When you are looking for a financial advisor, remember that you are interviewing them more than they are interviewing you. In this blog post, we list 20 questions to ask your financial advisor.
A financial advisor is not just for the wealthy.
However, some financial advisors don’t have an asset-related minimum. An expert can help you achieve your financial goals faster.
Ask as many questions as you need, and, if they refuse to answer or seem annoyed, that is an answer in and of itself that they are probably not right for you.
You will want a partner in your financial planning that puts your interests ahead of anything else and has your best interests in mind.
A financial advisor can help us make sure our hard-earned cash is invested in the right areas so we can grow our wealth. However, not all financial advisors are created equal.
It’s essential to ask them the right questions before committing to their services.
Here are 20 questions to ask your financial advisor.
#1 What is your experience, and how long have you been in the industry?
#2 What are your qualifications? Are you a CFA, CFP, or ChFC?
These questions are just you getting to know someone. Ask a financial advisor about themselves. Most people like talking about themselves, especially a potential advisor. Find out why they are in this business.
Do they have additional certifications that could be helpful, like are they a Certified Public Accountant or do they have a law degree?
#3 What is your investment philosophy, and how do you select your investments?
Understanding your financial advisor’s investment strategy is integral to the advisor-client relationship. This tells you about their approach to investing and managing risk, and it can provide a clear insight into how they make investment decisions. Their philosophy could range from aggressive growth investing to conservative income-based strategies, and it should align with your risk tolerance and financial goals.
Common Investment Philosophies
There are various investment philosophies that financial advisors may employ.
- Value investing: This strategy involves buying securities that are undervalued in the market, based on the belief that their true value will be recognized over time.
- Growth investing: Growth investors look for companies that they believe have strong future growth potential. They’re less concerned about the stock’s current price and more focused on its future potential.
- Income investing: Income investors seek out investments that regularly generate income, like dividends or interest. This strategy is often preferred by people who need regular income from their investments, like retirees.
- Indexing or passive investing: This strategy involves building a portfolio that mimics a market index, like the S&P 500. Passive investors believe in the market’s efficiency and think that, over time, this strategy will yield solid returns with low fees.
- Active investing: Active investors regularly buy and sell securities, trying to outperform the market. They believe that through research, market timing, and skilled selection, they can beat the market.
Knowing your advisor’s philosophy helps you understand their approach and how it fits with your financial goals and risk tolerance.
#4 How do you structure your fees? Is it a percentage of the assets managed or a flat fee?
Financial advisors typically structure their fees in a few different ways, and understanding how they do so is crucial to avoid any unexpected costs.
- Percentage of Assets Under Management (AUM): This is the most common fee structure. Advisors charge a percentage of the total assets they manage for you. The rate typically ranges from 0.25% to 1.5%. For example, if an advisor manages $100,000 for you and charges 1% annually, you would pay $1,000 a year.
- Hourly Fees: Some advisors charge an hourly rate for their time. This is usually the case when the advisor is providing a one-time service, like creating a financial plan for you.
- Flat Fees: Advisors may charge a flat fee for a specific service, like creating a financial plan or providing investment advice. The flat fee should be agreed upon before the advisor begins work.
- Commission-Based: Some advisors earn a commission from the products or investments they sell. This can create a conflict of interest, as the advisor may be incentivized to recommend products that offer higher commissions.
- Fee-Only vs. Fee-Based: Fee-only advisors only make money from the fees they charge clients, while fee-based advisors can also earn commissions on the products they sell.
When asking about fees, make sure to find out not just how much they charge, but how they charge it.
This can help you understand what incentives might exist and how they could impact the advice you receive.
Remember, a good financial advisor will always be transparent about their fee structure.
#5 Do you have a fiduciary duty to your clients?
#6 What is your approach to risk management?
#7 Do you have any conflicts of interest to disclose?
#8 Can you provide references from your existing clients?
Perhaps a friend referred you to this financial advisor, in which case, you already have a reference. It never hurts to talk to a few more.
#9 How often do you review and rebalance the portfolio?
#10 What does a portfolio review involve and how frequently do you perform it?
A portfolio review is a crucial activity undertaken by financial advisors to ensure that your investments are aligned with your financial goals. In a portfolio review, the advisor assesses the performance of different assets in your portfolio, evaluates the risk associated with each investment, and determines whether the asset allocation still suits your risk tolerance and investment horizon.
They also look at market trends and economic indicators to anticipate potential shifts that could impact your portfolio. If necessary, they may suggest rebalancing, which involves adjusting the proportions of different assets in response to market changes or changes in your financial situation.
The frequency of portfolio reviews can vary based on the advisor’s approach and the client’s needs. Some advisors may perform a review quarterly, while others may do it semi-annually or annually. Frequent reviews can help in timely detection of any issues and taking necessary corrective actions. However, the exact frequency should be clarified with your financial advisor, as it is a crucial component of your ongoing relationship with them.
#11 How do you communicate with your clients?
#12 What is your response time when a client has a question or concern?
#11 and #12 can be very personal. Literally how do YOU prefer to communicate? By phone, email, text?
Are you going to want to reach out to your financial advisor frequently and get a quick response, or do you prefer a hands-off approach?
Ask these financial advisor questions. There is no right answer. The answer is what works best for you.
#13 Do you provide financial planning services, or do you only manage assets?
You may have specific interests in financial planning. Do you have questions about your mortgage, retirement, and insurance?
Talking to a financial advisor about your mortgage can be incredibly beneficial. They can provide you with a comprehensive understanding of how your mortgage fits into your overall financial plan.
