Finding a financial planner can be complicated and maybe even overwhelming. We have compiled 4 questions to ask a financial advisor in the first meeting that will hopefully make finding the right financial planner for you a little bit easier. Personal finance is personal, and not every financial planner or advisor will work for everyone. Taking the time to find the right one is really important because this decision can make tens of thousands of dollars over the course of your lifetime.
What are some good questions to ask a financial advisor?
Searching for the right financial advisor can be daunting. There are countless companies, various designations, and a myriad of compensation schemes. Due to the fact that anyone can claim the title advisor, some may claim this title with no certifications at all! Below are 4 questions that you should ask a potential financial advisor in the first meeting.
1. Are they a fiduciary financial advisor?
Do they uphold a fiduciary standard 100% of the time or do they just adhere to a suitability standard? A suitability standard just means that an advisor has to recommend a product for you that is suitable. They could receive a bigger commission off of one product or another, or, recommend that you move funds from one place to another and it may not be in your best interest. A fiduciary financial planner is going to be in your corner and help you make decisions that are based on your best interest all the time. They want to help you maximize your money and they are not tied to a specific company. Fiduciary financial advisors have a sworn oath to act in your best interest.
2. How does the financial advisor get paid?
Financial advisors and planners are paid in three different ways.
The first way that a financial planner can get paid is with commission. This is when the financial advisor gets paid money on the products they sell you. It may be a one-time commission over the period of the product. Commissions are typically paid directly to the financial advisor from the company. You will never actually get a bill for it but it’s still important to look for and ask about. Unfortunately, because of these fees, the products are often higher priced than a similar product on the market. Additionally, a commission-based advisor may only have access to the products that are within their company’s offerings. This means that you won’t get the full array of options that are on the market. Again, none of this is inherently bad, it’s just something that you as the consumer need to be aware of and know.
The second way that a financial advisor can get paid is through a fee-based model. This is a combination of fees, as well as commissions. They may charge you for a service, but then they also receive commissions from the products they sell you. Again, it’s not bad. You just need to know there’s a chance that the products that they recommend to you are because they get paid a commission on it.
The third way a financial planner can get paid is through a fee-only model. This is not to be confused with fee-based. This is where you pay money to the financial advisor or the financial planner for them to give you advice and recommendations that are in your best interest. They only get paid through the fee. There are no commissions, kickbacks, or referrals. You will pay that either through a percentage of assets you have under management with them, an hourly fee, project-based, or maybe a retainer model. It is a fee you pay for their services. While you’re finding out how they’re getting paid, it’s important to know what you’re paying for. Are you paying for investment advice, such as mutual fund products or stocks like with a broker-dealer? Or are you getting a comprehensive financial plan that will look at all aspects of your financial life? That’s important to know, and it’s important to ask.
3. Is your financial advisor educated, credentialed, and experienced?
Unlike other professions, there’s not one specific way to become a financial planner. There are over 200 different designations. It’s vital for you to understand how they got that designation, and more importantly, what it means for you and your financial plan. Here are some of the more common ones that you may come across in your search.
There’s the designation of a certified financial planner or CFP. A certified financial planner is an individual who has taken a four-year bachelor’s degree along with university-level classes that are approved by the CFP Register Board. They’ve also passed a six-hour exam and have a minimum of 4,000 experience hours before they received their accreditation.
Another common one is an accredited financial counselor, also known as AFC. They have completed coursework that was approved by the AFCPE Board, and they’ve completed a three-hour exam along with 1,000 hours of professional financial counseling experience before they receive their accreditation. Both the CFP and the AFC have to take continuing education credits to keep their accreditation.
There’s also the CFA, which is a globally recognized professional designation given out by the CFA Institute. This is considered the gold standard. It includes an individual that has a bachelor’s degree or four years of equivalent experience along with a series of three intense exams to pass.
In addition, there’s also a chartered financial consultant or a CHFC. They have also completed a comprehensive education, as well as examinations and practical experience. They also have three years of work experience before being accredited.
These are just four examples of the many designations that are out there. It is important to know what those designations mean and if it’s something that’s applicable to your situation. You also want to check what their experience is in. There are financial planners out there that specialize in a lot of different areas. You want to make sure that the financial planner that you choose has experience working with individuals in your situation. If you are a federal employee then it would be in your best interest to work with someone who has experience with federal employees.
Those first three questions to ask a potential financial planner are pretty objective and easy to compare planner to planner. The last question to ask a financial planner is a little bit more subjective.
4. Is it a good fit?
Does it feel right? Do you trust this person? Do you think that they’re knowledgeable? Do you think that they’ll be there to support you through your financial life? Do they have the time for you? What kind of experience are you looking for? Are you looking for more of a boutique and a hands-on approach that’s available to you 24 hours a day, seven days a week? Or are you looking for someone that you can just touch base with, maybe once or twice a year? Are you looking for someone who’s going to make trades for you, like in a broker-dealer situation? What are you really looking for, and do they have the staff and the time to support that? Also, do you like them? I’m not saying this person has to be your new best friend, but you are going to share a very intimate part of your life. You want to be able to ask questions and share concerns.
It’s also important to think about the way that they talk to you. For instance, if you’re looking for someone to help you with some education, do they have a teacher’s heart? Are they willing to educate you and explain not only the things that they’re recommending but how it relates to you so that you can understand it? Are you already very financially literate and just looking for a little bit more advice? Or do you want to talk about some high-level financial topics and dig deeper? You want to have someone that you’re willing to pick up the phone and talk to, and that they’ll meet you where you are with no judgment.
It’s great to get recommendations from our friends, family, and colleagues about their great financial planners. However, personal finance is personal, and not every financial planner is a good fit for everyone. It’s important to really talk to the financial planner to see if it feels right. You can also talk to any of their current or former clients to find out what their experience was.
Finding the right financial advisor for you
I hope these four questions to ask a financial planner have made it just a little bit easier for you. We have also put together a ‘10 Questions To Ask A Financial Advisor‘ guide that will provide you with some more detailed questions. Some other blogs that may be of interest to you are how to find financial planners and if financial planners are even worth it. I wish you all the best in your search.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.