5 Questions To Ask Before You Hire a Financial Advisor

If you’re an accredited investor, you have many options for growing your money beyond investing in publicly traded stocks, bonds, and mutual funds. Weeding out the good from the bad investment opportunities will take some financial acumen, but don’t worry, you don’t have to figure it out alone. A financial advisor can help.

When it comes to seeking an advisor to direct your investments, not all professional titles are created equally, and not everyone with a legitimate-sounding title has your best interests in mind. While some designations require examinations, experience, and ethical standards, others don’t.

To know who you are dealing with, the Securities and Exchange Commission (SEC) cautions investors to look beyond a financial professional’s title to determine if they are trustworthy and can provide specific guidance, advice, and direction for your situation.

What’s in a Name?

The titles a financial advisor can use vary widely, and just because someone uses a particular title doesn’t mean they have the experience or education you expect them to bring to the table. To put it in another light, if you encounter two ‘doctors’ at a dinner party, how do you know the difference between the one who graduated from the Harvard School of Medicine and the one who simply stumbled through the School of Hard Knocks?

According to the SEC, when it comes to the range of ‘financial advisors’ interested in working with your money, “Some titles are granted by private organizations, such as a trade group. While some private groups that grant titles may provide a method for you to complain about one of their members and can discipline a member for misconduct, there are other groups that do not take complaints or discipline their members.”

How Do You Find a Trustworthy Financial Advisor?

In the colloquial sense, financial advisors can really be anyone. Someone with more experience than you can act as an advisor on financial decisions, but that does not make them qualified to do so. (The same goes for the doctor advising you on medical decisions.)

Ideally, you’ll hire a financial advisor who is certified and bona fide with an array of education and experience. Unfortunately, that ‘experience’ they told you about won’t tell you who just finished two years in Club Fed for embezzlement.

So, where do you start searching?

1. Personal Recommendations: A great place to start exploring financial advisors is by speaking to people whose portfolio growth and financial progress you’ve seen for yourself. First-hand testimonials are the gold standard in any business and if someone you know and trust has been successful with a specific advisor, they’re worth looking into.
2. The National Association of Personal Financial Advisors: They will help you find a financial advisor who is close to you and familiar with the legal nuances of your state. But even more important, NAPFA will only recommend advisors who are part of a fee-only, fiduciary financial group of advisors “advocating for high professional and ethical standards.” (‘Fee only’ is considered the most transparent compensation model, but it still doesn’t mean you aren’t responsible to do your own digging beyond their recommendations.)
3. A Comprehensive Checklist of Questions: Building a list of questions that are focused on the specifics of your needs is key, as is asking the right questions to a potential advisor, including asking how they manage their mistakes, what protections cover their work in the event of a loss, proof of education and certification, and proof of the experience they say they have. A transparent advisor will have no problem producing your answers and may have them ready before you ask.

Hiring a financial advisor is like hiring a nanny for your kids. You want someone you can trust. They should have a good reputation and solid references. You’ll want a proven track record of quality advising. Of course, you’ll need to select someone who won’t nip from your nest egg when you aren’t looking.

Essential Considerations Before You Hire a Financial Advisor

In 2020, the SEC clarified its rules on the use of the term ‘advisor’ by broker-dealers; however, the law still allows for loopholes and a wide range of vague or misleading marketing terms that can be confusing when it comes to what category an ‘advisor’ puts themselves into.

Investor.gov defines an investment advisor as a “firm or person that, for compensation, engages in the business of providing investment advice to others about the value of or about investing in securities – stocks, bonds, mutual funds, exchange-traded funds (ETFs), and certain other investment products.”

However, although advisors are ‘generally’ required to register with the SEC or state securities authorities, loopholes can still trap you in what could become a tangled mess.

According to AARP, “Some of the many professional designations advisers can have — such as certified financial planner — indicate a certain level of competence. Regulatory exams, however, don’t test whether advisers give good advice.”

Investor.gov provides a search tool to check if “your investment professional is licensed and registered, and if the firm or person has had run-ins with regulators or received complaints from investors.” Running this easy background check should be one of your first steps, even with personal recommendations.

It’s important to know that neither the SEC nor the North American Securities Administrators Association (NASAA) endorse any titles for financial professionals. So, when it comes to entrusting someone to deliver advice about investments, the responsibility is on you to look beyond the titles and do the research to educate yourself on a financial professional’s background. Otherwise, you could get your education from the School of Hard Knocks.

Question 1: What Are Your Certifications?

A reputable financial advisor should have at least one acronym following their name. Most will have CFP, which stands for ‘Certified Financial Planner.’ The designation shows they’re licensed, regulated, and required to pursue ongoing education. If you have questions about other designations, ask them to explain. And as technologies advance, having a financial advisor who can understand and utilize new tools will help direct your investments toward their most significant potential.

CFP Board is one of the providers of education for Certified Financial Planners and has noted that generative AI, an unregulated information tool that pulls from the breadth of the digital expanse, is quickly becoming a foundational resource for financial professionals, meaning that finding a trusted advisor is paramount to obtaining solid financial advice.

