They are known by many names: financial advisor, financial planner, wealth manager, retirement planner, and so on. Virtually everyone seems to be using the same, confusing terminology. So how can you tell them apart?
We have found that by asking each advisor the same set of questions, you can more easily compare and contrast their offerings and potential relationships.
You should speak to a few advisors in your selection process. The following questions will help you make sure you’ve found the right fit.
1. How do I pay for your services (or how do you get paid)?
There are a few compensation models that advisors tend to use. The most common terms advisors use are: commission-based, fee-based, and fee-only.
An advisor (or a broker, really) with a commission-based business is almost exactly as it seems. Typically the advisor makes money based on a transaction, for example, when a client purchases a commission-based fund or an insurance product. A commission-based advisor can also earn hidden, trailing fees that you may not see.
More advisors are switching to a fee-based model, where you may pay a flat or percentage fee for their services, but may also pay commissions. This can get confusing, as these advisors are typically tied to a brokerage firm but use a separate brand. The way to tell? If at the bottom of their website or business card, it reads “securities offered through…” then they probably fit into this category.
If avoiding conflicts is the goal, you should consider interviewing a fee-only fiduciary, who cannot earn commissions and must make recommendations in your best interest. The fee may be a percentage of assets, a flat fee, or even an hourly fee. Some brokers may claim to be fiduciaries when they have your assets in a fee-based account. Don’t be fooled.
2. What services do you provide to clients?
Some advisors have great depth and expertise in investments. Others have a passion for financial planning. While there is no right or wrong answer, you want to be sure that your needs match their offering.
Top advisors in the Washington, DC area take a holistic view of your overall finances, which means talking through your estate plan, looking for tax deductions, making sure you understand your investments, and proactively searching for opportunities to save you money.
3. Who is your ideal client?
This another way to see if you are a good fit. If the response fits your situation, you should explore further. If the advisor typically works with wealthy retirees and you’re a younger entrepreneur, you may not get the right kind of attention.
What you want to avoid is an advisor who changes their answer based solely on who is sitting across the table, not based on the type of client they serve.
4. How many clients do you have?
You want to find an advisor who has enough time to know you and your family, so they can spot the opportunities you may miss. Under 75 clients per advisor seems about right. After all, how many people can you really know well?
5. Who will be my primary points of contact?
Many advisors take a team approach. It’s important to know who your primary contact will be for all aspects of the relationship before you sign your paperwork.
6. What are the big lessons you’ve learned in your years as an advisor?
Nobody is perfect. You want someone with experience, and someone smart will openly admit and learn from their mistakes.
7. Will I receive a statement and/or a comprehensive performance report?
With most advisors, you’ll receive a monthly account statement from the company where your account is held. Unless you’re a math whiz or are great at Excel spreadsheets, interpreting these statements can be a bit of a challenge.
Especially if you have multiple accounts, or entities like trusts or college savings accounts, it’s important that your advisor provide a comprehensive performance report, or online portal, where you can see all your investments in one place and judge your own performance. Ask to see a sample performance report.
8. How do you measure your success as an advisor?
You should know what your goal is, and whether you’re on the right path to achieving it. For your advisor, “success” should mean helping you set and achieve the right goals. Defining success lays the groundwork for your relationship.
9. How many clients have left your firm in the past year, and why?
This tells you about their level of client service and attentiveness. If the advisor is more focused on building new business than on serving their existing clients, they’ll have greater client turnover.
This is also a great indicator of transparency. If the advisor dances around this question without providing any real answers, that could be a red flag.
10. The last is a question for yourself: Is this someone I can work with through good times and bad?
If you hire an advisor, there will be times when things are going well in both your portfolio and your relationship, and there will be challenging times when there’s a mistake or an investment that’s doing poorly. Ask yourself, is this someone I can work with through good times and bad?
As you go through this process, you should know whether your advisor will be frank and transparent. In other words, the quality of your relationship is just as important as everything else above.
If you’re interviewing financial advisors, we encourage you to download or print these questions. Asking the right questions will help ensure that you find your ideal advisor. These questions not only allow you to compare everyone equally, but also dig into the most important components of the advisor-client relationship.