8 Questions You Need to Ask Your Financial Advisor

An SEC study found that when it comes to understanding the role of their financial advisor, most people are, quite simply, confused.

So if you’re looking for financial advice, how do you know who to hire? How do we cut through the bull?

The following post details the 8 critical questions to ask your financial advisor. Whether you are looking to hire an investment professional for the first time, or if you are looking at alternatives to your current advisor, get the information you need to make a smart decision about managing your wealth.

Question 1: How are you compensated?

Do you know exactly how your financial advisor is compensated? If the answer you get is vague or takes more than a minute to answer, walk away. You should also know what the all-in costs are.

Make sure you understand how much you are paying per transaction, per product, or per service. Ask how much your financial advisor makes when he sells mutual funds, annuities, and individual stock or bond trades.

Question 2: Are you a fiduciary?

Is your financial advisor a fiduciary? A fiduciary has a legal obligation to act in your best interest. This includes disclosing fees and any potential conflicts of interest.

Brokers, for instance, do not have this legal obligation, but Registered Investment Advisors (RIAs) do. RIAs can provide you with holistic investment advice, and they must legally do what is in your best interest.

Question 3: Why did you recommend that investment?

Some firms have fee-sharing arrangements with mutual fund companies or insurance companies – i.e. kickbacks. This might mean your financial advisor is heavily motivated to sell a certain company’s investment products over another’s.

Be wary of mutual funds. In the past 20 years, 80% of mutual funds have underperformed their benchmarks, but selling them to clients is often a big source of revenue to the advisor and their firm.

Question 4: Do you have a sales quota?

Did you know that some financial advisors have monthly sales quotas? It means your Advisor has sales goals to reach and will be compensated if she reaches those goals.

Think about how sales quotas can impact your financial advisors behavior as she reaches the end of the month. Is your Advisor selling you a product in order to reach her goals or because it is in your best interest?

Question 5: What percentage of your time do you spend on portfolio management?

Most advisors wear multiple hats. They have to divide their attention between research, portfolio management, servicing existing clients, and prospecting for new clients. Find out how your advisor monitors your portfolio and how often. You don’t want someone managing your money who consistently has his attention elsewhere.

Question 6: What is your investment strategy?

Does your advisor understand what your specific needs and goals are? Did you work together to build your long-term investment strategy? Ask your financial advisor what his or her investment strategy is and most importantly, how it is customized for your needs. Make sure your investment strategy is dynamic and you have an ongoing dialogue with your financial advisor.

Question 7: What are your credentials?

Certifications and credentials are often good indicators of expertise and understanding. Investment professionals can go by many terms (financial advisor, financial consultant, financial planner) so it’s helpful to understand what designations and credentials they have. Common credentials are Certified Financial Planner (CFP), Chartered Financial Analyst (CFA). Make sure to ask, if they’re certified or chartered, or which exams they have passed. Ask them why they are qualified to help you with your investments.

Question 8: What Service Can I expect from you?

Find out what kind of on-going service you can expect. How often can you contact them and what can you expect in response times. Another important consideration is performance reporting. What materials do they provide so you can track how you are doing?
Remember, this is your long-term financial well-being.

If you’re not getting everything you ask for…demand it!