Top 10 Questions to Ask When Interviewing a Financial Advisor and 1 Trick Bonus Question

You have done your research online, looked through the advisor’s website, and stalked their online bread crumbs and now you are ready for your first introductory meeting. But what are you supposed to ask? Before you get into the details of how they can manage your money and review your financial life, here is a list of the top 10 questions you should ask upfront. This list will provide some clarity about how they do business so you can make an informed decision.

1.       Are you a FIDUCIARY at all times in working with clients?

The term fiduciary is someone who is required, by law, to act in the best interests of their clients. The same standard of care applies to your CPA and your attorney. A fiduciary is required to disclose conflicts of interest, provide transparency about costs, and do what is right by their clients. Unfortunately, the term “advisor” is unregulated and can be a bit like the wild west. It is oftentimes difficult to distinguish between those who coach, advise, educate, are regulated and credentialed, and those who provide “advice” to followers for fun. And to make matters worse, not everyone who claims to be a fiduciary is acting in a fiduciary capacity at all times. So here’s one way you can tell the difference.

When I worked for another financial services company, it was common practice for brokers to act, as if they were playing charades, that they were “putting on” their fiduciary hat to provide clients with investment advice. The broker would show the client they were lifting their imaginary fiduciary hat off the desk and putting it on their head. What was the result, you may wonder? The advisor was selling the client on their managed portfolios as an investment and therefore was required to “act” as a fiduciary when making such recommendations. Yet ten minutes earlier, the advisor was suggesting a client buy an annuity that helped the broker meet their quarterly quota and bonus – an example of not acting in a fiduciary capacity.

I describe this scenario to you so you can look out for it. When you ask the advisor if they act as a fiduciary, be sure that means 100% of the time. Otherwise, there may be products they are incentivized to sell which do not qualify as meeting the fiduciary standards of care.

My answer: Yes, 100% of the time.

2.       How do YOU make money?

There is a very nuanced word here and I need you to listen for it. The answer you are looking for is “fee-only.” There are many compensation models to pay for advice and planning. This broadly breaks down into three categories: fee-only, fee-based, and commission.

Fee-only means that the advisor or planner is only compensated by the fee that you pay directly to them. They do not receive any compensation from the investments that are recommended There is no incentive for them to pick one over another, which removes biases, and recommends only those they believe to be the most cost-effective solution for the goals and objectives you are trying to achieve.

Fee-based, on the other hand, is a term that means the advisor is compensated by both fees and commissions. It is often confused with the term fee-only. The difference is that they are acting as a broker in some capacity and as a fiduciary at other times, just like the advisor who was removing “imaginary hats.” This can create a bias that incentivizes the advisor to select products that provide additional compensation to them.  

Commissioned advice is sold just like a salesperson sells cars. When a person is incentivized to make money based on what you buy it can create a conflict of interest. They position their products to fit your need regardless of other, and potentially more cost-effective or better solutions that may exist. It may not be done with malicious intent and oftentimes the salesperson genuinely believes their solution will fit your needs, but it does not consider the entire universe of available solutions. Recommendations are based on their inventory like the car salesperson. This practice is much more prevalent when buying insurance and annuities so it is important to ask if they receive compensation for their proposed solution – and ask how much they stand to make from the sale.

A fee-only advisor is not limited by inventory. Instead, a fee-only advisor will direct you to the investments that best match your needs.

My answer: I am a fee-only advisor 100% of the time. The only way I make money is from the fee you pay directly to me. I have no other incentives or quotas to make. Details of my fee schedule can be found on my website here.

3.       What CERTIFICATIONS do you currently hold and what is your experience?

There is no shortage of an alphabet soup of certifications, designations, credentials, and licenses in the advisory world which can only confuse investors trying to understand what they all mean. While many can learn about financial planning and investment topics, there is a quality of expertise, ethical standard, and experience provided by an advisor who has earned professional designations and meets continuing education requirements.

A CERTIFIED FINANCIAL PLANNER™, or CFP® professional, is required to complete college-level coursework covering a broad range of personal finance topics, maintain a high standard of ethical practices, complete continuing education hours to stay up to date on the latest regulatory changes that impact your finances, pass a rigorous test, and have several years of experience before having the authority to use the credentialed status. It is considered the gold standard of fiduciary advice. Currently, only 27% of financial advisors are CFP® professionals.

