20 Questions to Ask Before Hiring a Financial Advisor
20 Questions to Ask Before Hiring a Financial Advisor
Don’t let your prospective advisor ask all the questions. Be sure to bring some of your own.
Be sure to ask how much the advisor costs and how he or she will be compensated if selected.
By Lou Carlozo April 8, 2015, at 9:31 a.m. + More
Remember the game "20 questions"? It’s no game at all if you’re hunting down the best financial advisor that your time, money and portfolio can buy. Yet the quest to find the right advisor is too often turned on its head, with potential clients considering themselves lucky to meet with an investment professional.
Here, we list 20 questions the experts say you should ask before getting down to business with a new advisor.
1. Can you tell me about your current relationship with your coach or mentor? For Lisa Margulies, branch manager and financial advisor with Regatta Capital Group in Los Angeles, this is “the opening question.” “I would listen carefully to the [answer] and gauge the financial advisor’s openness, honesty and vulnerability,” she says.
2. How do you invest in yourself? This isn’t about the money, but rather the ongoing education. “Ask them how they stay current in their training,” says Reno Frazzitta, president of Secure My Funds in Clinton, Michigan. “If they don’t have an answer, it may be time to look elsewhere."
3. Whose responsibility is it to keep connected? Avoid working with a financial advisor who sells you a product and then moves on. Ask about regular meetings, says Jeremy Shipp, president of Harbor Wealth Advisors in Richmond, Virginia. “Will they be quarterly or annually? And whose responsibility is it to schedule those meetings – the advisor or the client?
4. How are you compensated? It’s not as clear-cut as you might think. “Many individuals are under the impression that financial advisors only make money if the investor makes money,” says Gregory Sichenzia, founder of Sichenzia Ross Friedman Ference, a securities law firm in New York. “This is not true. Many investment sponsors pay advisors handsomely just for putting them into a specific fund or product.”
5. For referrals: What do you like about your advisor? You may trust your buddy, but what if he’s vague? “Referrals are great, but ask, ask, ask,” says Pam Friedman, partner at Silicon Hills Wealth Management in Austin, Texas. “How often do they meet? What designation does the advisor have? Are they a certified financial planner?” If so, that requires passing a two-day exam and ongoing education.
6. What’s your education? This isn’t polite party talk or an icebreaker. “Did the advisor obtain a college degree? Is the degree related to offering financial services?” says Keith Singer, owner and president of Singer Wealth Management in Boca Raton, Florida. “It's probably best to work with an advisor who is not only intelligent but educated as well.”
7. Have there been complaints against the advisor? This is one potentially confrontational question you may want to check out on your own by going to the Financial Industry Regulatory Authority website. “Before making a final decision, check with FINRA.org for any complaints filed or penalties levied against the advisor,” says Greg McBride, senior vice president and chief financial analyst for Bankrate.com.
8. Do you own the same investment and insurance products you’ll recommend to me? There’s nothing like an advisor who puts her money where her mouth is. “If she doesn’t buy what she’s selling to you, are you sure you want to buy it?” says Ric Edelman, founder, chairman and CEO of Edelman Financial Services, a national firm.
9. What happens to my account if something happens to you? This is a fear for many clients, especially those who rely on phone calls to stay in touch. “It would be important to understand who the next point of contact is and how liquid your assets are,” Sichenzia says.
10. How much do you cost? Don’t be shy about bringing up the money question early. “Compensation varies greatly,” Friedman says. “If fees aren’t clear or transparent to you, ask more questions. While no single model is right for everyone, it’s important to understand how your advisor is compensated.”
11. Are you a fiduciary? If you don’t know the term, a fiduciary is legally appointed and authorized to hold assets in trust for another person. “A fiduciary planner is required to put client needs ahead of his or her own, regardless of the situation,” says Bryan Hoover, vice president at Fragasso Financial Advisors in Pittsburgh. “Most importantly, this standard requires that all conflicts of interest be outlined in advance.”
12. Why did you choose this work? Edelman says the answer usually falls into one of two categories. “They either talk about their fascination with investments, economics, financial planning and other numbers-oriented topics, or they talk about their fascination with people and how the dynamics of family relationships, emotions, attitudes and desires interact with effective financial decision-making.” Ideally, you’ll find someone who strikes a balance.
13. Can you give examples of your client commitment? The examples the advisor cites (or fails to cite) will provide valuable clues about motivation. “There are those advisors who work primarily to collect a paycheck, and there are those truly dedicated and passionate about what they do, committed long-term to their clients and careers,” says Penny W. Gordon, senior vice president, private wealth advisor with Gibraltar Private Bank & Trust in Coral Gables, Florida.
14. How did you handle 2008? Questions about investing during the Great Recession aren’t common, but the answers could be very informative. “Were you in business then? Were you frightened? ‘No’ may be less than truthful,” says Gregory DeJong, financial advisor and market manager with Savant Capital Management in Naperville, Illinois. Also try to get a lead on whether the advisor stood firm or yielded to pressure. You might also ask: “With your clients who insisted that you do something, did you change their investments?” DeJong says.
15. What’s the past performance of your model portfolio? This ideally should be examined on a quarter-by-quarter basis, says Robert Franklin Muller, executive vice president and head of distribution for Behringer, based in Dallas. “The bottom line is that smart, complex strategies implemented by experienced financial advisors cannot be simply substituted with an algorithm."
16. What are your professional designations? Having the right credentials ensures a high level of competence. “I recommend hiring an advisor with a known and regulated professional designation, such as a certified financial planner or CFP,” Gordon says. “This is an excellent indication that the advisor has met specific standards in education, experience and ethics.”
17. Are you listening or pitching? You may want to be more diplomatic, but many financial advisors push the products of companies they represent, says Tom Halloran, president of Voya Financial Advisors. “Make sure the advisor listens to you and your needs and doesn’t talk or product-pitch at you."
18. Are you currently licensed to offer investment advice? Many consumers would assume a particular advisor is licensed to sell investments or give advice. “But that is not always the case,” Singer says. “Many financial advisors are only licensed to sell insurance products. Because these advisors are limited in what they can offer or discuss with clients, their advice may be limited as well.”
19. Can you tell me about the last client you lost? Don’t you just love tough questions? “It can be a difficult thing to discuss, but it’s crucial for you to understand why someone else decided to end a relationship with the interviewee,” Hoover says. “Asking this question directly may give you a better sense of what the advisor values, and it should provide you with insight on the type of client he or she works with best.”
20. Mind if I bring a friend? This person does not need to have any connection to the advisor, only solid knowledge. “Ask if you may bring along your accountant, attorney or friend who’s knowledgeable about the investment world,” DeJong says. “Their impressions will be helpful, and merely their presence may cause a rogue advisor to conclude that you won’t be worth the trouble.”
Corrected on April 9, 2015: A previous version of this story misstated the name of the firm Behringer.