25 Questions to Interview Your Potential Financial Advisor

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25 Questions to Interview Your Potential Financial Advisor

Hiring a qualified financial professional can be challenging. You might get a referral from a friend or relative. A co-worker might even suggest an advisor they work with. Yet, how do you know the referral is the right person for you? Are they qualified, trustworthy and do they have integrity?

The truth is most people say they do not completely trust financial advisors and money managers. This distrust does not come without some merit. The financial industry has certainly gotten a bad reputation. One with salespeople selling products for high fees and commissions. Financial advisors that sell investments with outrageous surrender charges. Investments that are only good for the salesperson’s bank account and not the client.

To add to the bad reputation of the people working to advise people on their finances are news stories of Ponzi schemes and scam artists ripping people off for their entire life savings.

Although not everyone truly needs someone to help them manage their money, there are situations it can be advantageous. Working with hundreds of financial advisors over several years and getting to know their personalities, I can truly say there are some good financial professionals left that are helpful. They might be far and few between, but they do exist.

How do you know if an advisor you are thinking about hiring is trustworthy, competent and has integrity? How will you truly know if they will be looking out for your best interests? You won’t. Yet, there are some questions you can ask a potential financial advisor to help increase the odds of a successful relationship. One where the advisor will be looking out for your well-being and they will have the experience to do it.

Here are 25 questions to ask a financial professional you are thinking about hiring to manage your money.

1. What kind of financial licenses do you have?

A series 7 license should be one of the answers to this question. This is a standard for financial advisor licenses. This allows a person to sell stocks, bonds, options, and futures. The only type of securities or investments that a person with a series 7 can’t sell are commodities futures, real estate, and life insurance.

Financial professionals may also hold other licenses, such as a series 63 or 65. A 63 license is required by each state and it authorizes licensees to do business in a state. The 65 license is a requirement for anyone providing financial advice on non-commission terms. Advisors that provide investment advice for an hourly fee or manage accounts based on a fee basis would require a series 65 license.

 An insurance license is also not uncommon for financial advisors. Unlike the series 7 or 65 licenses, which are administered by Finra (the government-authorized organization that oversees U.S. broker-dealers), an insurance license is regulated by the state in which an advisor does business. Financial professionals carry an insurance license to sell life or health insurance. Also, they may hold an insurance license to sell products like variable annuities. These are part securities investment and part insurance.

 The advisor you work with should at minimum have a series 7 license. Only a financial advisor with this license is legally authorized to discuss all types of investments, such as stocks, bonds, and mutual funds.

You may come across someone that holds only a series 6 license. This may sound impressive, but it limits the person’s ability to work with all financial products except for mutual funds. Series 6 licensed individuals can only sell mutual funds. Working with someone that only holds a series 6 license will limit your investment choices.

2 . What is your work experience and background?

It is important to know the background, education, and experience your financial advisor brings with them to work with your money. Ask questions on where they may have gone to school and how long the person has been a financial advisor.

The important thing to look for with experience is someone that has been through the battles of market swings. A financial professional that has lived through a recession, a major market downturn and more than one chairman of the Federal Reserve can be a good sign.

The truth about the financial advisor industry is that 70% of the licensed professionals end up leaving the business within three years. There are a lot of young adults that enter the industry only to find it is not easy. You don’t want a financial advisor working for you that is here today and gone tomorrow. The more experience your potential financial advisor has the better.

At a minimum, it is a good idea to hire a financial advisor that has at least 5 years of experience. 10 or more years is a plus. Yet, someone with decades of experience you will want to take a closer look at. People that survive for a large number of years in the financial advisor profession can be set in their ways. They don’t always keep up with the newest technology or trends.

Do not pay much attention to fancy titles. An advisor that has the title of vice president, senior director or senior investment specialist probably does not equal much. These titles are there to impress and reward egos. Impressive sounding titles as a financial professional are handed out all the time. They are usually for meeting sales goals or based on seniority. They many times do not mean much at all.

Just because a financial advisor has a big title or a degree from a prestigious university it doesn’t automatically make them a genius when it comes to managing money.

3. Will my account be insured? How is it covered and what is covered?

It is important to make sure your financial advisor’s firm has SIPC (Securities Investor Protection Corporation) insurance. This insurance is similar to what banks provide under FDIC insurance. SIPC protects against the loss of cash and securities held by a customer at a financially troubled SIPC member brokerage firm.