A Chartered Financial Analyst, or CFA charterholder, is a globally recognized post-graduate professional designation and one of the most respected investment designations in the world. To use the marks requires completing a minimum of three years of additional coursework for each of the three levels with a rigorous exam to follow each level before progressing to the next. It has one of the highest fail rates of any designation but provides an in-depth mastery of investments, portfolio management, and valuation. Using the marks exemplifies high ethical standards and requires several years of experience before the designation may be recognized. Only 1.7% of financial advisors are CFA Charterholders.

Other designations may be similar or may be specific to a niche. When searching for your advisor, don’t be afraid to ask about their experience and certifications that will be beneficial to your needs as a client.

My answer: I hold the CFP® and CFA designations and I have earned an MBA with a finance concentration. Fewer than 1% of advisors have completed the rigorous coursework, experience, and ethical requirements to earn both designations. I have been in the financial services industry for nearly 20 years working directly with clients on their investments, creating financial plans, and helping thousands of clients make the transition into retirement bliss and achieve their life goals.

4.       Do you have any DISCLOSURES on your records?

No. This answer should be straightforward. You can also review the advisor’s experience on the SEC website here.

My answer: No.

5.       What services do you provide and do you provide both FINANCIAL PLANNING & INVESTMENT MANAGEMENT?

Are you looking for holistic guidance from a planner who can take a look at your entire financial life? Do you want someone to manage your investments? Some advisors only manage the investments, but investments are only one piece of your financial life. It is important to look for an advisor who will evaluate all aspects and cover a broad range of financial planning topics that include: cash flow and debt management, investments and asset allocation, retirement planning, tax planning, estate planning, charitable giving, college planning, insurance evaluations, and risk analysis.

Make certain the advisor you hire will provide you with the financial planning tools and techniques so that you are well-equipped to see how the investments fit into your life-goals puzzle.

And read more here about What is Financial Planning and Why Would I Need Ongoing Planning.

My answer: We provide clients with ongoing financial planning and investment management services. We help you grow, build and protect your financial future to empower you to design a life of freedom, fulfillment, and joy.

6.       Do you require a specific MINIMUM investment portfolio to work together?

There are two reasons why it is important to ask this question. First, it helps you understand if you are a good fit for the cost of services they provide, but it also helps inform you where you might fall on the range of vying for the advisor’s time. As a follow-up, it would be important to know if the advisor segments clients based on account values and what that would mean in your working relationship with the company.

My answer: No. We do not have asset minimums. That is why we offer financial planning as a stand-alone service. You do not have to have amassed a sizable investment portfolio before seeking financial planning advice.

Instead, we charge a minimum fee for the work we provide to ensure we are fairly compensated for the time, services, and expertise we provide in our journey together. We strongly believe in full transparency and that you should know what the cost is for our services from the very beginning. You can find the details of our fee schedule on our website here. We do not segment client services based on the size of their accounts.

7.       What EXTRA costs are involved in working together?

It is impossible to avoid all costs and keep in mind the lowest cost options are not always the best solution. Here is a rundown of common costs outside of advisory and planning fees.

Exchange traded funds (ETFs) and mutual funds, a diversified mix of companies that are common in employer retirement plans, have an expense ratio - a cost of running the fund that derives from the management, operations, and regulatory oversight of the investment. ETFs and index mutual funds have some of the lowest costs in the industry and can be a great option to give you broad diversification inexpensively. Actively managed funds will make the expense ratios increase.

There can be transaction fees charged by some fund companies for buying and selling their funds. There can be fees charged by custodians for trades or operational requests like wire transfers to a third party, for example. 401(k) plans offered through an employer typically have additional administrative fees which may or may not be offset by your employer. And annuities can have commissions ranging from 1-10% of the total value of the contract which may cover the cost of insurance and some portion may go into the pocket of a salesperson as compensation.

While there may be additional costs involved in the investments you own, the key is to make sure these costs are fully disclosed, do not turn into compensation that nulls the advisor’s ability to be a fee-only fiduciary, and that these costs are reasonable.

My answer: We look to minimize costs as much as possible in building a diversified portfolio. We balance this need for low-cost with the desire to ensure your portfolio is structured appropriately. We prefer ETFs over more expensive options to keep costs low, optimize diversification, and keep more profit in your hands.

