Finding a new financial advisor, whether it’s your first time working with one or you’re a seasoned investor looking to spice up your portfolio, can be absolutely exhausting. A simple google search of “financial advisors near me” reveals pages and pages of endless options, and it’s not too long before analysis paralysis can start to set in.
And here’s where it gets trickier: not all financial advisors have your best interests at heart or the knowledge to really maximize your money.
Think of the relationship with your financial advisor like a marriage or long-term partnership. You’re likely going to be working with this person for the rest of your investing life.
Sure, divorce is an option – but just like in the real world, it can get messy and costly.
Fortunately, you can ask a handful of key questions to weed out the bad eggs from the golden ones.
Here are seven questions for your financial advisor to ask before you start working together.
1. “Are you a fiduciary?”
You’ve probably heard this word thrown around a lot and may not know exactly what it means. The legal definition of a fiduciary is “an individual or organization that has a legal duty of care and loyalty to another person (or persons).”
In simplest terms, it’s someone who has a legal and ethical duty to you to act on your behalf, in your best interest financially.
For me, this is a non-negotiable. It’s always reassuring to know that the person handling your hard-earned cash is quite literally legally bound to make decisions with your success in mind.
FYI – all Personal Capital advisors are licensed, registered fiduciary advisors, so this is a great place to start.
2. “What are your qualifications?”
Just like in dating, hiring, or any other partnership, it’s important to know someone’s strengths and weaknesses right off the bat. As you ask questions about your potential advisor’s qualifications, here are a few things to listen for.
It’s important to note that a bachelor’s degree is required for many of the exams required to become a certified financial advisor in the U.S. As far as what they studied? It varies, and it’s not always a significant factor. Many advisors have their masters, but it’s important to note that an MBA is not the end all be all. I studied Theatre and Communications in college, and look at me now!
You don’t need to understand everything about these licenses, just that they have them. The required licenses are Series 7 and Series 63, but many advisors get additional licensing, which can be a big perk depending on your financial goals.
Additional certifications are common among financial advisors. A great one to look for is the CFP® or Certified Financial Planner certification. The CFP® board has some of the highest standards and ethics codes, so this is a great way to know you’re working with a knowledgeable and trustworthy advisor.
Compatibility (aka Good Vibes)
You may appreciate different qualities in a financial advisor, depending on your personality type. Do you want an advisor who only calls when it’s absolutely necessary or someone who keeps you up-to-date every step of the way?
Are you more comfortable working with a 25+ year veteran with a steady track record or someone who might be a greener but feisty up-and-comer?
These considerations are 100% based on your preferences and personality. Again, this is a decades-spanning partnership, so don’t ignore the vibes you get – it’s an important factor!
3. “How will you help me achieve and maintain my financial goals?”
Do you want to retire early?
Buy a second home on a faraway island where you can escape for the summer?
Prep for your kid’s college funds?
Whatever your goal is, make sure your financial advisor is the best person to help you achieve it. This is why it’s essential to set clear financial goals before your appointment.
Say you set an aggressive goal, like I did, of saving $100,000 by age 25. You’d want to work with an advisor who isn’t intimidated by big numbers and short timelines.
If you’re having a hard time clarifying your goals, ask yourself questions like:
- When do I want to retire? And how much do I want to have saved?
- Do I have short and long-term savings goals? What are they?
- Am I more comfortable with high risk and the potential rewards, or would I prefer a slow and steady approach?
- What expenses do I need to keep in mind for the future that investing may help me prepare for? (i.e., weddings, college, buying a home, etc.)
Advisors can be highly intuitive, but they are not mind readers. Come prepared to share your goals, and ask specifically how they’ve helped others achieve those same goals.
4. “What are your investment principles?”
When you’re interviewing financial advisors, it’s critical that you find one that shares your investment principles (even if you don’t know what those are yet). As a result, asking an advisor about their investment principles should be one of the first things you do.
Here are a few topics that might come up:
- Risk: Each investor has a different risk tolerance, and it’s important that you find an advisor who fits yours. If you have a high tolerance for risk, you probably don’t want an advisor that’s going to take a low-risk approach to your portfolio. Similarly, if you have a low tolerance for risk, you’ll likely want to avoid advisors who want to invest your money in individual stocks and speculative investments.
- Strategy: Along the same lines as risk, there are many investment strategies an advisor might use. Some advisors will recommend dollar-cost averaging, where you make consistent contributions to your portfolio each month. Others may recommend lump-sum investing when you can. Similarly, some advisors will recommend a diversified fund portfolio with a buy-and-hold approach, while others may recommend more active trading in individual securities.
- Fees: It’s important to find an advisor who shares your view on investment fees. Some investors prioritize low fees above all else, while others might be willing to accept higher fees on certain investments. Generally speaking, it’s more favorable as an investor to pay lower fees, but it’s important to be on the same page as your advisor.
