Not sure how to choose a financial advisor? You’re not alone. Choosing the right financial advisor can seem like a daunting task. After all, they’re going to be advising you on a very important topic: your financial well-being.
To help you make a good choice, here are 8 questions that will help you determine if an advisor is right for you. If he or she is hesitant, reluctant, or evasive when you ask any of these questions, you may want to reconsider working with them.
Question #1: Are you a fiduciary?
A fiduciary is an advisor legally sworn to act in the client’s best interest regardless of what may be best for him or her.
Question #2: How do you get paid?
Look specifically for a fee-only advisor. They usually charge an easy to understand management fee. Be careful, fee-based advisors are able to charge management fees and receive commissions. This creates an obvious conflict of interest since your advisor’s compensation can be based on payout rather than your best interest. Be specific in your question: fee-only advisors do not receive commissions.
Question #3: What is my total cost?
Hidden fees and internal expenses can cost hundreds of thousands of dollars over a lifetime of investing. Unlike commission and fee-based advisors, fee-only advisors have no incentive to invest in expensive products. The decision to use a fee-only advisor can help provide peace of mind through cost transparency.
Question #4: How do you help me with taxes?
Ask about mutual funds and high internal turnover. This can lead to high capital gains taxes. Tax-efficient portfolio management can be worth hundreds of thousands of dollars over a lifetime of investing. Also, your advisor should consult with your CPA and coordinate an overall long term tax strategy that could change year to year based on changing income and circumstances.
Question #5: What are your qualifications?
Look for a firm that has someone with a designation who can aid in planning and portfolio management. One of the most widely respected and recognized designations is a Certified Financial Planner® (CFP®).
Question #6: How much access do you provide?
Ask how often the advisor plans to meet and is he or she is available for phone calls and emails outside of designated appointments.
Question #7: How do you determine my investment strategy?
Be sure he or she provides a financial plan. The advisor should use that plan to determine your investment strategy based on your time horizon and your personal risk tolerance.
Question #8: Who is your custodian?
Be sure your advisor has hired a custodian (such as TD Ameritrade, Schwab, etc.) to hold your investments. This provides an important safety net. You can go online at anytime and see your investments. Also, if something were to happen to the advisor or firm, your investments are still available and accessible at any time through the custodian.