Top 7 Financial Questions To Ask When Considering A New Financial Advisor
Managing your wealth can be tricky business, and having someone in an advisory capacity to guide you could prove invaluable. With 77% of Americans anxious about their financial situation, there’s no telling how unpredictable the market could become tomorrow. And if you’re just as anxious and dissatisfied with the current advisory services you receive, it’s time to look for a new financial advisor.
But how can you reliably know which one to choose? With so many offering their services, how can you ensure that the person will be trustworthy, act solely in your interest, and handle your investments prudently? Simple: you ask them relevant questions and assess the answers.
And that’s precisely what this article will look at. We’ll review the top 7 financial questions that could help you in your search as well as provide some additional helpful queries for informed decision-making.
Are You A Fiduciary Advisor All The Time?
Being one of the most important financial questions you should ask, this query may helps assess your potential advisor’s trustworthiness. A fiduciary financial advisor is legally obligated to always prioritize your best interests. This means that their compensation must be entirely transparent, often coming directly from you, the client, without any hidden commissions or conflicts of interest associated with selling financial products.
But, not all advisors in the US operate as fiduciaries all the time. Many have dual registration and can switch to acting as non-fiduciaries when needed. This duality can lead to scenarios where they may prioritize their interests over yours, such as selling products with higher fees and commissions.
So, don’t hesitate to ask your new financial advisor about their interests. To provide additional assurance, ask for a written statement or commitment of their fiduciary status.
What Is Your Investment Philosophy?
An investment philosophy works as a framework for your new financial advisor to create a plan to achieve your financial goals. It encompasses a set of principles and standards that shape the overall approach to investing. The clarity and definition of your financial advisor's investment philosophy is crucial because it allows for effective communication regarding their strategy.
Investment philosophies are developed over time, drawing heavily from past experiences and a deep understanding of what has historically worked or not in financial markets. Thus, compatibility between your investment philosophy and that of your financial advisor is essential. For instance, your preference for value stocks may contradict your advisor's success in pursuing growth-oriented companies. Even If your philosophies differ some, it’s important that both perspectives are considered in your investment strategy.
On the whole, this is one of the financial questions that is good to ask when dealing with less experienced financial advisors, as they may have limited exposure to the historical performance of financial markets under various conditions. Seasoned financial advisors might have established practices and more refined approaches to achieving financial success.
What Are Your Qualifications?
It's important to know your advisor's qualifications. Avoid advisors with minimal training or a lack experience , as the financial industry is ever-changing. Look for advisors with certifications like Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or Certified Kingdom Advisor (CKA). A decade of experience with clients like you and a clean record is ideal.
As a bonus, inquire about their specialty and client load. This may reveals their market focus and the depth of their experience. Some prefer niche expertise, while others want a broader range. Advisors with more qualifications and experience may charge higher management fees.
How Will You Tailor Your Advice to My Situation?
The significance of personalized financial planning and investment management cannot be overstated. Income, expenses, goals, and risk tolerance uniquely shape every individual's financial situation. Therefore, your new financial advisor should tailor their advice to your specific circumstances and aspirations.
The advisor will assess your financial goals and risk tolerance to ensure the advice they offer is tailored to your needs. This process involves deep-diving into your financial landscape, thoroughly understanding your aim, and assessing how much risk you're comfortable with. By doing so, they can craft a financial strategy well-suited to your objectives and aligns with your values and situation.
A related aspect of tailored financial advice involves understanding where your investments are held and how you can actively monitor them. Knowing where your money is kept and having easy access to monitoring it, helps facilitate informed decisions and adjustments as needed.
Which Benchmarks Do You Use To Track Stock Performance?
When looking into investment performance, you need something to compare it to. And that’s what benchmarks are for, as they help measure your investments relative to the broader market or specific sectors.
Does your advisor use a customized benchmark that makes them look good or do they use an industry recognized benchmark or index. There are many to choose from and they all have a little different focus or emphasis. What matters is that the benchmark used is one relative to your situation and investment strategy. Most often a well diversified portfolio will not have a single benchmark that matches well. In this case you want to make sure your advisor can help you reasonably compare your portfolio in a meaningful manner to what is happening in the markets.
Which Custodian Do You Use?
Selecting a reputable custodian is a critical aspect of safeguarding your investments. A custodian is responsible for holding and protecting your stocks, bonds, mutual funds, and other securities, ensuring their safety and security. When evaluating a financial advisor, ensure this query is on your list of financial questions.
Firstly, you must understand the fee structure of the custodian. You should ask what percentage of your investment these fees represent, as they can impact your overall returns. Some custodians charge fees for various services, including account opening and inactivity charges, which can significantly affect your investment performance.
Security is yet another concern. Inquire about the regulatory oversight of the custodian and whether they have a history of security-related incidents. A reputable custodian should have a solid standing within the financial services industry and robust measures to prevent fraud, theft, and unauthorized activity.
Additionally, assess the technology capabilities of the custodian. Ensure their platform offers secure and user-friendly access, allowing you to view your account information conveniently. Respected custodians in the industry, such as Charles Schwab, Vanguard, and Fidelity, are known for their reliability and commitment to safeguarding your investments.
What Is Your Exit Strategy?
Your financial advisor's exit strategy should be fundamental to your financial discussions. As a client, you want to understand how their eventual departure from the advisory role might affect your financial affairs. Is there a successor who will handle you accounts in the same fashion and one you are comfortable with. Addressing this aspect lets you make informed decisions about your financial well-being.
Unforeseen events can disrupt even the most carefully crafted financial plans. Therefore, it's prudent to inquire about the advisor's contingency plans. Understanding how they would handle unexpected situations provides reassurance that your financial affairs will be managed effectively, regardless of circumstances.
4 More Important Questions To Ask Your New Financial Advisor
With these seven financial questions out of the way, you should ask just a few more. From simple testimonials to service pricing, these should be on your question list when looking for a new financial advisor.
Can you provide references from some of your current or former clients? Obtaining references from a financial advisor allows you to hear about other client's experiences and gain confidence in their ability to manage your finances effectively.
Will you explain financial concepts and recommendations in a way that I can understand? Effective communication is essential. Ensure your financial planner can explain complex financial concepts in a way that makes sense to you and fosters a comfortable working relationship.
What is the annual projected cost for your services? The pricing for financial planners and investment advisors can vary according to the city they’re in, how much experience they have, and the amount of assets they need to manage.
Before we start working together, will you provide a written agreement regarding your compensation and services? A written agreement detailing compensation and services ensures both parties are clear on expectations and responsibilities before entering into a financial planning relationship.
And now, with all your questions prepared, you can make a well-informed decision. But if you still can’t find an advisor to suit your needs, we’re more than happy to speak to you today about your financial future.