The relationship you want to have with a financial advisor is not unlike the relationship you have with your doctor. You have to trust your doctor enough to take off your clothes, be poked and prodded, and respond honestly to questions about your habits so that they can accurately assess your physical health and recommend how to improve it.
Likewise, you have to be willing to open up with your financial advisor so that they can understand your financial health and recommend ways to improve it. You need to disclose the current state of your finances, warts and all, undergo a certain amount of poking and prodding about your goals, priorities, and spending, and talk honestly about changes that could improve your long-term financial wellbeing.
So, when hiring a financial advisor, you want someone who is not just technically qualified, although clearly that matters, just as you expect your doctor to have the proper credentials. You want someone you can trust when discussing things about money that, let’s face it, can be a bit sensitive, including choices about which items are most important to you.
This article suggests eight key questions you should ask when interviewing people you might hire as your financial advisor. But first, we pose five questions you should ask yourself.
Introspection is revealing.
So, what should you ask yourself before choosing an advisor? Take a few minutes to think about the following:
Do you want this relationship? Embedded in that question is another, deeper one: Are you willing to give up some control to get something in return? If you are a DIY person and would rather spend hours trying to replace a broken pipe or rewire light switches than call a plumber or electrician, are you ready to take someone else’s advice about managing your financial life?
Will you commit to the process? As advisors, we give our clients “homework” from time to time to gather important information. Would you be willing to complete assignments to support your advisor's work? Are you willing to talk about your goals, fears, and relationship with money and spending? And, are you ready to follow advice, such as not bailing out of stocks when the market gets rough? If not, working with any advisor is likely to become frustrating—for you and the advisor.
Are you looking for someone just to manage your money or someone to help you achieve your life goals? If you want to hire someone who focuses on managing your investments, the benchmark you will use to decide whether that person is doing a good job is, “what return did my investments earn, and how am I doing versus the market?” When you want an advisor to develop a plan to help you accomplish goals that require money—maybe paying for a college education, remodeling the house, traveling extensively, charitable giving, etc.—the benchmark for determining success is whether or not the plan is bullet-proof. It changes how you look at a significant decline in the market when you can still achieve your goals.
How do you want to interact? Do you want to meet with your advisor in person, or are you okay with virtual meetings? Many advisors are moving to a “Mostly Virtual” approach, and while there is certain energy when meeting in person, it can be a better use of everyone’s time to go virtual. It also gives you a wider choice of advisors. If you want to meet face-to-face, that’s fine—just make that clear when interviewing advisors you are thinking of hiring.
What “personality” do you want to work with? You have to be comfortable with your advisor’s personality. Do you gravitate toward high-energy people, or do you prefer someone less effusive? Do you like a certain amount of chit-chat, or do you want to get straight to the point? Do you prefer direct, logic-driven explanations, or do you learn better with imagery and metaphors? Note your gut reaction when talking with an advisor.
Now that you have done that essential introspective work…
Here are vital questions to ask when interviewing financial advisors:
Are you a fiduciary? You don’t really need to ask this question. A verbal “yes, I always do what’s best for my clients” does not guarantee that someone is a fiduciary. Better idea: verify that the firm is a Registered Investment Advisor—RIAs are, by definition, fiduciaries—using the Investment Advisor Public Disclosure website. If the firm is not listed there, the advisor is likely not required to act as a fiduciary. Warning: even a fiduciary has tremendous leeway to recommend investments that involve high fees and other financial products that may not be a good fit for you. Be on the lookout for conflicts of interest.
Are you a Certified Financial Planner? Being a fiduciary does not say anything about an advisor’s knowledge and qualifications. The CFP credential shows the advisor was willing to invest a significant amount of time in acquiring the knowledge needed to pass an exam covering a wide range of topics* and dedication to the profession. An advisor who is not a CFP may not know critical aspects of financial planning, such as the different types of accounts to use for investing and how to be tax-aware (which makes a much more significant difference than earning a return of 10% versus 10.5%). Like a personal trainer, a CFP coaches you, holds you accountable, and keeps you motivated. But don’t be afraid to tell a potential advisor that you don’t understand something they said. Look for a willingness to educate you.
Are you a NAPFA registered advisor? While holding a CFP means the advisor passed some tough exams, these additional credentials show a proven ability to create an actual financial plan tailored to a specific situation.
What is your approach to investing? An advisor should be able to articulate this—for example, “we focus on index or enhanced index funds with low fees,” or “we use actively managed funds because…,” or “we are stock pickers.” Follow-up question: What did you advise your clients to do during the first half of 2022? This period was an incredibly challenging time in the markets for both stocks and bonds. Did the advisor stick with the stated philosophy and work to keep clients in their seats in the face of that market volatility?
What role does tax awareness play in your work? You don’t want taxes to be the tail that wags the dog, but an advisor should always be tax-aware. Ask for examples.
How are you paid? Make sure the answer is clear and straightforward – not vague, like “we have a variety of ways…”. Fees should be reasonable and presented formally. Of course, you should expect to pay for quality work that saves you time, steers you away from bad choices, and improves your life. But even fees that seem “reasonable,” perhaps 1.25% of your investment portfolio (known as assets under management, or AUM), can create serious conflicts of interest. We believe advisors that charge based on AUM have an incentive to give advice that may not match their clients’ priorities. Paying off a mortgage or buying a vacation home reduces the size of your investment portfolio, which lowers what that advisor earns. That’s a conflict and is one of the many reasons we use an annual fee approach.
What benchmark do you use to measure success? As we noted above, the key issue is not whether you beat the market; the issue is whether you are on track to achieve your financial goals: short-term (buy a new car every four years), big aspirations (take the family on an African safari in 10 years), and must-haves (comfortable retirement). If the market has a bad year, but your plan’s likelihood of success holds up, that’s where you want to be, and that’s the benchmark you want your advisor to use.
What do you focus on other than accumulating wealth? We want clients to spend their money to enjoy life, not just pursue wealth for its own sake. We believe an advisor should encourage you to take that safari or buy the vacation home of your dreams when your plan shows you can do so and still withstand the inevitable ups and downs that are part of investing.
When you have decided to work with a financial advisor, seek recommendations from family, friends, and colleagues but do not rely on someone else’s judgment. This is your relationship, and you owe it to yourself to do your research. We hope these questions help you to do that. Reach out to the Gold Medal Waters team with any questions.
* The CFP® exam covers general financial planning principles, investment planning, retirement savings and income planning, risk management and insurance planning, tax planning, estate planning, professional conduct and regulation, and education planning.