7 Questions You Should Ask a Financial Advisor (and the answers that go with them)- From a Financial Advisor

By: Charles Kyle Harper CFP®, ChFC®, RICP®

Many of the folks that reach out to us are mid- or late-career or even already in retirement.  Often, they don’t even know what to ask in the first meeting.  It can be intimidating to approach a stranger, put your financial cards on the table and ask for advice.  For others, there is hesitancy due to the costs associated with working with an advisor or just being unsure about what they do in general (which is valid since the term “financial advisor” can mean a myriad of things).

Most, not all, advisors offer a complimentary intro meeting to gauge fit.  I think of it as a first date to figure out whether or not this person is someone I want to and feel competent to work with.  My goal for the person sitting across from me (or more commonly now, sitting in front of their computer screen) is for them to know what to expect in the process and see whether or not they feel comfortable with me.

Here are some of the best questions I’ve gotten as an advisor in that first meeting, plus some others that should help you when you sitting down with an advisor for the first time.  You could certainly send these to a prospective advisor in advance, but I’d recommend instead asking them during a meeting to see how well they communicate on their feet.  It can be easier to give a polished answer over email.

1) What goals do you have personally and for your business?

The reason I recommend this as the first question to ask is layered.  As a financial advisor, I find myself not only helping clients figure out how to accomplish their goals, but also how to form them in the first place.  A majority of clients I meet don’t have a quantifiable retirement goal (e.g.: $8k per month at age 62).  It can often be a discovery process with a client to establish goals in the first place, which must be done before you can start pursuing them effectively.  If your advisor is going to be assisting you in forming goals and amending them as life goes awry (which it will), you want someone who can not only give you mathematical data, but someone who is a good sounding board with whom to think things through.  You’ll want someone who’s insight you value and can also push you if your goals are not well defined or don’t align with your stated values. I won’t pretend to be the best at these things, but I’d like to think I add value above and beyond just providing mathematical projections.  If the advisor doesn’t have or can’t articulate specific, actionable goals for themselves personally or professionally, they may not be the person you want as counsel.

2) What’s your experience and how did you get into this position?

The goal here is to make sure you are dealing with a competent advisor.  If he or she is 2 years into the profession, they may not have the experience needed to be fully competent.  I jumped straight into a client facing role at 22 when I entered the industry and I found myself in the position often where the clients I met with knew more about financial planning than I did.  (Here’s a special thanks to the clients that stuck with me even then.)  Time is not the same thing as experience however.  A young advisor in tenure can be just as or more valuable than a seasoned advisor, but experience can be a difficult hill to climb.  I would recommend at a minimum looking for a CFP® professional.  The designation in and of itself does not mean competency, but there are so many “financial advisors” that it can be a good starting point to weed down the list of options.  The CFP® board offers a great tool on their website to find an advisor near you.  If the advisor is young in tenure (less than 3-4 years), I would want them to be a part of a team.  There are certainly things I do differently in my practice now than I did earlier in my career just due to lack of knowledge. As an added aside- just because they have been doing financial planning for 30 years doesn’t necessarily mean they are competent either.

3) Do you provide both financial planning services and investment management?

You’ll want to know what you are looking for when asking this question.  Financial Planning is the advice business.  The financial planning side is the one that helps you with macro issues like when to collect Social Security, whether to take a survivorship option on your pension, how to mitigate income taxes and how Medicare plays a role in your plan.  Investment Management is the building and maintaining a portfolio for you.  Good investment management should be a part of a financial plan.  To put it more simply, financial planning is the house and investment management is a brick.  Some clients feel comfortable doing their own investment management, others don’t.  I was speaking to an Edward Jones advisor within the last couple years who told me they were going to start providing financial planning.  I was shocked as I assumed a firm that large already did, but he explained that they had no way to charge clients for financial planning.  I’m hoping that has changed at the time of this writing.  If the advisor you are meeting with doesn’t offer financial planning services, I would move on to the next one.  I’d argue that it is impossible to do investment management well outside of a financial plan.  If you are looking to delegate the investment management part of your plan (such as opening accounts, funding them, placing trades, etc.), then you’ll want to make sure they offer that as well.  Some advisors are advice-only, meaning they do not offer investment management.

4) Can you provide references or testimonials for clients that are similar to me?