SIPIC insurance does not protect against a decline in value of securities nor does it protect clients that might get sold a worthless stock. It also is not protection against bad investment advice. It only protects a person from a brokerage firm that might go under.

If the advisor you are considering does not work with a brokerage firm that carries SIPC insurance, this should be a red flag. The SIPIC limit is $500,000, which includes a $250,000 limit for cash. Many firms carry excess SIPC coverage, which is extra insurance. You want to ask about additional coverage if you will be investing over the traditional SIPIC insurance limit.

You will want to make certain your account has insurance.

4. Do you hold any professional designations?

With many financial professionals there generally comes some type of designation or many different ones. You might see abbreviations, such as CFP, CRPC, or CDFA. Ask about the different designations the advisor has. Some are more difficult to obtain, although they all many times equal some type of additional education. This is a good thing.

The benefit with some designations is they require ongoing continuing education to retain them. With how fast taxes and securities laws can change, extra education never hurts.

5. Do you provide in depth financial planning?

There are different types of financial advisors. One type might only sell products. They are almost always interested in pushing the ones that make the most commission. It is important to know if the advisor provides more than just investment products. Are there other services the advisor can offer? These might include tax planning or specialized retirement planning.

You need to make sure you are not going to be working with someone that simply wants their next commission check. There should be other services provided to be worth the cost of hiring a financial professional.

6. What is the minimum investment account size you work with and what would you say is the average?

You may be hesitant to ask what an advisor’s minimum account size is, but this is important to know. A high number will show an advisor is doing well and they do not need to take on every account that comes in the door.

Getting an idea of the average investment account size can also be important. If your account is at the low end, you may not get the attention you need or want when you work with the advisor. An account that is on the higher end and you might receive a lot of personal attention.

Larger clients for a financial advisor pay the bills and keep them in business. For this reason, they will almost always get the most attention.

A good advisor might make an exception for an account with a lower investment dollar amount. You only need to ask. They may say no or surprise you with an answer of yes. However, make sure this will not lower the level of service you receive and stress this part.

If you like an advisor that has a higher dollar amount requirement than you have to invest, ask if they are able to charge by the hour. This does require a certain securities license, but it can be a way to hire an advisor that works with higher net worth clients when you do not meet their account minimum.

7. How many household accounts do you have?

Make sure to ask how many household accounts a financial advisor has under them. This is not just asking for the number of accounts. Household accounts are a much different number.

A household account could have several accounts under it. For example, a husband and wife that both have an IRA and also a traditional brokerage account. This is one household and not three accounts.

If you ask for the number of accounts only, an advisor might tell you they have 500 accounts, but in truth, there might only be 100 households. This would mean the advisor only has 100 real clients and not 500 clients. A number too low and it could show the advisor is not very successful. One with a high number of households and you might just end up being another client with a number.

There can be exceptions to the number of households. It is possible for a well- established advisor with very high net worth clients to have a small number of households. Generally, you probably want to see a household number between 200 and 500. An advisor with a good team and support staff can also have an easier time managing more households and accounts.

8. How many accounts would you say clients have closed with you in the previous few years and moved them to another advisor?

This is another question you might not be comfortable asking, but it is one that needs to be asked. If you have an advisor that quickly tells you no client of theirs has ever moved an account, this should be a red flag.

Personalities can differ and with financial advisor’s this can certainly be the case. It would be rare that an advisor did not have any clients decide to leave them. If the advisor tells you they do not keep a record of their clients that leave, be on alert. Most do know which clients have left and when they decided to leave.

9. Have you ever asked a client to move their account?

Believe it or not, there are financial advisors that will ask a client to move their account. It might be due to the advisor not being able to provide the service the client expects. A client might also be asked to leave because they will not follow the advice provided. Advisors will ask people to move their accounts if the relationship is no longer working.

An advisor that has no problem asking a client to leave can be a good and bad thing. However, it can be nice to know they do not keep every account just because it provides an income.

Just about every financial professional will have at least a few clients they likely would like to see leave. Many times, they will keep the ones that provide substantial revenue. Yet, often there is a limit and they might even let them go.

10. Have you or your firm ever had a written complaint filed against you? Did you plead guilty or no wrongdoing?

The answer to this question that you will likely want to hear is “no”. However, there are numerous financial advisors with formal complaints on their records. Especially if it is an advisor that has been in the business for decades.

The problem with advisor complaints is that many of them may not be warranted. Investors will many times get upset just on the premise of losing value in their investment. A client may also file a complaint stating that they did not agree with an advisor’s recommendation at a later date due to investment loss.

