What defines a “good” financial advisor? If you asked five different people, you’d get five different answers. But when you ask 19,000 people, some common trends start to appear. According to this survey, a good advisor is one who
- gives you a sense of security and peace of mind,
- is knowledgeable of your personal financial situation, and
- helps you make progress toward your financial goals.
But in a vast sea of financial advisors, how do you find one with those qualities?
It starts with a little bit of research, and it’s followed by some one-on-one meetings. Remember, your financial advisor has full control over your hard-earned dollars. You trust them with your whole financial future. You want to shop around and make a careful decision.
Meeting with a financial advisor for the first time is a chance for you to see if they can meet your financial needs. You could view it as a “first date” of sorts. And when you go on that “first date,” here are five questions you absolutely must ask:
Question 1: Are you a fiduciary financial advisor?
Don’t get lost in the sea of acronyms—trust me. Advisors can be CFPs, CPWAs, AIFs, and the list goes on. Don’t be afraid to ask about certifications, but the most important thing you need to know is that they’re fiduciaries. Fiduciary advisors have a legal responsibility to:
- Put their clients’ needs above their own
- Be transparent and act in good faith with their clients
- Avoid (and disclose) all conflicts of interest
- Provide accurate and thorough advice in all situations
They’re top priority is helping you reach your financial goals. It has to be, that’s the law. They’re not going to try to sell you products you don’t need because they’ll get a bigger commission. There are no strings attached.
If they are not a fiduciary, I don’t know how you will ever know whose interests they are serving. I would recommend you interview other advisors.
Question 2: How do you get paid?
Pay for financial advisors can range from flat hourly rates to a combination of fees and commissions. There’s nothing inherently wrong with any of these methods as long as the advisor is crystal clear on how they’re compensated.
Here are the three most common pay structures for advisors:
- Fee-only. These can be hourly fees, AUM fees, or retainer fees. Most of these firms are independent, Registered Investment Advisors (RIA) firms. Fee-only advisors usually fiduciaries and they receive Zero/Zip/Zilch commissions on product sales.
- Commission-only. This means the advisor makes money off of your investments. For example, if you invest $10,000 and the advisor earns 3% commission, you’d pay $300 to the advisor and invest the other $9,700.
- Hybrid or Fee-based. This is a combination of fee-only and commission-only (the two types mentioned above). You pay a fee for their service, and you also pay some form of commission on investments.
If the advisor is commission-only or hybrid, then you are likely not dealing with a pure fiduciary. Keep looking.
Question 3: What does your ideal client look like?
You want someone who’s ideal client looks like you. You want to work with someone who knows about the things that are important to people like you.
If you’re a business owner, you may want a financial advisor who has experience with business planning and entrepreneurship. If your near retirement age and had a late start investing, you may want a financial advisor who’s well-versed in maxing retirement income.
Your ideal financial advisor is out there. You just have to do the research to find him or her.
Question 4: Can you explain how _____ works?
For this question, choose any topic to fill in the blank. You may have a question about not running out of money in retirement or saving for your child’s college fund. Be creative and don’t be afraid to pick a topic you know little about. You’ll learn something and you’ll get to see how the financial advisor explains complex topics.
You don’t want to work with a financial advisor who talks way over your head and leaves you more confused than when you started. You want to choose someone who breaks big financial topics into words you understand.
A good advisor always explains their process in plain language.
Question 5: How often will we meet?
You want an advisor who’s available and communicative. If you’re someone who takes a hands-off approach to investing, maybe you only want to meet with an advisor once a year. If you’re new to the process and have a lot of questions, maybe you want someone who meets with you once a month.
Ask yourself how many times you need to communicate with your advisor to have peace of mind, and then go from there.
The Bottom Line
Choosing a financial advisor is a big deal, so don’t be afraid to keep looking until you’ve found “the one.” When you do have that first meeting, be prepared and ask questions. If you get a weird feeling about anything, look for a different advisor.
The most important thing is that your advisor is:
1. A fiduciary
2. Transparent with their fees
3. Available & communicative
4. Able to explain their process in plain language
All advisors know how to create a financial plan and offer investments to help you reach your long-term goals. Good advisors—on the other hand—empower you with the patience, discipline, and resilience needed to stick to your plan in the good times and the bad.