This is a better way of asking their typical client.  It can be really difficult for me as an advisor to give one avatar as my typical client.  Most of my clients are at or in retirement with anywhere from a few hundred thousand to a few million dollars invested.  They are certainly those that don’t fit that mold as well.  What you would really want to know is have they helped someone in your position before.  If an advisor is unwilling to, I’d move on.  If they do provide them, certainly reach out and ask them about their experience.  It will not only give you a feel for the advisor, but confirm whether or not they work with clientele like you.

5) What will our relationship look like going forward if we choose to work together?

Will you be working directly with that advisor on an ongoing basis? Will you see them once per year or more?  Will you be working primarily with a junior advisor or client service associate?  Some clients I’ve worked with only want to work directly with me.  Others prefer to have a team to reach out to.  It’s important to have a clear understanding of who is going to be quarterbacking your financial plan because if it’s not clearly established, you will end up being the one in that role.  Some advisors only offer 2 meetings per year during specific calendar months (called surge planning), which can be very effective, but if that doesn’t provide you the access you desire, it may not be a good fit.  Lastly, you’ll want some level of proactivity from your advisor.  Ask them if and when they will be reaching out to you.  If they don’t give a solid answer, you will only hear from them when you call.

6) How are you and/or the firm compensated?

This is a much more complicated question than most clients realize.  In my role at a previous firm, I received commissions on life insurance, disability insurance, annuities and loaded mutual funds (meaning they had a front-end or back-end charge).  I also received ongoing compensation on certain funds in the form of 12b-1 fees.  On advisory accounts, I received a portion of the management fee.  Separately, I could charge planning fees if desired.  I also received compensation for loans that were referred over to the bank.  Lastly I got deferred compensation awards based on a number of metrics, but mostly tied to insurance sales and investment rollovers. That can sound like Greek to clients and can be too much information, so here is a simpler explanation.  Advisors can be grouped into three categories: fee-only, fee-based and commission-based.  

Fee-only advisors only collect compensation from their clients- not from insurance or investment companies or referral incentives. In my opinion, this is the purest form of financial advice and does the best to mitigate conflicts of interest.  It does however mean that you may work with another professional when a specific product is needed, such as life or long-term care insurance.  This can be further divided in hourly advisors, flat-fee advisors and asset-based fee advisors.  Each has its own pros and cons and is worth exploring on its own.  A few organizations that have directories that are helpful to find fee-only advisors online are XY Planning Network, NAPFA and Garrett Planning Network.

Fee-based advisors receive both compensation directly from clients but also in the form of commissions.  Essentially, if an advisor receives compensation from any source other than his clients, he is fee-based.  This creates more conflicts of interest, but also allows more to be done “in-house” without being referred to a third party for execution of the financial plan.  This tends to be the most popular form of the big name firms.

Commission-based advisors receive compensation strictly from insurance or investment companies.  These folks are financial product salespeople and generally cannot charge for financial advice. They are not bad in and of themselves, but this is not the type of relationship that yields good advice.  When the only way you get paid is by your client buying a specific financial product, you tend to see every situation as one where that product is the best recommendation.

7) What is your investment philosophy?

An advisor should be able to articulate his or her investment philosophy and what tools they typically recommend.  A good follow-up question is to ask whether there is anything the advisor is not permitted to recommend by the firm.  I have been in the position before where what I considered to be the best option for the client, I was not permitted to recommend by the firm.  Do they use passive investment strategies or active ones?  Do they recommend individual stocks, bonds, mutual funds, exchange-traded funds?  Is it customizable or do they only offer model portfolios.  We personally use mostly passive ETF funds in our investment strategy, but there are places where other instruments can be appropriate.  The one answer you don’t want to hear is that they predict what’s going to happen with the stock market and make large changes to portfolios accordingly.  Those investors tend to perform poorly over time.

There is much more that could be said here, but if you focus on these seven questions, you will be well-prepared to gauge the fit of the advisor you are sitting with.  You’ll want to get the answers you are desiring and also to enjoy (or at least not dread) talking with them.  If all goes well, you can have the same financial advisor for 20 or 30 years.  Make sure they check both boxes or you will likely be looking for a new advisor pretty soon.

Lastly, here’s a few additional tips. I always recommend interviewing at least two advisors, especially if you have never had one before.  I tell this to many of the clients I sit with as well.  A second data point helps to give context for the things you like and dislike.  Don’t go by price/fees alone- you tend to get what you pay for, but expensive is not always better.  For example, an hourly advisor who charges $100/hr may not be as qualified or experienced as one who charges $400/hr, but they could both be a better fit than one who charges $600/hr.  

Best of luck on your hunt for the right fit!