Some really good financial professionals will have at least one complaint on their record at some point. This does not necessarily make them dishonest or unethical. It is also not uncommon for an advisor to admit to no wrongdoing and pay an amount to settle a dispute.

If a financial advisor admits to something in a complaint, this deserves a second look. Also, an advisor that has several complaints on their record should be a real red flag. Any type of suspension or something along these lines should also be an issue.

The problem with complaints in the financial services business is some advisors and even brokerage firms look at them as a cost of doing business. What this means is some will keep doing what they have done and just deal with the consequences if they come up. You will not only want to look at the financial advisor’s complaint records but also view the record of the broker-dealer they are representing.

FINRA has an easy broker check you can perform at https://brokercheck.finra.org/. This will show the record of a potential advisor.

11. What can I expect from you as my Financial Advisor?

Setting expectations with an advisor early is important. You need to know what services the financial advisor will be able to offer.

12. Will I be working directly with you or another member of your staff? Who else will be working on my finances? Is there a team?

It is not uncommon for a financial advisor that has many clients to work within a team of people and support representatives. You need to know who else will be working with your investments. If you are expecting your advisor to personally handle everything, this will tell you if that will be the case. You might not want other people working with your money other than the advisor themselves. Also, if you have a smaller investment amount to offer, the advisor might have a newer licensed team member manage some aspects. You might not want this as well.

If you will be working with other team members, make sure to get a list of their credentials in addition to the advisor.

Make sure to ask who will be working with your money.

13. How often will we communicate and how will this be accomplished?

Communication is extremely important between a financial advisor and the client. You need to be comfortable with the frequency of communication. The advisor might tell you that most of the time communication will be done over the telephone or through email. You might also be told you will get a yearly review.

If the advisor does not present a schedule of communication that lives up to the service you want for the price you will be paying, move on to look for another financial professional. Make sure to be clear on what you want from the advisor when it comes to communicating.

14. How will you be compensated from working with me? Will there be commissions? Will it be based on an hourly fee or a percentage of my investments?

There are different ways a financial professional can get paid. An advisor can earn commissions on the products they sell, as a percentage of the assets invested or through an hourly or annual fee.

Commissions

The method of earning commissions on products sold is almost always not a preferred way for an investor to pay their advisor. The reason for this is once you pay an upfront commission there might not be much of a reason any longer for a financial advisor to stay in contact or give your account the attention it needs or you believe it requires.

An example of an up-front commission might be an advisor that sells a mutual fund to a client with a 5% sales charge. If an investor put $100,000 into this investment, the advisor would profit $5,000 up-front. A client that had only $100,000 to invest would have paid the advisor up-front on everything they can until either more money is invested or the advisor moves the funds to another product.

Financial advisors are salespeople first. Once they have earned their fees and there is no longer any money to be made, don’t expect to hear from them often. They won’t be going out of their way to contact you. It is a good idea to always just asked upfront if the advisor earns their pay based on up-front commissions.

Stay away from the financial advisor that charges up-front commissions on products they sell. They are salespeople and will keep trying to sell in order to earn a paycheck.

Percent of Assets 

A financial advisor that gets paid on a percentage of assets will generally receive payment on a quarterly basis. The fee could be something like 1%-2% of the total amount a client has invested. For example, a person that invested $200,000 would pay $4000 for the year for an advisor charging 2%. The 2% is paid out each year based on the value of the client’s assets. If the client’s investment value rose to $250,000 the following year, the client would pay $5000 for the year.

A financial advisor that charges a fee should be providing the service level you believe is worth the money being paid. $4000 per year for one annual review and a few phone calls is likely not worth the cost.

If you hire an advisor based on a fee structure, check your returns against a comparative market index. If the advisor is not at least matching a similar market index based on your investments, you might be better off with someone else if you are not getting the service you want. The truth is most financial advisors will not beat market averages over a period of time for a long-term investor. You do not want to be paying fees when you could likely do just as good or better on your own.

Hourly Fee

A growing number of financial professionals are using an hourly or annual fee. The client purchases a block of time in advance and the advisor gets paid based on the time spent with the person.

An hourly fee pay as you go payment structure with a financial advisor can be a good arrangement. Although, if you tend to be on the frugal side, you might be more willing to skip a meeting or review due to the cost. This would not be a good practice. If an hourly fee compensation is an agreement, don’t miss important meetings just to save a few dollars. Not getting your money’s worth will be the result and it could cost you financially.

