6 Questions you Must Ask a Potential Financial Advisor

I’ve sat down with hundreds of potential clients in my career, and I’m always amazed at how few questions I receive. Sure, I get the common question, “What are your fees?”, but almost nothing else. It appears to me that people spend more time researching a new washer and dryer than a new financial advisor. Yet, choosing the right financial advisor is one of the biggest, and potentially costliest, decisions that a person can make. I’m convinced the reason that more people don’t ask more questions is that they simply don’t know the right questions to ask. If you don’t know the right questions to ask, how are you able to compare which financial advisor may be best for you? Most people come to my office because they were referred by a friend. That is great, but just because I am the right fit for your friend, doesn’t mean that I am right for you too. This article discusses the questions that you should be asking potential financial advisors in order to find the right one for you.

Are you a fiduciary?

Would you rather work with someone looking out for your best interest or the best interest of the advisor? That may seem like a dumb question, yet this is the difference between working with a fiduciary or not. A non-fiduciary is essentially a salesperson. He sells you a financial product and receives a commission. A fiduciary on the other hand needs to have the best interest of the client at all times. Typically, this means that a fiduciary charges a fee based on account size, or a retainer fee each year. Rarely, will a fiduciary sell you a product, rather just a service. You should demand that your financial advisor be a fiduciary.

What are the total fees that I will pay?

Don’t ever accept the answer that you don’t pay any fees. There are ALWAYS some fees involved.  Trust me, financial advisors are not doing this out of the kindness of their heart.  Yet, I hear all the time from potential clients that another advisor is not charging them fees.  This is a lie.  You may not see the fee but trust me, they are there.  There are typically two types of fees; fees that you see and fees that you don’t see.

Fees that you see

As I mentioned previously, most fiduciaries have a very transparent fee schedule.  Probably the most common fee structure is an Asset-Under-Management (AUM) fee structure.  In the AUM model, you pay a certain percentage, for example, 1%, on total assets that the advisor is managing.  This fee is typically taken right out of the account on a quarterly basis.  Other advisors may instead charge a retainer or financial planning fee that should be very transparent.  

Fees that you don’t see

Basically, every investment also has an internal expense which you will also need to pay.  These can range from very low to very high, depending on the investment. Exchange-Traded Funds (ETFs) have expense ratios as low as 0.05% per year.  On the other hand, annuities and non-traded REITs may have internal fees that exceed 4% per year.  You typically won’t see this fee “come out of your account”, but it does negatively impact the absolute return of your investments.  Brokers, and non-fiduciaries, are paid a commission out of these types of fees.  

A quick tip, just because a financial advisor is a fiduciary, does not mean your fees will be low.  I just had a meeting with a potential client who was paying 2.1% AUM fee plus another 0.5% per year in internal expense ratios.  That’s crazy!  You should insist that your potential financial advisor lay out all of your fees in writing before starting with any new financial advisor.   

How often will we meet and what is covered in those meetings?

The thing I’m most surprised about is that people really never ask what they get for the fee that they are paying.  A financial advisor is expensive.  Yet for some reason people want to know the fee they are going to pay, but never ask what they get for that fee.  For example, I charge nearly 1% per year and complete a comprehensive financial plan which is updated yearly. I meet with my clients twice a year and have phone appointments two other times a year.  Yet, if I didn’t bring this up, no one would ask me. If you just want investment management, that is available at a very small fee through many robo advisors.  Other advisors will complete a financial plan and also help draw up an estate plan and do taxes yearly.  Fees are certainly important, but getting a good value should be top of mind.  You should know exactly what you are getting for the fee that you are paying.   

Where will my money be held?

Unfortunately, this is the Bernie Madoff question that has to be asked.  Yes, 99.99% of financial advisors are honest and good-natured, but you need to protect yourself against the other 0.01%.  The money should be “held” by a custodian and never just with the financial advisor.  For example, I have control over my client’s investments, but all of my client’s investments are held at Schwab or TD Ameritrade.  This means that my clients get monthly statements from Fidelity and can access their accounts each day through the Schwab or TD Ameritrade website.  When a client funds their account via a check or rollover from an IRA, the check is always made payable to Schwab or TD Ameritrade and never to myself or my company.  It is extremely important that your advisor does not have custody of your account and you should have online access to your account in which you can see the account balance and change of account balance each day.  

Who will I be working with and how many other clients does my advisor work with?

I worked at a company in which I was assigned over 300 clients.  No matter how hard a financial advisor works, it is impossible to do quality financial planning for 300 families.  You really don’t want to work with a financial advisor that has over 100 clients.  Also, you want to make sure that your financial advisor is qualified.  This post describes the different credentials that you may find while looking for an advisor.  If you are looking for a qualified financial advisor that has put the time into honing their craft, you should strongly consider a Certified Financial Planner (CFP).  

Are there any surrender fees if I were to cancel, and how long is my surrender period?  

I believe very strongly that you should never get in an investment which has a lock-up period in which you would have to pay large fees to get your money.  It is your money, and you should be able to have access to it at any point.  Not to mention, typically the longer the surrender period, the higher the fees and higher the commissions for the advisor.  For most fiduciaries, there are no surrender fees or obligations.  You can cancel services at any point and not be crippled with fees.  This is not the case with all advisors or investment vehicles.  For example, many annuities have surrender periods that exceed 10 years.  No chance that you could convince me to invest in something that requires me to lock up my money for 10 years or more.  Make sure you know what the surrender period is and what the fees are for getting out of the investment.  

Sitting down with a financial advisor for the first time can be intimidating.  You are typically sitting in a nice office, with a well-dressed financial advisor, and you may understand very little of what he or she is saying.  Many times this results in very few questions, and you are simply trying to figure out if you trust the advisor enough to part with your life savings.  When trying to decide what financial advisor is best for you, make sure that you have a series of questions that are important to you.  Also, meet with a few different advisors and ask them the same questions.  Yes, getting a referral from a friend can be important, but just because an advisor comes highly referred, doesn’t mean he is the right fit for you.  At the end of the day trusting a financial advisor is very important.  Trust, however, doesn’t stop that financial advisor from selling you an expensive financial product, with a long surrender period.  These questions allow you to know exactly what you are getting into, and will help find the right advisor.  

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