When people are searching for a financial advisor or a financial planner, one of the first things they want to know is, “What is your rate of return?” Unfortunately, that question can’t be answered directly because every client is unique and so the conversation becomes unproductive. Instead, you can ask the following top 10 questions in order to evaluate a potential financial advisor or your existing advisor and get a really good sense of who you’re working with and if they’re a good fit for your financial needs.
1. Will you act as a fiduciary when making recommendations and making decisions on my behalf?
A financial advisor or financial planner should be able to tell you whether they act in a fiduciary capacity or by a suitability standard. You’ll also want to ask what credentials they hold.
2. How frequently do you meet with your clients throughout the year?
Generally financial advisors or financial planners should meet with their clients at least once a year, but you may require more. Ask if they meet once or twice a year, quarterly, or on an as-needed basis depending on your needs.
3. What services do you and your team offer besides investment management?
While investment management is a very important part of your portfolio, you should ask your financial advisor or planner if any other services are offered, such as retirement planning, cash flow analysis, or tax reduction planning. If you want to or have set up an estate plan, can your advisor assist you and give you advice on how to distribute your assets efficiently, or do they work with outside professionals to curate a plan that is tailored to your situation?
4. How are you paid? Is your fee or commission transparent?
Advisors can get paid in a variety of ways, but it’s helpful to know what you’re being charged for, and so transparency is key. Some advisors get paid by commission; typically, these advisors are making a recommendation on your behalf, but they are not required to act in a fiduciary capacity. They should still be looking out your best interest, but the suitability standard is not as high as the fiduciary standard. As long as a product is suitable for a client and the advisor has done a minimum amount of research on the product, they can recommend a product and get paid – make a commission – on the transaction for that product.
Those advisors who operate by the fiduciary standard require that the advisor charge a fee for the advice that they're giving. This fee is generally going to be billed as “assets under management,” which is a percentage of your portfolio that is deducted either on a monthly or quarterly basis. It is transparent on your statement.
Other financial planners simply charge an hourly rate or retainer fee for advice.
5. What makes you unique from other firms and their advisors?
Your potential financial advisor or financial planner should be able to describe what differentiates them and their firms from others and how they go above and beyond for their clients compared to other firms.
6. Who is your average client?
Advisors can and do work with a broad range of clients, but you might be looking for someone who specializes in a specific area and who generally works with those who fit your demographic or life stage. For example, you might be wanting someone who works in retirement planning or who implements high-net-worth sophisticated strategies. Or you could be just starting out on your financial journey and need someone who specializes in younger demographics to help you save for the future. Make sure you ask your financial advisor this question to ensure they’re a good fit for your needs.
7. What custodian do you use to hold my accounts?
This question relates to third-party custodians, who are responsible for holding assets. You might remember Bernie Madoff, who executed the largest Ponzi scheme in history. In order to avoid mistrust, your advisor should never ask you to write a personal check to them or their firm directly or tell you that they’ll hold on to your money themselves - that’s a red flag. You want to make sure that your advisor or advising firm is using a reputable third-party custodian who would be responsible for reporting on your assets, holding your assets, and placing trades for your assets.
8. What are your qualifications?
Ask your financial advisor if their background is in economics or finance. See if they have certifications and what their designations are: some are designated as a Certified Financial Planner (CFP) or a Chartered Financial Consultant (ChFC). Some may be Chartered Financial Analysts (CFA), who deal more with data analysis and the reporting and managing of assets in mutual funds.
You’ll also want to ask about the kind of licenses an advisor may hold. Series 7 is a general securities license. The Series 65 or Series 66 is a license that allows your advisor to call themselves an investment advisor representative, charge a fee for the advice that they’re giving, and requires them to be a fiduciary.
9. Do you have a minimum asset base or account size?
This is a good question to ask because many advisors have a minimum account size, and your assets might not be within their requirements to take you on. Similarly, advisors cannot take on an infinite number of clients, so this is a good way to figure out if you’re a good match in order to avoid some disappointment down the road.
10. Do you currently have any disclosures for misconduct?
If an advisor has a disclosure for misconduct, it doesn’t necessarily mean that they engaged in misconduct or that you shouldn’t work with them, but they should be able to tell you why the disclosure was made and what the outcome of that was.
Have questions on how to evaluate your financial advisor?
If your financial advisor cannot answer the questions above, chances are they aren’t a good fit, and you may need to move on. At Chatterton and Associates, we are a team of Investment Advisor Representatives and will always act as fiduciaries to act in your best interest. If you need help with retirement, tax, or estate planning, please contact us today.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.