15. Who do you work for? Are you considered an independent financial advisor or do you report to a branch manager or someone else?

Financial advisors can work in a number of different professional areas. Some might be at your local bank while others might have an office at a traditional brokerage firm. There are also financial advisors that work for themselves and use a particular brokerage firm to clear investments through and some that work directly for a broker.

There might even be some other professionals licensed to sell investment products. This could be something like your accountant or your insurance company.

Banks

Financial advisors at banks are generally something you want to avoid. The quality of most advisors located at banks is typically not very high. They are there to hopefully retain the money a person has with the bank by selling investment products and adding to the revenue. The reality is that most really good financial advisors can make much more money on their own or with a traditional brokerage firm compared to being in a bank. There are exceptions to just about everything, but you will almost always not find a very seasoned and financially successful financial advisor in a bank. It is best to avoid a bank for finding your financial professional.

Brokerage Firm

A financial advisor working directly for a traditional brokerage firm is what comes to mind for most people when they think of one. These firms spend millions every year advertising their services and they work with investments every day. Even though this might be the case, they are many times also not the best choice for hiring a financial advisor.

Brokerage firms are often only concerned about themselves. They want to ensure they make the commissions, fees, and profits to pay their large salaries and keep shareholders happy. Big brokerage firm advisors work to earn the maximum amount of money they can from their clients. At the same time, they will many times be competing for perks and bonuses based on their sales. Again, there might be an exception at a brokerage firm with a really good advisor. But generally, they are a good idea to avoid.

Insurance Company

Your insurance company might sell investment products. They are good with insurance and often know the products and industry inside and out. However, they are usually not a good choice for your investments. Many might be able to work with mutual funds, but not any other types of investments. You should avoid using your insurance company as your financial advisor.

Accountant and Additional Professionals

There can be other professionals you might already work with that also sell investments. You might have an accountant you work with that can also act as your financial advisor. The problem with this is both industries can be highly complicated when it comes to changing laws, regulations, and services. It would be extremely challenging for someone to master both professions.

Unless you find a financial advisor that works for a large firm that has accountants, lawyers and financial advisors all in the same office, it is best to not hire your accountant. If your account works in the same firm as a full-time financial professional, this might be okay.

Independent Might Be the Best Choice

Your best choice for finding a financial advisor is locating one that is independent. These people are entrepreneurs. They hire their own staff and pay all the bills themselves. It isn’t easy to build your own practice as a financial advisor. They have more at risk when it comes to serving their clients and ensuring people are happy. If they don’t, their business will not survive.

Not all independent financial advisors are trustworthy and have integrity. However, your best chance of finding a good one is often with someone that is working for themselves.

16. Why do you want to work with me? What do you believe would make me a good client?

Listen closely to the answers of this question. If an advisor only has all positive things to say and sounds so excited, be a little hesitant. No client of a financial advisor is perfect. Hopefully, the advisor will provide the answers that fit your situation.

You want to also know the typical background of your advisor’s clients. If they are all doctors and lawyers and you don’t fit this mold, you might want to know why the advisor wants you as a client.

17. Are you a fiduciary?

The word Fiduciary is used a lot when it comes to the financial business. Fiduciaries are supposed to work in the best interest of the client. A nonfiduciary financial professional only needs to recommend products that are “suitable”.  This is even the case if a financial product does not have the lowest-cost or is most ideal for you. This is why you want to ask a potential advisor if they follow the fiduciary standard.

A financial advisor with a fiduciary standard does not guarantee they will be honest and ethical.

A financial advisor with a fiduciary standard does not guarantee they will be honest and ethical. However, most fiduciary advisors will be acting in the client’s best interest. You want to ensure the advisor you will be working with is a fiduciary. If they are not, you run a higher risk of an advisor selling investment products only on the basis of receiving a high commission check. A non-fiduciary advisor might sell a suitable investment, but it could be one with the highest payout.  

18. What is your philosophy on investing?

It’s important to ensure you have the same investment philosophy as your financial advisor. The reason for this is you have to believe in what they are doing. If your view on investing is one based on a passive approach, you don’t want an advisor that is going to be trading in and out of your account regularly.

Also, ask what asset allocation the advisor might recommend. Knowing how your investments will be allocated is an important question to ask a potential financial advisor that you might want to hire. It is important to know how they plan on investing your money. Will it be in stocks, bonds, mutual funds or a combination of investments? What type of investment mix will be used?