- Taxes: Just as most investors want to lower their investment fees, most also want to reduce their tax burden. Depending on where you’re investing, you could be on the hook for capital gains taxes and income taxes. When you’re interviewing investors, ask their philosophy on tax minimization.
5. “Which services do you provide/have expertise in?”
Asking an advisor what services they provide and have expertise in is one of the most important things you can do when shopping around for a financial professional.
It’s easy to assume that all financial advisors offer roughly the same services, but that couldn’t be further from the truth. Some advisors offer comprehensive services that touch every area of your finances, while others specialize in one service (or a couple of different ones).
And even if an advisor offers a specific service, they may not necessarily be an expert in it. Ultimately, the goal is to find an advisor that not only offers the services you need but also has expertise in them.
For example, let’s say your primary financial goal is planning for retirement. When you’re interviewing different advisors, you’ll want to hone in on those who specialize in retirement. Sure, the advisor you choose might also be able to help you with your estate plan and insurance plan, but retirement should be their bread and butter.
6. “What kind of clients do you typically work with?”
You may feel like you’re breaking some forbidden rule asking about other clientele, but it’s one of the most important questions you can ask!
Suppose your advisor typically works with seasoned big spenders with massive portfolios. In that case, they may not be the best fit for a first-time investor with a small budget and vice versa.
You don’t need to get into hyper-specific details. A simple “tell me about the last time you worked with a client who has similar goals to me. How is it going?” should open this conversation up and tell you what you need to know.
Think of their client stories as your investment fitting room; this is about helping you “try on” your potential investment journey before you buy.
7. “How are you paid?”
One of the most important questions to ask any advisor you’re considering working with is how they get paid. How your advisor gets paid will impact not only how much you pay, but also what incentives your financial advisor may have when recommending certain investment products.
There are generally two primary ways financial advisors make money: fees and commissions (or a combination of the two).
Many advisors make money from the fees they charge their clients. Fees are often based on a percentage of assets under management (AUM), with a common fee being about 1%. Other fee structures can include flat fees and hourly fees.
The other way advisors can make money is through the commissions they earn when they recommend certain investment products. In this case, the money comes from the investment company rather than you as the client.
Investments don’t necessarily have to choose between one compensation structure or the other — some make money from both fees and commissions.
It might seem like a commission-based advisor is better since it means someone else is paying them. But it’s important to remember that if someone else is paying them, their loyalties may also lie elsewhere. That’s not to say a commission-based advisor is going to scam you. However, they may recommend products based on which pay the highest commission rather than which are actually the best fit for your portfolio.
Each brokerage will operate differently, so make sure you’re asking for a full breakdown of costs right from the start. And if you ever feel like the advisor is withholding information on compensation over the course of this conversation, that is a HUGE red flag. When a financial advisor isn’t transparent with you about their compensation, it’s likely they won’t be transparent with you about your investments.
Is an investment minimum required?
Some advisors may require a minimum AUM to work with them. This investment minimum helps an advisor to ensure they’ll make enough money from each client to be worth their time. Many advisors have minimum AUMs of around $100,000. However, depending on the advisor, the minimum could be as low as $25,000 or as high as $1 million.
The Bottom Line
Choosing the best financial advisor for you can be a difficult decision. The questions above can help you narrow down your list, but there may still not be an obvious winner. In that case, here’s another piece of advice: trust your gut.
We’ve talked about how your relationship with your financial advisor is a lot like financial matrimony. At the end of the day, it’s important to have an advisor you feel comfortable with.
Want a better way to manage your investments? Personal Capital’s free and secure online financial dashboard is the financial tool that I check daily. You can use the tools to see all of your accounts in one place, analyze your investments, and plan for long-term goals saving for retirement. And if you’re looking for a financial advisor, Personal Capital offers fee-based fiduciary advisors.
Erin Gobler contributed to this article.
Personal Capital compensates Tori Dunlap of Her First $100k (“Author”) for providing the content contained in this article. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. Additionally, in a separate referral arrangement between Author and Personal Capital Corporation (“PCC”), Author is paid $70 and $150 for each person who uses Author’s webpage (www.HerFirst100k.com) to register with Personal Capital and links at least $100,000 in investable assets to Personal Capital’s Free Financial Dashboard. As a result of these arrangements, Author may financially benefit from referring potential clients to Personal Capital and/or be incentivized to present blog content that is favorable to PCC. No fees or other amounts will be charged to investors by Author or Personal Capital as a result of the Referral Arrangement. Investors that are referred to PCC and subsequently subscribe for investment advisory services provided by PCC’s affiliated adviser, Personal Capital Advisors Corporation (“PCAC”) will not pay increased management fees or other similar compensation to Author, PCC or PCAC as a result of this arrangement. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.