Top Questions to Ask a Financial Advisor Before You Hire Them
Considering finding a financial advisor? Be sure to ask these important questions before you make the choice about which one to hire.
Determining which financial advisor or wealth management firm to hire is one of the most important decisions you’ll make and can have a significant impact on whether or not you reach your financial goals and your desired lifestyle in retirement.
So, how do you know what you should be looking for? Ask these 13 key questions to help you make an informed decision.
#1: Who is your ideal client?
Many advisors specialize in helping a certain type of client. Look for an advisor who has experience working with others whose financial situation and goals are similar to yours. For example, are you within a few years of retirement? Are you focused on long-term planning that minimizes your risk? Whatever your goals are, make sure they align with the investment philosophy and approach of the firm you’re looking to hire.
#2: How do you get paid?
There are three primary ways an advisor gets paid: Commission-only advisors who are paid commissions for selling or recommending certain investment products; fee-only advisors who charge an hourly fee, flat fee, or a retainer; and “hybrid” advisors who can get paid in both ways.
Make sure you fully understand how you’ll be charged, and ask for an itemization of fees and expenses in writing. A trustworthy financial planner will always be transparent about how they are paid.
#3: What qualifications and credentials do you have and what do they entail?
Just about anyone can hang a sign that says they’re a financial planner, so it’s important to look for the right credentials and training. Not only will these credentials indicate that financial advice is backed by a certain level of professional expertise, they’ll also tell you something about an advisor’s code of ethics and the integrity with which they operate.
We believe that two important credentials to look for include CFA, which stands for Chartered Financial Analyst, and CFP, which stands for Certified Financial Planner. The CFA designation is an internationally recognized prestigious designation earned via both a bachelor’s degree and an intense level of on-the-job training, additional education and examinations. A CFP is also bound by rigorous requirements, including education and testing, set by the CFP Board. Both CFA Charterholders and CFPs must adhere to stringent codes of ethics and guidelines.
#4: Are you a fiduciary — and are you always a fiduciary?
A fiduciary is someone who manages another’s assets in good faith, loyalty, and in a client’s best interest. A non-fiduciary, on the other hand, is only required to recommend investment products that are “suitable” for a particular client — their focus may be more on selling you something.
Some firms are registered as a broker-dealer (which allows it’s Registered Representatives to sell securities for a commission) and as a Registered Investment Advisor (RIA), which allows its investment advisor representatives to render investment advice act in a fiduciary capacity. These “hybrid” firms can make it tricky for clients to discern whether or not a certain investment is right for them, and can even create conflicts of interest.
Here at Ironwood Wealth Management, we made the decision several years ago not to be affiliated with a broker-dealer. We are a Registered Investment Advisor, which means we are registered with the U.S. Securities and Exchange Commission (SEC) and therefore bound by fiduciary duty — in other words, bound to by the highest standard of care and cannot place its own interests ahead of the interests of its client.
#5: How often will we meet? How will we communicate and how regularly?
Will you meet with your advisor in person, over the phone or by email? Will meetings be scheduled in advance at regular intervals, or take place on a more ad hoc basis? We pre-schedule meetings with our full-service clients — typically one to four meetings per year, depending upon the complexity of a given client’s financial situation and where they are in their career stage — to keep both us and our clients accountable and on track to meeting their goals.
#6: How do you measure success?
The exact specifics of success will look different for every client, but generally speaking, success should be based on whether or not an advisor is helping you attain your goal over the identified period of time. An advisor should be able to articulate their approach for measuring your success.
We work with each client to create a financial plan that is based on their goals, and that plan is what dictates our entire relationship. We run what are called Monte Carlo simulations — which help us understand risk and probability of different outcomes to various scenarios — to gauge the potential success of a client’s financial plan.
#7: What services do you provide?
If you want a firm that can handle all of your personal finance and retirement planning needs, then look for a firm that offers a holistic menu of services, including portfolio management, financial planning, tax preparation, and, if you run a small business, accounting and payroll.
#8: What investment benchmarks do you use?
We believe that you should find an advisor that offers diversified benchmarks, benchmarks that include domestic equities, international equities, emerging markets, commodities, fixed income, and so on.
#9: How do you report investment performance?
Try and seek out a financial advisor and firm who adhere to the Global Investment Performance Standards (GIPS), a set of standards that ensure full disclosure and fair representation of investment performance. The idea is that this additional layer of credibility allows you as an investor to see how the firm you’re interested in hiring stacks up against the others out there. Firms who are GIPS compliant will share their reporting with prospective clients.
#10: Who is your custodian? In other words, where is my money held?
For security and ethical reasons, we believe it’s important that a firm use an independent, well-known custodian (or firm that holds client assets), such as Charles Schwab, Fidelity and TD Ameritrade. As a client, you’ll sign a power of attorney that gives your advisor the right to do two things and two things only: make trades on your behalf, and deduct their asset management fee. They may have the option to assist you with transferring money if you provide them with the authority.
#11: What is your approach to financial planning?
The financial advisor you hire should have an approach that is focused on you and your goals and creating value for you. At Ironwood, we like to take a holistic approach: Starting with an understanding of the client’s goals and aspirations, and then creating a cash-flow-based financial plan. From there, our clients can make educated decisions based on that financial plan, and we work with them to keep their focus on the things that matter most to them and that we can control (for example, being efficient with taxes or employing social security strategies).
#12: How might you optimize my portfolio for tax purposes?
This is a very important one, because some studies show that asset location strategies could add as much as a half a percent return on an annual basis. An advisor who is an expert in asset location will be able to structure your assets across your different types of accounts — including tax deferred, tax free, and taxable accounts — for the most advantageous and efficient tax scenario possible.
Interested in learning more about the Ironwood Wealth Management approach to financial planning and wealth management? Set up an appointment today. These questions are ones that Ironwood Wealth Management believes are relevant and important to ask your current or prospective financial advisor. There may be other questions that are relevant to your needs.