19. What benchmarks do you use for comparison?

Financial advisors like to use past performance and show account performance against popular investment benchmarks, such as the S&P 500. You need to know what benchmarks your advisor will use to show account performance and comparisons. If they use a benchmark that is not comparative to the investments being used, the results are completely irrelevant. You don’t want a financial advisor that uses a stock index to compare bond investments.

Make sure the benchmark’s your advisor plans on using are relevant to the investments for your money.

20. Would you say you generally beat average market returns?

Ask the advisor what their performance is generally like for client investments. A majority of financial advisors do not beat average market returns year after year. If the advisor you are considering hiring tells you they beat market returns every single year, be hesitant in hiring them.

Financial advisors are very careful when it comes to discussing performance. This is particularly the case with any type of future performance. The reason for this is it is a liability. An advisor that will guarantee above-average market returns every single year should be one that you are leery about.

21. What custodian do you use?

A financial advisor should have an independent custodian, such as a brokerage, to hold your investments, rather than act as his or her own custodian. This is an important safety item that should be in place. With an independent custodian, an investor can check their investments online and they would get an account statement from the independent custodian.

You only need to think of the many Ponzi schemes and fraudulent financial professionals that have made the news to know that your financial advisor should not be the custodian of your investments.

22. Do you follow an active or passive money management strategy?

Active investment management is the philosophy of timing the market to hopefully outperform an index. A financial advisor using an active management strategy will buy and sell investments regularly trying to make immediate gains. An active investment strategy will many times be more expensive.

Passive investment management tries to match the returns of an index instead of trying to beat the market. Passive management has lower costs to the investor because there is considerably less trading involved. Research has shown that passive management can deliver higher returns to investors compared to active management due to the lower costs.

23. How would you say your client accounts have performed when the market is down?

Investment markets have ups and downs and you will want to know how your potential new advisor-client accounts have done in times of volatility. An advisor that moves all their clients out of the market during bad times might not be a good sign. This could show the advisor is one that tries to time the market, which usually does not benefit the client.

Ask the advisor what they did and how their clients’ portfolios performed in times of market turmoil. Your advisor is supposed to be level-headed and disciplined. If they jump in and out of markets, particularly during times of poor performance, it’s a bad sign that you have an advisor who is trying to time markets, and in most cases, that does not work out to the benefit of the client.

24. Are there any fees if I decide to move my account at some point?

There can be transfer fees to move an account. The cost could be nothing or $50 and more. Some brokerages will charge a fee to move an account as an administrative cost. Depending on the investments the financial advisor recommends, it could be costly just to pull your money out. There could be something like a surrender charge that might be quite a lot of money. Ask the financial professional what costs are involved if you decide to move your account.

If there seems to be an excessive cost to move your account or pull your money out of a recommended investment, this should be a red flag. You don’t want to be charged an extreme amount of money if you end up not wanting to work with the financial advisor.

25. What services do you offer?

Depending on your needs for a financial advisor, it is important to know what services they offer compared to the cost it will be to work with them. If you have a complicated investment portfolio and require assistance with trust and estate planning, you will want to ensure the advisor you work with can offer these services.

It is not necessary for a financial advisor to provide many different services. However, if they can do this under one roof it can make things much easier. Someone that works with one financial firm for all their needs can provide a much more comprehensive financial representation of their financial situation.  This can lead to a better experience and even a less expensive one compared to hiring several different financial professionals.

You don’t want to be paying a financial advisor for just investing your money. You can do that on your own. If you need the help of an advisor for retirement planning, you don’t want to hire a broker that only likes to trade stocks all day. It will be important to hire someone that works with retirement planning.

Final Word…

The Bureau of Labor Statistics reported 271,700 personal financial advisor jobs in the industry for 2018. There are people that enter the business every day and 70% of them are estimated to leave the business within three years.

With so many financial advisors available to hire as the professional to manage your money, how do you know the one you choose will be qualified, experienced and honest? Answering these questions can be difficult. However, if you follow a good set of your own questions to interview your possible financial professional it can give you a good indication of the chances for a good relationship.

A lot of people will say financial advisors are not worth the money. This can be the case for numerous investors. I have even written a previous article titled – Does Everyone Need a Financial Advisor. But there are situations it can be helpful to have a professional manage your money and the fees would even be worth the price.  You just need to find the right advisor for your situation and one that will meet the expectations you have for the compensation you are providing them.

Do you have additional questions you would ask a financial advisor? What kind of questions did you ask your advisor if you are currently working with one?

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