By Dr. James M. Dahle, WCI Founder
This post is a continuation of a post, 12 Things You Should Know About Choosing an Advisor. You'll be paying a financial advisor a great deal of money over the years, so you should interview several before choosing one. Don't feel guilty about being assertive when establishing this business relationship. You want someone you'll be happy with for years to come. Consider asking these questions to a financial advisor before hiring them to manage your finances:
What to Ask a Financial Advisor
#1 How Do You Get Paid?
This question is essential to knowing the advisor's conflicts of interest. I'm all for someone hiring a good financial advisor as long as they are giving good advice for a fair price. You need to know how you will pay them and what other sources of income they have other than client's fees, ie. soft-dollar arrangements, loads, and commissions.
More information here:
How to Find a Good Financial Advisor at a Fair Price
My Two Least Favorite Ways to Pay for Advice
How Much Can an Advisor Cost You?
#2 What Do You Do and What Don't You Do?
You can show him a list of your financial needs and he can then show you what he is qualified to take care of and what is covered by his fees. Consider having these on your list:
- Developing a comprehensive saving/spending plan
- Developing an investment plan
- Maintaining the investment plan through investing new funds, tax loss harvesting, rebalancing, calculation of returns and comparisons to benchmarks, etc.
- Life insurance
- Disability insurance
- Property insurance
- Liability insurance
- Tax planning
- Tax preparation
- Estate planning including preparation of wills and trusts
#3 What Designations Do You Hold?
#4 What Kind of Annual Returns Can I Expect After Taxes and Fees by Investing with You?
The key here is not what the number is, but the explanation that comes with it. You certainly aren't looking for the person that quotes the highest number, in fact, the lowest might be preferable. You can definitely cross off your list anyone promising you average returns over 10%. Ideally, the advisor will go into a long explanation about where returns come from and discuss the concept of long-term expected returns. Remember, the role of an advisor isn't to generate excess returns through market timing and security selection. A good financial advisor knows this and will explain this to you.
#5 May I See the Sample Portfolios of a Couple of Your Clients, Preferably One from 5 Years Ago and One for the Same Client from Now?
You're looking for a roughly similar portfolio. If there have been huge changes your advisor either gives inconsistent advice or is guilty of market timing.
#6 May I See Your Personal Portfolio and Performance?
Does it look like the client's portfolios? You want an advisor that eats his own cooking. If the advisor's portfolio is only $20,000, do you really want someone this inexperienced managing your money?
#7 What Is Your Investment Philosophy?
This question will tell you how up-to-date the financial advisor is on investment theory. You can follow it up with, “What do you think about timing the market?” and “What do you think about using mostly index funds in a portfolio?”
#8 Do You Recommend Variable Annuities or Cash Value Life Insurance to Many of Your Clients?
A “Yes” answer should disqualify the financial advisor from your consideration.
More information here:
What You Need to Know About Whole Life Insurance
10 Reasons People Regret Buying Whole Life Insurance
Should You Invest in Variable Annuities and Non-Deductible IRAs?
#9 Have You Ever Had Any Disciplinary Action from Regulatory Authorities?
This is the time to ask about any complaints you found about the firm or the advisor on the FINRA website, the SEC website, or the Better Business Bureau.
#10 Will You Have a Fiduciary Requirement Toward Me?
This refers to whether the advisor is legally obligated to put your financial interests first, or if his first allegiance is to a firm.
#11 How Often Will We Meet and What Reports Will I Receive from You?
The more you're paying, the more face-to-face time you should expect.
#12 Why Did the Last Two Clients That Left You Leave? What About the Last One You Dismissed from Your Practice? Would You Mind Giving Me Contact Information to Talk to Them?
An advisor might not give you this information (citing privacy issues mostly likely), but if they do, it may be the most helpful thing you do.
The best way to establish a long-term relationship is going in with your eyes wide open. Make sure you hire right or you'll be doing the whole thing again in a year or two. Also, don't feel obligated to hire someone who lives in your town. Most financial advising can easily occur by email or phone. I'd rather have a great advisor who lives across the country than a mediocre one who lives next door.
What questions would you ask a financial advisor before hiring one? Comment below!
I am currently in a mental debate as to whether I should continue with my current advisor, consider a new advisor (meeting with him later this week), or brave personal finance/investing on my own.
It’s been 4 years since you wrote this blog post. Any new questions you’d consider asking a potential financial advisor?
I’ve written a number of posts on the same subject since then. Just put “financial adviser” in the search box on the site and you’ll find a dozen or so articles, most more recent than this one.
WCI: What does it mean if one of the recommended financial advisors (from your website) was on the list a couple years ago, and is no longer on the list? Thanks!
It often means their practice filled and they’re no longer looking for new clients. It sometimes means they felt they weren’t getting good value for their advertising dollars and decided to spend money elsewhere. I don’t think I’ve removed one yet from that list because I changed my mind about approving them as an advertiser. You can send me an email if you have a specific question about someone.
Enjoy and agree with your writings.
I am interested that on your “Recommended Advisor” list that you did not include Martin Watkins and his firm TrueNorth Wealth in Salt Lake, UT and Boise, ID.
Marty was the FOUNDER of your favorite UMAFS. He built it from the ground up as a low-cost fee-only fiduciary firm.
TrueNorth continues to work with Idaho physicians through IMAFS & near 300 physicians and dentists.
I am a practicing radiologist interested in finance like yourself who joined the firm part time with Series 65 and CRPC (Chartered Retirement Planning Councilor) designations.
Please consider adding TrueNorth Wealth to the recommended list.
You know it costs money to get on that list, right? So it only includes advisors looking for new clients. I have a doc down the street who uses Marty though.