8.       What is your investment PHILOSOPHY?

An investment philosophy is a set of beliefs and principles that guide our decision-making process. If you believe strongly in actively trading from one stock to the next while your advisor focuses more on a passive approach then your core philosophies will not jive. If you prefer to follow trends that are gaining momentum yet your advisor focuses only on blue-chip dividend stocks, these fundamental differences in strategy will eventually lead to disappointment. It is important to understand the general approach the advisor will take in managing your portfolio. And, if you want to get specific and ask how they feel about certain companies, styles of investing, and even what types of investments they avoid, it will give you much more clarity on how your portfolio will be designed.

My answer: We believe the markets are efficient and reflect publicly available information. Therefore, active management through selecting individual stocks generally does not add consistent value over a long period of time. Frequent buying and selling can add more in taxes, fees, and lost opportunities through trying to time the market and therefore, can do more harm than good. We believe that the best way to achieve long-term financial success is through an appropriate asset allocation strategy that aligns with your goals, establishing a regular investment regime (for wealth builders), periodic rebalancing, and diversification in a disciplined approach. We focus on things we can control.

Our Investment Management Principles:

·         ALIGN & STRATEGIZE: Designate strategies by account to align with your values and goals

·         LOW-COST DIVERSIFICATION: Minimize costs with low annual expense ratios and use index funds where possible

·         GROW NOT CHASE: Optimize long-term inflation-adjusted appreciation and/or income to fit your goals and avoid chasing past-performance that leads to unjustified portfolio risk

·         TAX FOCUSED: Minimize taxes over the long-term while maximizing your goals for financial success through tax-efficient investments and tax planning

·         KEEP IT SIMPLE: Look for opportunities to simplify your financial picture and alleviate financial stressors of life

9.       How often and in what ways do you COMMUNICATE with clients?

Before moving forward, you should learn more about their process, communication methods, and how frequently you would be expected to meet. For drafting and creating financial plans, there is generally quite a bit more communication at the onset of the relationship while gathering important documents and organizing them into the initial plan. When setting up accounts for investment management, there will be administrative meetings to complete paperwork.

Find out how the advisor likes to communicate: phone, email, web conference, in person and make sure that matches what is convenient for you. Learn more about their financial planning software and if you will be uploading important documents to a cloud storage provider or into your online vault. Will you have login information for a custodian who holds your accounts and one for your financial dashboard. How often will you meet and update your plan? How should you connect if you have a quick question?

My answer: We will be in communication frequently in the first three months as we set up your initial financial plan, organize your financial dashboard, and establish your investment accounts if we are managing them on your behalf. We are a 100% virtual firm based out of St. Petersburg, FL that works virtually with clients across the US where licensed or exempt. Our meetings will be held via web conference and communication for non-sensitive materials through email. You will gain access to your own financial planning dashboard where we will collaborate together and you can upload important documents to your vault to share and/or store for safekeeping.

Details of our Financial Planning Process can be found here. Thereafter, we recommend quarterly or semi-annual meetings to check in on plan progress as your life journey changes and evolves. But we are always available to schedule a meeting or answer a question if something comes up before then.

10.   Will I work DIRECTLY with you or others?

The most important element in cultivating a life-long relationship with an advisor is the trust you develop over time. However, when working with one individual and then experiencing a shift of being passed off to another, more junior advisor, can leave you feeling like you have to repeat your story and start over from square one in building rapport. If you work with a new advisor ensure to ask all of the same questions in this top 10 list to them as well. It may also be valuable to find out how many clients they serve. And the higher the number of clients, generally the more focused that firm is on simply adding more assets rather than building relationships. This can be the difference between feeling like you are “just another number” versus receiving the personal attention you deserve.

My answer: You will work directly with me.

As a bonus, here’s the Trick Question: How much money will I make?

There is no way to accurately predict with certainty how investments will perform in the future. Tread carefully how an advisor answers this question. If they believe they can deliver specific results, it is a warning sign that you should continue interviewing other companies. The most honest answer here is “I don’t know.”

Asking these questions will provide you with greater transparency in how the advisor is compensated, if there are any conflicts of interest, if they are acting in your best interest at all times, if their expertise matches your needs, that their philosophy aligns with yours, and ultimately give you a greater sense of trust with the person you are entrusting to guide your biggest financial resources.

*****

Cassandra Smalley, CFA, CFP® is a fee-only financial advisor for women business owners and high-achieving professionals located in St. Petersburg, FL, and works virtually with small business owners, moms, and families across the country.