Essential Questions for a Financial Advisor

Choosing the right financial advisor is, in essence, taking the time to invest in what should be a long-term professional relationship that keeps your financial health and future on the right track. The search should go well beyond referrals from colleagues, friends, and family and an emphasis on investment performance.

In fact, investors should dedicate as much effort as they would to finding a medical professional with whom they trust their physical well-being. The right financial advisor will provide the professional help needed to reach long- and short-term financial goals.

What Are Your Professional Qualifications?

Anyone can hand out business cards maintaining they are a financial advisor, so it is important to ask about qualifications and credentials. 

While there are myriad professional designations, top advisors typically have credentials such as certified financial planner (CFP), chartered financial analyst (CFA), and chartered financial consultant (ChFC).

Advisors with CFP designations, for example, are regulated, licensed, and take mandatory courses related to financial planning, such as estate planning and retirement planning among others.

Some advisors are also certified public accountants (CPAs). For those who also need tax advice and preparation, choosing a financial planner who also has a CPA designation may make sense. 

Financial advisors who sell stocks, bonds, mutual funds, or insurance have licenses including the Series 6, Series 7, or Series 63. To obtain these licenses they must take exams administered by the Financial Industry Regulatory Authority.

Are You an RIA?

Some financial advisors are registered investment advisors (RIAs), which means they are held to high fiduciary standards put in place to protect investors. The fiduciary standard requires that advisors unconditionally put their clients' best interest first at all times no matter what. 

Advisors who aren’t fiduciaries adhere to a less stringent standard called the suitability standard. This means that any investments they offer must be suitable for a client although it may not be in their best interest.

True to their name, RIAs are also required to register with the Securities and Exchange Commission (SEC) or the states in which they conduct business.

How Do You Charge for Your Services?

Most RIAs charge clients a percentage of assets under management or a flat fee or hourly rate. Advisors who are fee-only do not earn commissions on investment products they sell to clients. On average they charge no more than 2% of assets under management. That percentage often declines the more assets you have for them to manage.

Advisors who work for full-service firms, such as big broker-dealers like Merrill Lynch and Morgan Stanley, typically charge commissions on investment products such as stocks, bonds, mutual funds, exchange-traded funds, and annuities that are bought and sold. In theory, advisors who charge commissions could be less objective when recommending investments. 

Who Are Your Typical Clients?

It's important to get a sense of what types of clients a financial advisor you are evaluating typically caters to in order to make sure they have experience and expertise aligned with your circumstances. A millennial just starting to save for retirement, for example, might not be best served by an advisor who caters mainly to baby boomers nearing retirement or those already retired. 

Some advisors specialize in clients within certain professions. If you are a medical doctor or small business owner, for example, ask if they have experience in handling similar clients. You will want to hire an advisor with expertise ranging from insurance to taxes that suit your circumstances. 

How Do You Communicate With Clients?

Make sure they are willing to communicate as often as you are comfortable with. Some clients are happy to meet once a year, while others prefer to meet quarterly. You also want to get a sense as to how accessible they are outside of scheduled meetings. Ask them how quickly they typically return calls and answer emails. 

Are They Asking You Questions?

Questions an advisor asks a potential client during an initial meeting can be telling. Financial planning is much more than numbers. An advisor who focuses on touting stellar performance is probably best avoided. Instead, they should be asking you about your financial goals, concerns you may have, and how comfortable you are with risk when it comes to investing.

The Bottom Line

While there is no shortage of financial advisors, choosing the right one can be daunting. It's important to interview an advisor you are considering like you would a job candidate. Make sure you understand how they are compensated and whether they have the credentials and experience to come up with a plan that best suits your personal financial needs and circumstances.