I’ve had a lot of first-hand experience with the work and business practices of other financial advisors over the past 15+ years. This has come not only from my experience working with other firms, but also from providing second opinions on each new Client’s previous financial plan.
Seeing the good, the bad, and the ugly that exists in this industry has given me a very clear idea of how I would go about finding an advisor. You can find an extensive list of questions to ask a potential advisor from the National Association of Personal Financial Advisors (NAPFA), but here are the questions that I’d be sure to ask.
Question 1: How are you compensated?
Most advisors will earn money from sales commissions, fees (i.e., fee-only), or a combination of commissions and fees (i.e., fee-based). Advisors that work on commission will always have an incentive to sell you something. “Fee-based” advisors often charge planning fees in addition to earning commissions from their recommendations, so they also have an incentive to sell you something. “Fee-only” advisors are paid for advice, don’t sell financial products, and never receive commissions from their recommendations.
Question 2: Do you have any skeletons in your closet?
Although it’s still a good idea to ask this question in person, researching an advisor’s background is something you can do before you meet face to face. In Texas you can contact the Texas State Securities Board to find out if there are any legal or disciplinary events in an advisor’s past. You can also go to FINRA BrokerCheck if you’re researching someone affiliated with a broker-dealer or to SEC Investment Adviser Search for information on an advisor with a Registered Investment Advisor (RIA) firm like ours.
Question 3: Are you required to put my interests first?
Did you know that the majority of financial advisors aren’t required to act in your best interests when making recommendations? Only advisors that are held to a “fiduciary standard” are required to put your interests first. Be sure to ask a potential advisor if he or she would be willing to sign a Fiduciary Oath like ours.
Question 4: Are you good with your own money?
I’ve never seen this on a list of questions to ask an advisor, but it’s something that I would want to know. Many advisors have a lot of debt, have gone through bankruptcy, or live way beyond their means. I’ve even come across an advisor that had an IRS lien against his home! A perspective advisor should be willing to disclose enough about his or her money habits to make you comfortable that they won’t have a negative impact on the advice you receive.
Question 5: Are there any limits on your recommendations?
Advisors that are affiliated with a bank, brokerage firm, or insurance company are often limited to certain investment products or policies from specific insurance companies. Make sure you understand how any limits on your advisor could affect the type of advice you get. For example, an advisor that earns a living from commissions isn’t likely to recommend low-cost, no-load mutual funds. Likewise, someone affiliated with a single insurance company won’t be able to shop around for the best policy for your needs.
Question 6: Do you provide comprehensive financial planning?
Most people that claim to be “financial planners” are really just stockbrokers or insurance salesmen in disguise. Financial planning is much more than investments and insurance, so make sure your advisor understands the importance of comprehensive financial planning and is qualified to review all areas of your finances. Advisors that hold the CFP® designation have taken courses in financial planning, insurance, investments, retirement planning, tax planning, and estate planning, so they have the background to look at all areas of your finances.
Question 7: How much experience do you have working with Clients similar to me?
Although an advisor might have a great educational background and credentials, he or she might not have the knowledge and skills needed for your level of planning. You can start this conversation by asking about an advisor’s “typical client” and ask for a few examples of how he or she has helped Clients with similar planning needs to yours.