If you’re thinking about working with a financial advisor to make your money goals a reality, it’s wise to conduct research beforehand and make sure they’ll end up being a good fit.
A financial advisor is someone you’ll be working closely with in one of the most personal aspects of your life. Before deciding on who you should work with, here are five questions to ask a financial advisor before hiring them.
1. Are You Working Under Fiduciary Duty?
Asking a financial advisor if they work under a fiduciary duty is perhaps the most important question to ask.
Fiduciaries are required by law to put their clients’ best interests above their own. They are not allowed to earn commission from any investment products they recommend to clients, thus making them more trustworthy in recommending products and services you will benefit from, rather than only doing so when they can earn money.
Financial advisors who work for brokerages are generally not working under fiduciary duty—meaning they can offer products with higher fees and bigger commissions for themselves. To find a fiduciary financial advisor, you can use databases from reputable organizations, including the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network.
2. What Are Your Qualifications?
Social media has made it easier than ever for people to share their input on investing and financial planning, even when they’re not legitimate, formally educated financial advisors. The amount of bad advice money advice out there means it’s crucial to be upfront and ask what a potential advisor’s qualifications may be. Someone who says most of their knowledge stems from their own research and experiences is not formally trained to be a financial advisor.
Aside from pseudo-advisors running amok on the internet, there’s also a confusing flurry of titles to describe different financial advisors. For example, there are certified financial planners (CFPs), investment advisors, brokers and wealth managers. These are all different in their own unique ways, and some are more specific in their expertise than others.
CFPs, for example, have a fiduciary responsibility to their client and can create tailored financial plans to help you achieve your goals. An investment advisor also acts under fiduciary duty and creates tailored plans but focuses specifically on your investment portfolio, rather than assisting with your entire financial picture.
Be sure to also check an advisor’s Form ADV before hiring them. This disclosure document will list out the services the advisor offers, explain their fees, detail their education and work history, and include any legal or disciplinary actions taken against the advisor. You can also use BrokerCheck to find this information.
3. How Do You Make Money?
As with any service you pay for, you’ll need to ask a financial advisor about their fees and how they will be paid. Some financial advisors charge a flat fee, whereas others charge hourly fees or asset-based fees. The most common types of payments are fee-only, fee-based (a mix of commissions and fees) and commission-based.
If a financial advisor discloses that they make money based on the commission of products they sell to you, that means they don’t have to work under fiduciary duty. The products they recommend may not be appropriate for your goals or risk tolerance—so proceed with caution, or look for a financial advisor who works under fiduciary duty elsewhere.
4. How Do You Allocate Assets?
Having a diverse asset class can help your portfolio endure short-term market volatility and set you up for success in the long term. That’s why it’s important to ask a potential financial advisor how they allocate assets.
Good asset allocation typically includes having investments in a mix of categories, including stocks, bonds and cash.
Another important aspect of asset allocation is its associated risk tolerance, which refers to your ability and willingness to lose some or all of your investments while seeking a return. It’s imperative to make sure you and a potential financial advisor are on the same page when it comes to your risk tolerance. If a potential advisor makes you uncomfortable by pushing you to take on more risk than you’re willing to take, then they’re not a good fit for you.
Keep in mind that enduring at least some risk is beneficial; not including enough risk means your investments may not earn a large enough return to meet your financial goals.
5. What Are Your Investment Values And Principles?
If you’re someone who takes pride in investing in ethical companies or those that are aligned with your moral values, you should ask a potential financial advisor about their investment values and principles.
Not all financial advisors are concerned with investing in ethically responsible companies. By asking before hiring an advisor, you both can be on the same page about where your money should be allocated. Some financial advisors even specialize in ethically responsible investing.
It’s also important to ask a potential financial advisor how they’ll measure progress toward your financial goals. You’ll want to make sure that you’re comfortable with the risk and pace of their presented strategy.
More From Advisor
- What Is A Fiduciary Financial Advisor?
- Should I Get a Financial Advisor?
- What to Know About Financial Advisor Fees and Costs
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
