initial interview? Please share them or any tips you may have in the comment box below.