One major factor that will determine your level of satisfaction with your investment firm and with how they manage your money is how well your investments performed compared to the broader market.
But according to a 2013 U.S. Full Service Investor Satisfaction Study, two elements (aside investment performance) determine whether you will be satisfied with your investment firm in the long term or not: your financial advisor and the relationship you have with them.
When it comes to your money, how well your investments perform is out of your control. After all, they say past performance is not an indicator of future results. But you have full control over who you choose to manage your money—your financial adviser or planner.
Choosing a financial planner to help you manage your money and meet your long-term investment goals is one of the most important hiring decisions you can ever make. But most investors fumble when it comes to hiring financial advisers and planner. Why? Because even the well-informed entrepreneurs often don’t know the right questions to ask or what the job actually entails.
Here are 10 tough questions to ask a financial adviser or planner before entrusting them with your hard-earned money:
10 Tough Questions to Ask Your Financial Adviser or Planner
Question 1: What licenses, credentials, or certifications do you have?
Financial advisers and planners obtain a number of certifications. The most popular ones are Certified Public Accountant (CPA), Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Registered Investment Advisor (RIA), and Personal Financial Specialist (PFS).
The CFP designation requires a comprehensive board exam and is harder to obtain than ChFC, but they both use the same core curriculum. If you want someone to manage your money, then consider someone with an RIA. If you are a small business owner or have a high income, then a CPA—who can offer you advance tax planning—will be your best choice. If you need help with comprehensive financial planning, then go with a CPA who also holds a PFS certificate.
Question 2: How much experience do you have?
Experience is more relevant than credentials. You need a financial adviser who is experienced in the aspect of investment you are going into. For example, a financial adviser or planner may have decades of experience catering to the rich—helping them set up tax-saving trusts for their grandchildren.
But if you have simpler needs, such as saving for a home or planning retirement, you want someone who has experience in those areas. So, don’t just take “I have X years of experience” for an answer. Ask your adviser or planner to describe their typical client.
Question 3: How do you charge for your services?
Your potential financial adviser should clearly state in writing how they will be paid for the services provided. Basically, financial advisers receive their payment in three ways:
- Based on an hourly or flat rate
- Based on a percentage of your portfolio value (often called Assets Under Management or AUM)
- Commissions paid per transactions
How often you expect to trade and whether you want your money pro-actively managed will determine which payment method is best for you.
Question 4: How much do you typically charge?
You don’t want your deal with a financial adviser or planner to crumble because of cost issues. So, ask how much exactly you will be paying. These costs should include their hourly rates (or otherwise, depending on the model of payment they accept), asset management fees, and any commissions they are likely to receive from the products they sell you.
Question 5: What services do you offer?
Some financial adviser or planners (investment advisors) will only give you expert advice on how to handle your investment. Others do comprehensive financial planning around retirement, insurance, tax planning, and estate planning. If what you need is not among the list of services a financial adviser offers, let them go. You need to go with someone whose services suit your needs.
Question 6: What is your investment approach?
One of the causes of friction between investors and their financial advisers is when the investor has a strong preference for a particular investment philosophy and the adviser or planner favors something else. You need to ask what your financial adviser’s investment approach is, to know if you can work together.
Question 7: How often do you see your clients?
Some financial advisers will hold an initial meeting with you and then you see them once in a year, and that’s all you get. Others hold quarterly or monthly meetings with their clients.
So, if you are the savvy type of investor who’s comfortable with going over everything just once in a year, then you won’t have problems with a one-meeting-a-year financial adviser. But if you expect your adviser to explain things to you on a frequent basis, you will never be satisfied with meeting them once in a year. In that case, go with an adviser that can meet you more frequently.
Question 8: Why should I work with you?
By asking this question, you are expecting the adviser to explain what makes their client experience unique. You want to know if their strengths are the exact ones you seek in a financial adviser. If you don’t get the answers you are looking for, then consider another option.
Question 9: Can I see a sample financial plan?
While there is no set structure for a financial plan, you want to be sure your financial planner is the competent type. Some advisers will provide you with 70 or more pages of stuff you don’t understand, while others will give an easy-to-understand five-page plan. Don’t be intimidated by huge volumes, look through and seek clarification where necessary.
Question 10: Can you provide three references?
Ask for two current clients whose investment goals and finances match your own, as well as a professional reference, like an accountant or attorney. Any experienced and competent adviser should have no problems with this.