A financial advisor can have a major impact on your finances — both for good and bad. The best financial advisors can help you stick to a long-term investing plan that meets your investment goals over time, while the worst advisors are more likely to put you in investments that line their own pockets, potentially costing you tens of thousands of dollars for advice that was supposedly free.
When you hire a financial advisor, you need to essentially conduct a job interview to make sure that a would-be advisor’s approach and incentives align with your own. Here are five key questions to ask financial advisors to see if they’re the right fit for your needs.
1. ‘Are you a fiduciary?’
Many people assume any financial advisor is a fiduciary. Unfortunately, many individuals can hang a sign that says they’re a financial advisor without having to give you good advice. In many cases, so-called advisors are really just salespeople in disguise. So you need to determine whether they’re going to work in your best interest.
That’s why you need to ask them if they’re a fiduciary, because it helps align their interests with yours. According to the Certified Financial Planning Board, a fiduciary must “place the interests of the client above the interests of the … professional and the … professional’s firm” and “avoid conflicts of interest,” among other requirements.
Instead of the fiduciary standard, many financial advisors are held to a lower suitability standard, which requires a financial advisor to make sure the investment is suitable but not necessarily the best for you. This lower standard means that advisors can recommend investments that make more money for them, even if they aren’t the best for you.
The answer you want: Ask your potential advisor whether he or she is a fiduciary and whether they’re obligated to work in your best interest at all times. If you want the chance at getting the best advice, you need to hear that they are always a fiduciary on your behalf.
2. ‘How are you paid?’
It pays to keep in mind the familiar phrase, “He who pays the piper calls the tune.” It’s vital that you apply that wisdom to your choice of financial advisor and ask your potential advisor: “How are you paid?” If you’re not paying the advisor directly, you’re probably not getting the best advice.
Many financial companies — insurers, brokers and others — can set you up with a financial advisor, but these individuals are typically paid by the firm itself. They’re compensated when individuals buy their products and services, so they’re incentivized to work in their own interest, not yours. Now, that doesn’t necessarily mean you’re getting bad advice, but are you really getting the best advice?
So you must know how advisors are paid if you want to understand whether they are incentivized to act in your best interest.
The answer you want: Look for a fee-only fiduciary advisor for the best chance of receiving advice aligned with your goals, but expect to pay for the advisor out of your own pocket, often on an hourly basis. Still, the advice may be much better than the free advice from an advisor who is a salesperson in disguise.
3. ‘How will you help me stick to my financial goals?’
One of the biggest ways that a good advisor can add value to your life is by helping you stick to a solid financial plan. When the stock market falls, many clients get skittish. They’re inclined to sell after prices have fallen and only buy back into the market when things feel safe, setting themselves up to sell low and buy high. A good advisor helps clients stay away from this kind of wealth-destroying behavior. So be sure to ask potential advisors how they’re going to help you do that.
This aspect of a good advisor is highly underrated, but it’s so valuable. A good advisor can help you calm down during a market meltdown when stocks are plummeting. Then, the advisor can help you understand how to make good financial decisions amid the panic. That can be especially valuable for long-term retirement accounts such as 401(k)s and IRAs.
The answer you want: The best financial advisors are able to work with your personality to keep you on track, especially during tough times. Make sure they understand your specific fears and goals and feel confident in their own ability to keep your financial plan in focus. An advisor needs to be part psychologist to keep you on the path to financial success, while ensuring you are pursuing strategies that align with your goals.
4. ‘How does your firm measure your performance as a financial advisor?’
How a firm measures the success of its advisors should also give you a good idea of how the advisor is incentivized to work on your behalf. If you have a firm that prioritizes only advisors who bring in more money, you should expect an advisor who will try to sell you products.
Success can be measured in a variety of ways. Financial advisors should be measured by their ability to give advice to their clients and create positive outcomes for them. Performance can also be focused on acquiring professional designations such as the certified financial planner (CFP), education or client investment performance. Because a financial advisor is supposed to be in the business of giving advice, their performance measures should reflect that.
The answer you want: Ask potential advisors how their employment performance is measured by their firm. Ideally, they are evaluated on their ability to give advice and help people rather than their ability to generate revenue for their company.
5. ‘What happens if you change companies?’
At its best, working with an advisor should be like working with any other professional, such as a doctor or dentist. You’ll get the best experience if you can find someone who wants to do right by you for the long haul. You can build up decades of trust and a strong working relationship.
But like those other professionals, sometimes financial advisors change firms, and it may not be so easy to transfer your accounts and follow someone you trust. Many advisors, for example, have non-compete agreements with their company so that they can’t solicit clients if they change employers. In some cases, advisors may not even be able to contact you to say that they’re working at a new company and that you can move your investments there. Your account may simply be reassigned to a new advisor who’s not as familiar with you and your situation.
At some companies, advisors can take some basic client information when they leave the firm as part of what’s called the broker protocol. Under this protocol, an advisor can take key contact information for clients that they personally served. But not all companies are part of the protocol, so you’ll want to ask what happens if your potential broker changes their employer.
The answer you want: Companies handle an advisor leaving in different ways. In this case, it’s more about having full understanding of how your account might be handled in the event that your advisor leaves.
Bottom line
It can be difficult to open up your financial life to someone else, making you feel vulnerable. That’s why it’s important to hire an advisor who is closely aligned with your best interests. Look for advisors who are fiduciaries and are financially compensated and managed in ways that make them more likely to be aligned with your goals and needs. Finally, it’s crucial to understand that you’re paying someone for an important job — so interview them carefully to ensure they’ll do it well.
— Bankrate’s Lisa Dammeyer contributed to an update of this article.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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