When you are looking for a financial advisor, you need to find someone you can trust, who is knowledgeable and can guide you through the different phases of your life as you start to accumulate wealth and then transition into retirement later in life. Finding the right fit with an advisor can be a time-consuming and challenging endeavor, especially if you are just starting your financial planning journey. Below are seven questions to ask a prospective financial advisor to help take some of the guesswork out of finding the right fit.
1. What types of clients do you typically work with? You want an advisor who has experience helping people like you! If you are a business owner, your needs will differ from someone who is employed by a public entity, like a university, for example. So be sure to dig into what type of clients the advisor works with and what types of issues they help those clients solve. This will ensure they have experience with your particular set of circumstances.
2. What would our first year together look like and how frequently will we communicate? This question is especially important for people who may have never worked with a financial advisor before as it helps to set the right expectation about what first-year communication and accomplishments will be. Another reason why this question is important: you want to make sure your advisor actually has a process for the first year and longer. If they can’t give you a clear picture of what the first year will look like, they might not have a process in place and may just be trying to “win” the business and move on. An advisor should be able to articulate a compelling process for how a new client is onboarded and how the process will continue beyond just signing paperwork.
3. How are you compensated? There is likely no more important question to ask a prospective advisor. Advisors can be paid through a fee, like an annual planning fee or percentage of assets managed (AUM fee), commissions, or some combination. The goal here is transparency. You want the advisor to comfortably answer the question and communicate the details. You also want to make sure you truly understand what the details are, especially if the advisor gets compensated in multiple ways. Make sure this is fully documented in a written client agreement so there is no confusion. Also, we advise looking for firms that have Registered Investment Advisors (RIAs). They are firms that are required to put their clients’ best interests ahead of the firm, which is to say they are bound by the Fiduciary Standard.
4. What is your philosophy on investment management? It’s important that you’re aligned with what you’re looking for and what the advisor provides. Many advisors will be quick to pull from their lineup the strategies that seem to be outperforming “for now” and you end up buying yesterday’s hot commodity rather than what’s in your best interest, or what will do well in the future. Remember, you want to choose investments that have the highest likelihood of achieving your goals and that are appropriate for you, not be sold investments that are not likely to continue their outperformance and may not even be appropriate for you as an investor. Ultimately you should get a portfolio tailored to your individualized goals and objectives, not pulled off the shelf of investments that have done well recently.
5. Do you use your own proprietary financial planning software or use software developed by a third party? Advisors are not in the technology business, and it’s common for advisors to leverage third-party financial planning software. If the advisor uses their own, it’s not a bad thing, but be sure to dig into whether it is robust enough to handle the comprehensiveness of your needs. Security can also be an issue with homegrown solutions.
6. What is the average expense ratio (%) of the underlying funds used in your client’s portfolios? And do you use your own proprietary investment funds? This question is to make sure you understand every part of this advisor’s engagement, it’s proper due diligence on your part, the client. We’re not suggesting you choose an advisor solely based on price alone, but many advisors still use overpriced investments rather than finding a more fairly priced solution. Also, many advisors might charge you an AUM fee, but then also put you into their own investment lineup that has its own one percent fee, so you’re now all in at two percent. Again, as with the compensation question, the goal here is transparency and understanding your all-in costs, not just the advisor’s
7. Tell me about your practice, and what services do you offer? It’s important for you to understand if this is a one-person show, or if they have a team of experts to support them in serving you. It’s unlikely that a one-person shop can carry out a broad range of services at a high level of service and quality of work. Historically, advisors were largely just stockbrokers, but as the industry has evolved, advisors are advertising that they do a whole host of things. However, proceed with caution, because someone may advertise they do something, when in fact they don’t have a process and practice to actually deliver on that particular service. So, it’s important to ask follow-up questions on services that aren’t related to traditional investment management and learn about their process for fulfilling those promises, and who will actually be doing the work.
In addition to asking good questions about fees and compensation, there should be room for asking personal questions that will help you get at the heart of the most important question—is this somebody I like and trust enough to do business with? If the answer is not a resounding “yes!”, then keep looking. There is no shortage of qualified and ethical people out there who would love to help you navigate the financial complexities of your life.
BerganKDV has a team of financial advisors who can help you navigate all areas of your financial life as you prepare for, enter into, and live in retirement. Want to learn more about what we can do for you? Schedule an introductory call today with our advisory team.