A good financial advisor can help you determine the best type of mortgage for your specific situation, whether it’s a fixed-rate, adjustable-rate, or interest-only mortgage. They can help you understand the implications of different loan terms, down payment amounts, and interest rates.
Furthermore, an advisor can guide you through the process of deciding whether to pay off your mortgage early or invest the extra money elsewhere, based on your overall financial goals and risk tolerance. This holistic approach ensures that your mortgage decision aligns with your long-term financial plans and helps maximize your wealth.
#14 How do you work with clients to establish their financial goals?
What are your financial goals? Saving for a home, something else, or retirement?
Discussing retirement with your financial advisor is paramount in ensuring a secure and comfortable future. Your advisor can help you understand how much you need to save, the best investment vehicles for your individual circumstances, and the effective strategies to minimize tax implications.
They can assist you in determining the optimal retirement age considering your lifestyle, health, and financial commitments. Your advisor can also guide you on how to strategize Social Security benefits, factoring in your projected retirement age and income streams.
They can provide insights on managing risks such as inflation and healthcare costs in retirement. Lastly, talking about retirement can help you align your financial goals with your vision of retirement, be it travelling the world, starting a business, or simply enjoying a peaceful life.
All these factors make retirement discussions with your financial advisor an essential part of comprehensive financial planning.
#15 How do you measure the success of your investment recommendations?
The success of investment recommendations by financial advisors is often measured through a combination of quantitative and qualitative metrics.
From a quantitative perspective, the performance of recommended investments is compared against relevant benchmarks or indices. This involves evaluating the returns generated by the investment, adjusted for the level of risk undertaken. The advisor may also assess the investment’s contribution to the overall portfolio diversification.
From a qualitative standpoint, the success of an investment recommendation is measured by how well it aligns with the client’s financial goals and risk tolerance. For instance, a recommendation is considered successful if it has helped the client move closer to their financial objectives, whether it’s purchasing a home, saving for their child’s education, or preparing for retirement.
It’s worth noting that the perception of success can vary from one client to another, depending on their individual needs, expectations, and financial situations. Therefore, a good financial advisor takes the time to understand these aspects thoroughly and uses them as key components in measuring the success of their investment recommendations.
#16 What is your recommendation for the appropriate asset allocation for my portfolio?
Appropriate asset allocation is fundamental to successful investment management. A competent financial advisor should understand that asset allocation involves distributing an investor’s portfolio among different asset classes such as equities, fixed income, commodities, and cash equivalents.
The goal is to maximize returns and minimize risk by capitalizing on the varied performance of different asset classes in different market conditions. The advisor should also recognize that the appropriate allocation varies for each individual client and depends on their financial goals, risk tolerance, and investment horizon. They should be adept at tailoring asset allocation strategies to the needs of each client and adjusting these strategies as market conditions and clients’ circumstances change.
#17 How do you factor in taxes when investing?
Discussing taxes with your financial advisor is a pivotal aspect of comprehensive financial planning. They can provide valuable insights into the tax implications of different investment strategies and financial decisions, helping you to optimize your tax liability and enhance your net returns.
An adept financial advisor will factor in your current tax bracket, potential future changes in tax laws, and various tax-advantaged investment vehicles to develop a tax-efficient strategy tailored to your financial goals.
They can guide you on strategies to minimize capital gains tax, the benefits of tax-deferred investments, and the optimal timing for retirement withdrawals.
Additionally, they can advise you on tax deductions and credits you may be eligible for, estate tax planning, and tax-loss harvesting strategies.
Consequently, discussing taxes with your financial advisor can play a crucial role in maximizing your wealth and achieving your long-term financial objectives.
#18 How do you incorporate environmental, social, and governance factors in your investment recommendations?
Incorporating Environmental, Social, and Governance (ESG) factors into investment recommendations is a growing trend among financial advisors. This approach recognizes that ESG factors can impact an asset’s performance and thus, should be considered alongside traditional financial measures.
From the environmental perspective, advisors can look at how a company’s business practices might affect the natural environment. For instance, companies that actively reduce their carbon footprint and invest in sustainable practices may be more attractive to investors conscious about environmental stewardship.
Social factors involve examining how a company manages relationships with its employees, suppliers, customers, and communities where it operates. Companies with strong human rights practices, favorable labor standards, and positive community engagement could be more sustainable and less likely to face social controversies that could negatively impact their reputation and bottom line.
Governance factors refer to a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Good corporate governance can be a sign of a well-run company, which could be more likely to deliver long-term shareholder returns.
By integrating these ESG elements into their investment analysis and decision-making processes, financial advisors can provide more holistic investment recommendations that align with their clients’ values and financial goals.
#19 Do you provide financial education to your clients?
Financial advisors often provide financial education to their clients as a vital component of their service. This education can encompass a wide range of topics, such as understanding investment principles, the dynamics of the financial markets, the impact of economic factors on investments, and the importance of risk management.
They may also guide clients on the benefits of diversification, the effects of compound interest, and the role of various financial products. Financial education also includes the understanding of tax implications, retirement planning strategies, and estate planning basics.
The goal is to empower clients with the knowledge and confidence to make informed financial decisions.
#20 What are some common mistakes clients make that you have seen, and how do you address them?
Don’t be shy to ask your financial advisor the tough questions. Your financial future depends on their expertise and advice.
As women, we need to be empowered to manage our wealth wisely, and a capable financial advisor can help us achieve our goals.
Remember to find an advisor whose investment philosophy aligns with yours, has no conflicts of interest and is legally obligated to act in your best interest.