Last Updated on
When dealing with money, I find there are often more questions than answers. With retirement planning, we all wonder if we will have enough when we retire and what to do if the market crashes. In addition, many of us put our money in the hands of a financial advisor. Before you blindly trust a financial advisor, make sure you get the answers to these questions!
Learning Who You Can Trust
Years ago when I was much less educated about money and investments, I didn’t know who I could trust to manage my money. My wife and I met with a Dave Ramsey Endorsed Local Provider and the experience was less than stellar. For more information on my visit, check out my related article: My Dave Ramsey Endorsed Local Provider Experience.
As I have written about in previous articles, I never did feel like I could trust others with my money which is why I now manage my own retirement funds. I decided I would educate myself on the best practices and how I can properly set myself up for success in retirement.
However, once I near retirement, I more than likely will meet with a financial advisor to ensure my setup will work throughout retirement and be tax advantaged at the same time.
I believe a financial advisor is a great investment for most people.
I know that this is not the route that most people are willing to take. Many people don’t enjoy learning about money and investments as much as I do. Due to this, I decided to come up with a list of questions to ask your current or potential investment advisor.
These questions are geared to give you a clear understanding of the motivation behind your advisor’s advice. In no particular order, here are a clear set of questions you can use to gain a more clear picture of how your financial advisor operates.
Questions You Should Ask Your Financial Advisor
Before we begin, I want to clearly inform you that none of these questions are necessarily a deal breaker. Use these questions to gain insight into your advisor so you can make an informed decision about whether or not you invest with them.
#1 – Tell Me Your Philosophy On Investments
I am a firm believer in index funds because over 90% of the time, actively managed mutual funds do not be the market over a period of time. I wrote an article about the tricks actively managed mutual fund companies play to justify their higher costs. You can read my related article here: Exposing The Mutual Fund Industry
If your advisor believes that he or she will ensure your money is actively managed so it outperforms the market, I would strongly caution against this investment strategy.
#2 – What Services Do You Offer?
The other day a friend of mine sent me a text and asked about a certain investment company. They were meeting with an advisor and wanted to know what I thought about the company.
I had not heard of the company they were meeting with but a quick search showed they were primarily an insurance company that dabbled in investments. Many of these firms are trying to branch out into other investment areas as a means to get you to invest in their main form of compensation. This company specifically pushed whole life insurance as an investment vehicle.
Track your investments for free with Personal Capital. It's how I track my pension and retirement funds.
Luckily my friend decided not to move both her and her husband’s retirement accounts over to this company. They are now looking at a company that specializes in retirement planning through fiduciary practices.
#3 – Are You A Registered Investment Advisor / Fiduciary?
First off, what is a fiduciary? Quite simply, a fiduciary is an investment advisor who is legally obligated to put their clients best interest before their own. That means they are required to recommend the best funds and advice to you that will make YOU the most money – not them.
For this reason, fiduciary’s usually are fee-based advisors, meaning they don’t earn a commission on different funds they sell. A fee-based plan is one that charges around 1% of the total investment as a flat fee. If you make less money, so do they. If you make more, your advisor makes more.
Advisors that work off commission as a broker can also work as a fiduciary but are not required to.
***I personally like the layer of protection that a fiduciary standard affords me but there are many commission-based advisors that are just as good if not better than someone who has the fiduciary designation***
With a fiduciary standard, I have less worry that my advisor is selling me something just because it makes them money where I would be much more skeptical with a broker/agent.
#4 – Are You Or Your Company Associated With A Broker-Dealer, And If So, When Will I Know You Are Working As A Sales Agent Rather Than A Fiduciary?
In the investment world, financial advisors can be both a fiduciary and a sales agent earning a commission in the same office. In other words, they can wear different hats. Your advisor can be working as a fiduciary one minute and then switch hats and drop the fiduciary standard.
After they move roles into a sales agent, they are no longer held to the fiduciary standard and can sell you products that earn them commission and are not necessarily your best option.
This question will determine if they have the ability to switch roles and if they do, how they will notify you of the switch.
#5 – Do You Earn A Commission Based On Selling Products?
Again, this question is point blank and will determine if they are ever compensated for selling a certain fund or product. This does not mean that they are not an honest person but it is something to be aware of.
#6 – How Are You Compensated?
This is where the advisor should tell you exactly how they make their money. Advisors may be fee-based, commission based, or fee and commission.
[Fee-based] is that flat fee I wrote about earlier. It can also be an hourly rate they charge to meet with you. Fee-based compensation does not rely on selling certain products.
[Commission Based] means the advisor makes money when he/she sells certain products.
[Fee And Commission] refer to those who can switch roles. You need to be able to determine when they are working as a fee-only advisor and when they are working for commissions.
#7 – Tell Me What Certifications And Licenses You Possess
- Many top advisors have some of the following certifications
- Certified Public Accountant (CPA)
- Certified Financial Planner (CFP)
- Certified Fund Specialist (CFS)
- Chartered Financial Consultant (ChFC)
- Chartered Financial Analyst (CFA)
- Chartered Life Underwriter (CLU)
- Juris Doctor (JD)
- Carry Insurance Licenses Such As Series 7, 24, 51, 63, 65, and 66
#8 – Will I Be Working With A Team Or You Personally?
This depends on your level of comfort. Some advisors are the initial intake but you will later work with a team for any future help. Other advisors are your primary contact and are the one you will call if you need information.
#9 – How Will You Manage My Account To Be Tax-Advantaged?
Taxes play a large role in retirement accounts. Some accounts grow tax-free and others defer taxes until you withdraw funds. Make sure your advisor has a strategy to minimize your tax liability so you don’t end up with a large IRS bill each year.
#10 – How Long Have You Been A Financial Advisor And How Will We Communicate?
Communication is extremely important regarding your investments. Will your advisor regularly update you on your investment account or call you with advice? Or will you only receive quarterly emailed statements detailing your fund performance? Decide what type of communication you want and ensure your advisor can deliver what you expect.
#11 – How Many Clients Do You Currently Have And What Happens To My Money If Something Happens To You?
Obviously the more clients under your advisor’s watch, the less attention he can give to your account. Also, make sure your advisor or their firm have a plan in place to easily move your investments under another manager if your advisor becomes sick or injured.
Avoid making future financial mistakes by not understanding the above questions. Every investment advisor should be able to answer each and every one of these questions relatively easily. If you get the feeling the advisor is trying to hide something or is not answering the questions thoroughly, go somewhere else.
Remember, your financial advisor works for you-you don’t work for them. There are thousands of financial advisors out there so find one you connect with.
I hope this list was able to provide you the necessary information to make an informed decision about your choice of a financial advisor.
Do you have any investment advisor horror stories? Comment below and let me know if you found someone you can trust and how you did it. Thanks for reading and have a great day!