According to CFP Board, “During the coming decades, it will be critical to expand awareness around the value of working with a financial planner trained to harness the vast amount of available data and apply it effectively for each client’s unique situation…But just as it was in the profession’s earliest days, good advice still comes down to trust and understanding between financial planners and their clients.”

Should you find yourself feeling suspicious about an advisor’s credentials, their ability to find and pursue solid financial investments, the satisfaction of their clients, or even the range of their experiences, you’re probably talking to the wrong person.

However, regardless of any other factor, nothing can replace the need for you to do your own due diligence. The Financial Industry Regulatory Authority (FINRA) has a nifty ‘ask and check’ function, so you can look up an investment advisor ahead of your face-to-face. Are their certifications current? Are their investments registered with the SEC? (Not all types of investments are required to be, like crypto assets.) Such verifications should take place before you hire a financial advisor.

Says FINRA, “Keep in mind that registration with the SEC doesn’t guarantee that an investment will be a good one or immune to fraud. Likewise, lack of registration doesn’t automatically mean the investment lacks legitimacy.”

Consider running a background check as well. It’s perfectly normal and within your rights to know as much as you can about the financial investor who will be managing the funds for your future. If a CFP has been disciplined, you can find out from the CFP Board.

Question 2: How Do You Get Paid?

On the one hand, advisors are just like any salesperson — they get paid more to sell you more. A general rule of thumb is that someone paid on commission may be incentivized to work harder to earn their keep than someone guaranteed a flat hourly rate. Their success is directly proportional to the success they create for you.

According to CNBC, “…there’s an important benefit to hiring a fee-only planner versus working with a free planner who is employed by a financial company, like a bank or insurance company: Fee-only planners are paid for their time and advice, so they usually don’t make a commission when you sign up for certain financial products.”

Some commission-based advisors combine marketing and sales techniques with their other services, and someone working for commission may be incentivized to ‘churn’ your account.

Before you hire a financial advisor, you must understand their business model and decide if you are comfortable with it.

Don’t confuse a broker-dealer with an investment advisor, either. There is a world of difference between these two professions.

CNBC writes, “To avoid any conflicts of interests, it’s important to vet your fee-only planner. Ask them what their business model is and whether they earn money on their recommendations.”

Question 3: Are You a Fiduciary?

A fiduciary is a financial professional who must, by law, have your best interest at heart. If you hire someone to look after and help build your financial future, that’s the type of person you want on your team.

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.

According to the US Department of Labor, “[A fiduciary] may not engage in transactions on behalf of [any] plan that benefits parties related to the plan, such as other fiduciaries, services providers, or a plan sponsor.” Translation: Conflicts of interest can arise when money is involved, so eliminating as many as possible is smart.

Not being a fiduciary is a dealbreaker, so walk away. Remember that skills and credibility play as significant a role as professional designations. Go for the trifecta.

Question 4: Can You Prove the Success You Say You’ve Had?

A financial advisor worth their salt will have documentation that lets you examine their track record. Documents like a quarterly trading report, for instance, may prove helpful. If you have to ask, ask yourself why. A financial advisor with a background of success will have that information ready for you.

If you don’t understand all the numbers and jargon, don’t hesitate to ask as many questions as needed. 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.

NAPFA provides a Financial Planner Comparison Tool that can help you ask the right questions as part of your due diligence.

Plenty of financial managers, or anyone else looking to earn your business,  will work to attract you with the right language, the important-sounding titles, and maybe even a list of so-called successes. But can they prove it beyond the certificate on the wall and a website resume? If not, take your money and run.

Question 5: How Does Your Experience Relate to My Situation?

Some financial advisors only work with certain types of clients. They might have the bulk of their experience in one particular asset class, like real estate or insurance. Some specialize in specific strategies, like index investing or global diversification. Their investment philosophy should intersect with your financial goals.

Even as an accredited investor, certain advisors might remain out of reach. Some set their own net worth or experience stipulations. Understanding where they stand will help you determine if it’s a good fit.

Your financial situation is as nuanced as you are and having a financial advisor with a richness of experience in an array of areas may help, or having a specialist might be a better fit. It all depends on what is the best fit for your goals.

Discuss education, work history, previous investments, and areas of concentration. You’ll want someone who can advise you because they have been there and done that, not someone who thinks they can if they give it the ‘old college try.’ Investing your money is inherently risky, but your financial advisor should not be one of the risks you take.

Hire a Financial Advisor You Trust

Once you feel confident you’ve found the right individual or firm, your advisor-client relationship can grow. The right advisor will want to get to know you and learn your values, concerns, and goals for the future. They should have no problem being transparent with you about their strategies. They should be approachable, available, and ready to answer your questions.

Your relationship with your advisor will ultimately be driven by mutual trust and respect. But before you get in that car, ensure it’s worth the ride and heading in the right direction.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Digital Assets as Equity Shares and Securities
2. Investing in Commercial Property
3. Why Green Investing?

This article was originally published in 2019 and last updated on April 21, 2023.] 

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