Financial Poise
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5 Questions to Ask a Financial Advisor Before Hiring

Build Trust with Your Financial Advisor Using These Simple Questions

If you’re an accredited investor, you have a whole world of options beyond investing in publicly traded stocks, bonds and mutual funds. And, thanks to new channels opened by the JOBS Act, average investors are even more inundated with opportunities to invest. Weeding out the good from the bad investment opportunities will take some financial acumen. Are you up to the challenge?

If you want to throw your proverbial hat into the ring and start making some investments, even on a smaller scale, but you aren’t confident you can do so without ending up with said hat in your hands, a financial advisor can help.

Financial advisors can really be anyone, from someone smarter than you to someone certified and bona fide with education and experience. Most unfortunately, it can also be the guy who just finished two years in Club Fed for embezzlement. How do you find a great advisor? Personal recommendations are a great place to start. The National Association of Personal Financial Advisors is also a good resource. And finally, you should come prepared with a list of questions to ask a financial advisor.

Hiring a financial advisor is somewhat like hiring a nanny for your kids. You’ll want to find someone you can trust, who has a good reputation and solid references, a proven track record of quality and who won’t nip from your nest egg when you aren’t looking. Never be afraid to ask questions and request proof. In fact, a good financial advisor will already have it ready for you.

Here are 5 Questions to Ask a Financial Advisor:

1. What are Your Certifications?

A reputable financial advisor should have at least one acronym following their name. Most will have CFP, a Certified Financial Planner designation that shows they’re licensed, regulated and required to pursue ongoing education.

Ask for the designations the advisor has and then, if you have questions, ask them to explain. The SEC says they have to. FINRA has a nifty “ask and check” function, so you can look up an investment adviser ahead of your face-to-face. Are the certifications current? Check it out, and while you’re at it, consider running a background check. It’s perfectly normal and within your rights. If a CFP has been disciplined, you can find out from the CFP Board.

2. How Do You Get Paid?

On the one hand, just like any salesperson, a general rule of thumb is that someone paid on commission may have the incentive to work harder to earn their keep than someone who is guaranteed a flat hourly rate. Their success is directly proportional to the success they create for you.

However, beware that some commission-based advisors combine sales techniques with their other services, and someone working for commission may have the incentive to “churn” your account. You need to understand how your advisor gets paid, and then you need to decide if you are comfortable with it.

Don’t confuse a broker-dealer with an investment advisor; there is a world of difference between these two professions. Read The Doctor and the Drug Dealer: A Parable of Registered Investment Advisers and Broker-Dealers to understand these crucial distinctions.

3. Are You a Fiduciary?

A fiduciary is a financial professional who must, by law, have your best interest at heart. Request a copy of an advisor’s code of ethics and make sure the language includes a commitment to prioritizing your needs and a fiduciary responsibility to recommend a course of action that will be best for your money. Not being a fiduciary is a deal breaker, so walk way. Keep in mind that skills and credibility play as big a role as professional designations. Go for the trifecta.

4. Can You Prove the Success You Say You’ve Had?

A financial advisor worth their salt will have documentation available that lets you examine her track record, like a quarterly trading report. If you don’t understand all the numbers and jargon, don’t hesitate to ask questions. Ask about the reasoning behind this or that investment. Locate where the fees were taken out. Make sure that you will always have access to similar reports pertaining to your own investments for tracking and record keeping.

5. How Does Your Experience Relate to My Situation?

Some financial advisors only work with certain types of clients, like the very wealthy. Others have the bulk of their experience in one particular asset class, like real estate or insurance. Their investment philosophy should intersect with your financial goals.

It’s important that your financial advisor has a background in areas that relate to your financial situation and your goals. Discuss education, work history, previous investments and areas of concentration. You’ll want someone who can advise you, because she has been there and done that – not someone who thinks they can if they give it the old college try.

Building trust is one of the most important aspects of the advisor-client relationship. Knowing what questions to ask a financial advisor can reveal red flags and help you decide if your advisor’s strategy and experience is right for you.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds 2019 and Goal Based Investing – Planning for Key Life Events 2019. This is an updated version of an article that was originally published on February 1, 2014.]

About Alicia Purdy

With a Master’s degree in Journalism and extensive experience as a freelance writer and editor, Alicia has found success across genres including: news, business and finance, government/politics, faith and family as well as blogging.

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