What questions should you ask a financial advisor?

So you’re interested in hiring a financial advisor to help you manage your money. Great! That’s an important step to take for your future, and you’ll want to make sure you hire the right one. If you’re coming from outside the financial industry, like any unfamiliar area, there’s a lot to take in and a lot of jargon will be thrown your way. To quickly get you up to speed, here’s the quick rundown of the various roles different financial advisors historically play.

For this post though, we want to give you a playbook for what you should be asking when you’re interviewing advisors. 

Are you a broker-dealer or a registered investment advisor? Are you a fiduciary?

There are two main types of advisors out there: broker-dealers and registered investment advisors. Let’s walk through the differences between the two types.

Broker-dealers are just that, brokers. They broker and sell and primarily make money from commissions charged on transactions. Their obligation is to sell you, the client, something that is “suitable” for your situation. This isn’t inherently good or bad, but it does create conflict of interest. Is the broker selling me something because it’s the best possible thing for my situation or is it something that pays the broker the highest commission? Again, this isn’t inherently good or bad, it’s just how things operate. There are plenty of good brokered products out there and it’s fine if it’s what you’re looking for.

Registered Investment Advisors (RIAs) are advisors that act differently than broker-dealers. They can’t profit from commissions and their obligation is to act as a fiduciary to their clients. Acting as a fiduciary means that you are legally required to act in your client’s best interest when you make recommendations. Again, this isn’t inherently good or bad, it’s just different. 

Take this into consideration when you’re looking to hire an advisor. Do you want to hire someone who benefits from selling you products and collecting commissions or someone who has to act in your best interest when making recommendations?

How do you make your investment recommendations?

For this, you want to make sure that the advisor isn’t solely recommending funds/products from which they directly profit. Ask why they use the products they use and what their evaluation criteria is. Some may have a list of approved funds, some may not. Either way is fine as some advisors like to use funds they know well while others may prefer to do their own research. You simply want to make sure that you’re aware of any conflicts of interests that may be out there. 

How are you compensated? What are the fees?

As mentioned before, compensation differs based on the type of advisor. Brokers make commissions, RIAs charge advisory fees. Again, either of these are fine, you just want to make sure you’re aware of them. Additionally, the products the advisors use generally come with their own fees like expense ratios and/or administrative costs and these can vary greatly. The advisor should be able to explain these costs to you in plain detail and/or provide you with prospectuses. Be conscious of these costs when making decisions and be wary of things that seem too good to be true.

What is your approach to client service? 

It’s better for everyone to know what the expectations are around client service. Can you expect quarterly calls or something less frequent? Will you be working with the same advisor or will you be working with someone else or perhaps the advisor’s assistant? Will the contact be proactive or reactive? This isn’t meant to be a qualitative evaluation on how frequently an advisor should be contacting you, but you should outline what you expect versus what the advisor is willing to provide. Not everyone wants to be called every quarter the same way some people like to be contacted more frequently by their advisor. 

Do you provide ongoing financial planning?

Some advisors are more focused on investment management while others are more focused on planning. It’s important to know what will be provided before you hire someone. You don’t want to hire an advisor that only does asset management and then ask them for advice on funding your child’s 529 while also saving for retirement. 

What is your approach to portfolio risk?

This is a pretty broad question by design. You’re going to want to get an understanding of how they construct their portfolios for clients. Will your portfolio’s risk be aligned to your specific goals or is it more one-size-fits-all? Do they separate funds based on specific goals or do they put everything together? You want to make sure the approach is the right fit for you. 

How did they make you feel? Are you excited to work with them?

You’ve now met with, hopefully, a couple of different advisors and had different proposals. Now it’s time to reflect. How did the interactions go? Did the advisor talk down to you or talk with you? Did they use a bunch of jargon or did they try to relate to you? You want to work with someone who knows what they’re doing, but you also want to work with someone who you’ll enjoy working with as well. 

Don’t be shy about getting references or looking into their backgrounds either. Regulatory agencies also keep detailed information on all types of advisors. You can find out more about brokers and their firms here and RIAs and their firms here.

Think about the answers they’ve provided to the above questions along with what you think it’ll be like to work with them. Working with an advisor should be an affirming experience, not a stressful one so keep that in mind as you embark on this journey. 

One last thing. 

Once you’ve asked the questions, feel confident in your choice, and move forward with your plan, make sure you’re getting the most of out of the relationship. More on that here.