Using a financial advisor is a smart idea if you are unsure of how to manage your portfolio or don't know what to do with a large inheritance. However, not all financial advisors are created equal, and some might be trying to line their own pockets with commission-based product sales rather than give you the best advice for your investment and retirement.
Although you are relying on your financial advisor for their expertise, it remains very important to ask questions and gain an understanding of what your advisor does, how they do it, and what strategies they are trying to employ. Here are several questions you can ask your advisor this year to ensure you are getting the best advice.
- The use of a financial advisor can be beneficial if you are uncertain about how to manage your assets, portfolio, or any other money-related matters.
- Your financial advisor's investing philosophy will drive all of their decisions and make a big impact on how your portfolio is managed.
- It's important to ask your financial advisor the right questions to ensure you are getting the right products for you, not ones that benefit the financial advisor through commissions.
- To gain confidence in your advisor's abilities, ask them about their experience and professional qualifications.
- You should also ask your advisor about emerging technologies and their strategies for investing for different intentions.
1. What Is Your Investing Philosophy?
Each financial advisor has a different approach to how they generate a strategy. An investing philosophy is the set of standards and principles used to create that strategic plan. If your financial advisor's investing philosophy is well-defined, they'll be able to easily communicate to you how they intend to help you achieve your financial goals.
An investing philosophy is also constructed over time, heavily reliant on previous experiences and knowledge of what has or hasn't worked in the past. This is an incredibly important question to ask of younger, more inexperienced financial advisors as they may have less historical knowledge of how financial markets have performed under certain circumstances. Alternatively, older financial advisors may be set in their ways, unaware of more modern approaches to achieving financial success.
It's important that you and your financial advisor have compatible investing philosophies. You may prefer value stocks, while your financial advisor has had tremendous success pursuing growth companies. You may be more interested in socially responsible investing, while your advisor is more focused on profits and less environmental impacts. If your philosophies aren't compatible, no worries - just be mindful that you and your advisor must communicate through differences to make sure each of you respect the approach of the other.
2. How Much Do You Charge?
It is a good idea to know what your costs will be upfront. If your advisor is paid a fixed fee and does not earn commission on products, you can rest assured they have little to no financial incentive to have you invest in certain ways. If their fees are contingent on your portfolio balance, your advisor may even be incentivized to see your portfolio grow as this means more fees for them.
In addition to a management fee, your advisor may receive a commission on products they sell to you. These products include insurance plans, annuities, or private security offerings. Ask your advisor if they are associated with any commission-based products, as your advisor may offer you these items when they may not actually be in your best interest.
After learning your advisor's cost structure, evaluate the benefit of their service against what you are paying. Keep track of your portfolio's growth (or lack thereof), and observe if you think your advisor is worth the performance you have been receiving. Another option is to consider your options for restructuring fees; with a larger portfolio balance, you may be able to negotiate different or scaling payment terms.
3. What Are Your Qualifications?
Learn what certificates your advisor holds. Many firms will only require their advisors to take minimal courses or pay a fee. You want to avoid these advisors, as the financial industry is always changing and you'll want someone most in tune with the latest happenings in the sector. Instead, look for one of these three advisors:
- A Certified Financial Planner (CFP)
- A Chartered Financial Analyst (CFA)
- A Certified Public Accountant (CPA)
It's also a good idea to choose an advisor that has at least a decade of experience dealing with clients that are similar to you. You also want your advisor to have a clean record, meaning they have not had issues with regulators or the law. It might also be wise to ask if they have ever been sued. There are often public records online through state governments or professional membership groups that identify your advisor's background.
Within this realm, you may also want to ask about the advisor’s specialty and how many clients they take on each year. This will help you to get a feel for the market segment the advisor focuses on if any and the breadth of investing advice they offer. Some investors may want someone focused on a market niche while others appreciate a broader range of advice. Be advised that the more designations and experience your advisor has, they will likely charge higher management fees.
4. Do You Offer Hybrid Robo-Advisor Services or Access to New Technologies?
Robo-advisor technology and advanced personal financial management platforms are being integrated across the financial advisor market. Many large firms are partnering with robo-advisors and new technologies to help their investment clients access the best and most up-to-the-minute opportunities for trading their accounts individually and with the help of their advisors.
Technology and personal account management can also be a big factor for choosing an advisor as many investors look for the greatest transparency in following their account online and communicating with their advising company. Hybrid robo-advisor platforms can also offer some of the best channels for receiving the most well-vetted access to firm offering and market insights.
If you'd prefer to work directly with a human at all times, this criteria is still important for you to evaluate. Firms may attempt to reduce overhead costs by limiting the scope of in-person financial advisor services and encouraging customers to use digital means of communication to address some financial topics. Whether you have to use technology or not, some advising firms will make that decision for you.
5. What Are the Best Options for My Liquid and Illiquid Funds?
Most investors want to focus on liquid savings and retirement with help from their advisors along the way with everything in between. A liquid savings fund is typically the first line of defense for personal investments and can be one of the first reasons to start talking with a financial advisor. Liquid funds can be used for emergencies or saving for miscellaneous purchases. At the least talking with your advisor about the best options for this type of portfolio can be one of the most important first questions to discuss.
On the other hand, illiquid funds are set aside for long periods of time. Often locked up in tax-sheltered accounts, this money is being saved for retirement. It often can not be accessed until an investor reaches a certain age.
It's important to understand your advisor's approach to both types of funds. The financial strategy behind both is very different, and your advisor should have a different approach to risk for short-term and long-term holdings. Your advisor should also be aware of your shorter-term goals where you might need access to funds and don't want as much volatility impacting these holdings.
Can I Trust My Financial Advisor?
By asking your financial advisor questions and better understanding their background, you will be able to determine whether you feel comfortable with them overseeing your finances. Ask them about their qualifications, experiences, fee structure, and philosophy to gauge whether or not you'd still like to pursue their services.
What Should I Ask My Financial Advisor?
It's a great idea to start your new relationship with a financial advisor by understanding their strategy and approach to investing. This investing philosophy often drives how they make decisions and will have a large impact on how your portfolio is managed.
What Fees Does My Financial Advisor Charge?
Your financial advisor may charge fixed management fees, fixed retainer fees, hourly consulting fees, or fees based on the total assets under management. Your financial advisor may also receive commissions, though you don't pay for that. To better understand your advisor's fee structure, ask them what they charge.
The Bottom Line
You wouldn’t pick just anyone to watch your children, especially without first interviewing them and checking out their background. Therefore, you shouldn’t trust your money or retirement savings with just any advisor. Don’t be afraid to ask questions and do your research, as it could save your investments in the long run.