Learn more about Jarrett on NerdWallet’s Ask an Advisor
A few weeks ago a potential client came in to meet with me. He was armed with a list of questions.
After discussing his situation for a few minutes, he began asking questions. I dutifully answered each one to the best of my ability. When we were through, he thanked me for my time, apparently satisfied with the answers, and we parted ways. But when he left, I stood there shaking my head for a moment, wondering if — despite my best efforts to steer the conversation — he had any idea how our firm works or what we do for our clients. To my mind, he had asked all the wrong questions.
As I sat down and started to explain this to my wife that night, I noticed a disapproving look on her face. I instantly knew what she was thinking: “OK, smarty-pants, what questions should he have asked?” It made me think about how I would interview a potential financial advisor. I came up with the top six questions I would ask and that you should ask any advisor you consider working with:
1. Are you a fiduciary?
Working with a fiduciary is a crucial first step to ensuring that the advice you receive will be in your best interest. As a fiduciary, an advisor must always put the client’s interests before his or her own. The advisor must also disclose how he or she is compensated, as well as any conflicts of interest that might arise in the working relationship.
Under the Investment Advisers Act of 1940, investment advisors are regulated by the Securities and Exchange Commission or the appropriate state authority and are required to provide services to their customers under the fiduciary standard. Investment brokers, on the other hand, are held to the suitability standard. As the name suggests, this standard requires only that the broker have a reasonable belief that any recommendations made are suitable for clients in terms of their financial needs, objectives and unique circumstances. Though the Department of Labor and the SEC have been working to simplify and streamline the fiduciary standard rules in the retirement and investment advice industries, no changes have been finalized.
2. With whom will I actually be working?
When you go to interview a new advisor, often you will meet with one of the principals of the firm. You may find that you really like him or her. However, many firms are structured as teams or groups, and you may usually work with someone other than the principal advisor. Before you sign up for a long-term relationship with an advisor or firm, find out how the team is structured and who your main contact will be, so you can get to know that person as well. A good advisory relationship will be built on trust, so you’ll need to be comfortable with everyone you will interact with.
3. What services do you offer?
All financial advisors offer slightly (and sometimes significantly) different services to their clients. It is important to know exactly what services an advisor will provide and to make sure those services are aligned with what you are looking for. Be sure to gain a good understanding of the advisor’s basic service model. You may also want to drill down for more detail in some of the following areas with these questions:
Financial planning: Do you provide comprehensive financial planning, just investment planning, or no planning at all? If you provide comprehensive planning, what areas does the plan cover (cash-flow analysis, cash reserves, insurance, investing, education, retirement, taxes, estate planning, etc.)? Do you provide ongoing planning after the initial plan is complete? What is the process?
Investment management: Do you require that I move all of my assets under your management? Do you manage the investments in-house or hire outside managers? Will you help manage investments not held with your firm?
Tax, accounting and estate-planning services: Do you provide tax and accounting or estate-planning services? If not, do you have qualified referrals in these areas?
Coordination: Do you coordinate with the other financial professionals I work with to make sure all of the areas of my financial profile are in sync?
4. How are you compensated?
Fees can be very transparent or extremely opaque, depending on the investment platform and specific investments you ultimately use. Each advisor sets up the compensation arrangement that suits him or her best, and while none is inherently better or worse than the rest, it is extremely important that you understand precisely how, and for what, your advisor will be compensated. Before you start, you should ask:
- Is there an initial financial planning charge? Is this charge ever waived?
- Are there any ongoing planning or advice charges? Do the charges change each year?
- How do you charge for investment management? The most common fee structures include charging a percentage of assets under management, a commission for each trade, or some combination of these two models.
- Do you use outside asset managers? If so, do they add an additional layer of fees?
- What are the average internal expenses charged by the investment companies or managers that you use?
- Do you receive any more or less compensation based on the type of investments you recommend? If so, how do you determine which investments to recommend?
5. What type of clients do you most commonly work with?
Learning whether the advisor has experience with clients in situations similar to yours is very important. Does he or she really understand the specifics of your industry? Does your advisor commonly work with clients who are in a similar financial position and share the same concerns as you? You want to be sure that your advisor has experience addressing the types of issues that are most important to you and relevant to your situation.
6. What is your investment approach?
There are many different investment philosophies and methodologies, and each advisor will have good reasons for believing in his. The truth is, most can be effective, as long as the methods are disciplined, deliberate and articulated in advance so that the client (or advisor) is not making emotional decisions during times of heightened market volatility. Even so, it is crucial that you fully understand your advisor’s investment approach and agree with how he or she will execute it.
Just getting started
This list is clearly not an exhaustive one, but it’s a good starting point. These questions, along with any additional queries more specifically tailored to your situation, should result in a good understanding of what the advisor does, how he or she is compensated, and what you could expect from the relationship. Getting solid answers to these questions will help provide you with the relevant information you need to make an informed decision when hiring a financial advisor.
Jarrett B. Topel is a certified financial planner and partner at Topel & DiStasi Wealth Management in Berkeley, California.
This article also appears on Nasdaq.
Image via iStock.
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