Find it difficult to have productive conversations when interviewing financial advisors?

Asking these 10 questions will help you find an advisor with the knowledge, experience, and qualifications you need, while avoiding the excessive fees and commissions you don’t.

Are you a fiduciary?

Simply put, the answer needs to be a clear “Yes.” There should be no qualifiers.

Fiduciary advisors are obligated by law to work in the best interest of their client. If an advisor is not a fiduciary, the advice you receive might not actually align with what’s best for you.

Surprisingly, this is not the industry standard. In short, you should choose a fiduciary.

Note: Make sure that your advisor is always held to a fiduciary standard, not just for retirement accounts.

How much experience do you have, and which credentials do you hold?

Your advisor should have experience working with people like you, but also people like the future you. They will be there to help you work through life decisions and changing market conditions; it is helpful if this isn’t their first rodeo. Don’t let age distract from experience, they are not the same thing. Credentials vary in the industry, but we recommend looking for advisors with the CERTIFIED FINANCIAL PLANNER™ designation.

Has your firm or anyone in your firm ever been subject to disciplinary or legal actions?

An affirmative is a significant warning sign. Proceed with caution.

Will I be working with you on a long-term basis?

Larger firms often rotate client relationships among advisors; you can sign-on with one person and end up working with another without notice. It is important to work with an advisor who gets to know you well so that they can better understand your unique financial needs.

How many clients do you have?

Your advisor’s workload will impact the level of personalized service you receive. An advisor managing more than 50 relationships will be harder pressed to offer the time and personalized guidance that you deserve. It’s not a deal-breaker – technology, outsourcing options, or relying on associates can help – but it is important to know how their business is structured to ensure that you are viewed as a relationship and not a number.

Are you a fee-only firm?

Fee-only advisors are only compensated directly by the client. Fees are transparent, and the advisors don’t receive any hidden compensation for the advice they render. Advisors who are “fee-based” can collect a fee from the client and accept commissions and compensation from the products or services they recommend. Your advisor should be in the business of providing advice, not selling you products.

What services are included in the fee?

Some advisors are solely money managers, focused on investments. Others are financial planners only who don’t offer investment advice. Wealth managers aggregate these two services to support all your financial needs.

 What is included in your financial planning services?

Some financial advisors focus on retirement planning services only. Others address all areas of financial planning, such as taxes, asset protection, estate planning, college funding, etc. Whether you want a slimmed-down approach or a comprehensive plan, the cost should reflect your choice.

What is your investment philosophy?

Ask the advisor to explain the firm’s investment philosophy. Your future advisor should be capable of doing this in a clear and succinct manner. Don’t hesitate to ask them to clarify anything that you don’t understand. If you walk away confused, it’s probably a sign to cross them off the list – either you’re not comfortable asking them questions, their investment background is limited, or they don’t communicate well.

Some key points to listen for when discussing investment philosophy:

• Diversification: Portfolio diversification is essential to enhancing your returns while also reducing your risk over time. Ask your advisor to discuss the importance of diversification in the portfolios that they build.
• Active vs. Passive: Some managers “actively” pick individual stocks (or mutual fund managers who then pick stocks themselves) with the goal of beating the market. Others invest “passively” through index-based funds. Research tends to favor passive investing, but active investment will likely be with us forever. How much are you willing to pay every year for occasional outperformance? Make sure your answer aligns with your advisor’s answer.
• Fees: Ask for the typical weighted expense ratio of a portfolio. This is the ongoing cost of your investment portfolio and is in addition to what you pay your advisor. Anything over 1% is worth reviewing in more detail. Confirm that there are no loads for any funds purchased and ask about transaction costs.

Will I have to sell all of my current investments if you manage my portfolio? What about taxes?

Some advisors require that you sell everything in order for them to invest your portfolio in their preferred investments. If you own investments outside of an IRA or other tax-qualified account, this could result in significant taxable capital gains. A customized portfolio transition takes more work on the advisor’s part but can save you money versus a one-size-fits-all approach.

How will you determine my asset allocation?

This is almost like asking if you will receive personalized attention. If they offer an allocation recommendation on the spot without knowing much about your finances, say it is up to you, or that most clients tend to hold the same portfolio, this is a point of concern. The appropriate asset allocation should only be determined after they have a solid understanding of your current finances, short-, medium-, and long-term goals, and risk tolerance.

What Next?

Do you have a question specific to your situation? By all means, add it to your list. The above questions are an excellent starting point, but by no means exhaustive.

What is important is that you ask the same questions of each of the advisors you meet. Compare apples to apples. Note the answers you receive in each meeting and then compare on your own to decide who makes the cut. This gives you an easy out if pressured to make a decision – although a pressure-tactic sale should be disqualifying on its own merits – and helps you make a fully informed decision. After this initial screen, it’s time to evaluate based on personality fit. This is a relationship, after all, and communication is key.

Heritage Road Advisors, Inc. is an independent, fiduciary, fee-only wealth management firm with a presence in Seattle, Washington and Point Clear, Alabama. We offer financial planning and investment management services to people with significant equity-based compensation, small business owners, and those in retirement. Want to chat? Reach out to us today.