Clients rarely ask tough questions of us or any other financial advisor they are considering hiring to help plan their financial future. The average investor seems to be willing to spend hours planning a vacation or negotiating the price of a new car. Still, when choosing a financial advisor, most throw their investigative posture out the window and go off a “hunch” or “feeling” that they get when they meet with their prospective advisor.  Trusting your gut is essential in any long-term decision-making process—but it also helps to do a little homework and ask some important and revealing questions that can set the stage for a mutually beneficial long-term relationship between you and your advisor.

Below is a partial checklist of questions that any competent and reputable advisor should be able to answer without hesitation (don’t be afraid to ask them):

Are You a Fiduciary?

The general investing public is confused about this term. The term is important because it shapes your relationship with your so-called “financial advisor.”  Not all advisors are held to the fiduciary standard. This article explains what this means and why it is important.

What Is Your Experience?

There are many licenses, certifications, degrees, and credentials in the investment industry. It is essential to know the differences between those that signify professional excellence and those that do not. For example, it would be easy to confuse the designation of CFA (Chartered Financial Analyst) with that of CRFA (Certified Retirement Financial Advisor). However, Jason Zweig, author of The Intelligent Investor, clarifies that the CFA designation requires more than 900 hours of study in “accounting, economics, ethics, finance, and mathematics, and only 42% of candidates pass its three required exams, a process that can take several years.” In contrast, the CFRA designation only “requires that students pass one exam consisting of 100 multiple-choice questions, for which 40 to 75 hours of preparation is typically sufficient preparation”.  This Wall Street Journal article gives a rundown of the most common designations. According to CNN Money, the designations you should look for in your team are CFA and/or CFP.

What Is Your Investment Strategy and Philosophy?

Understanding an advisor’s investment strategy and philosophy will help you determine whether they can meet your objectives in seeking financial advice. Suppose an advisor specializes in specific products or plans that you find hard to understand. In that case, you may find yourself in an investment portfolio that does not fit your long-term goals and expectations. Implicitly, there are two sides to this equation: first, the advisor’s specific strategy and philosophy about investments, selection, time horizon, timing, fees, market outlook, and expectations, and secondly, an understanding of your investment objectives and expectations and whether the advisor is well-suited to meet them.

How Will You Communicate with Me?

It is essential to recognize that a good advisor will be an in-demand and busy professional who will treat your relationship with the highest priority. From the onset of your relationship, understanding how often and in what form you expect to hear from your advisor will help establish a set of expectations. How frequently will the advisor review your plan with you, and how often will you meet face-to-face or communicate via phone or email? Knowing your preferences and whether the advisor can accommodate your needs and expectations is critical in ensuring the relationship has longevity.

Do You Have Any Disciplinary or Regulatory Infractions?

Ask your prospective advisor whether any regulatory authority has sanctioned them and, if they have, what the circumstances were surrounding those sanctions. Considering recent investment frauds, it is paramount to detect any red flags with the advisors you are interviewing. Investors can find additional information on the SEC’s website, including regulatory records. Broker’s records can be found here.

Who Will Be Working with Me? What Is Your Succession Plan? 

Most advisors work in teams, so getting to know each team member and their role is as important as the advisor who initiates your relationship. When you need to discuss your account or when you need a check sent to you, whom will you call? Does the advisor have a succession plan, and with whom would you work if your advisor was no longer able to work? Continuity and familiarity with your unique situation are important considerations, especially for elderly clients who rely on their advisor as a financial counselor as much as they do as an investment advisor. 

How Are You Compensated? Do You Get Any Compensation from The Companies That You Use for Investments?

Advisor fees should be clearly stated and easy to understand. Unfortunately, the fees for some investments can be hard to find. Furthermore, some advisors have “soft dollar” arrangements with firms that incentivize them to use certain investments in return for brokerage and research services. Additionally, some advisors are incentivized to use their own firm’s investment offerings where there are indirect compensation considerations. You have a right to know exactly how your advisor will be compensated and whether that might affect their impartiality when choosing investments for your account. 

Now, Ask Yourself:

Why am I seeking an advisor? What are my expectations about the value my ideal advisor will bring to my unique situation? Are my expectations fair and reasonable? We suggest this moment of introspection for anyone considering a relationship with a professional advisor. Vanguard suggests that many people hire advisors to “outperform the market.” While this goal might seem like common sense, no advisor can consistently and reliably perform such a task. Vanguard suggests that a “financial advisor has a greater probability of adding value…through relationship-oriented services, such as providing cogent wealth management and financial planning strategies, discipline, and guidance, rather than trying to outperform the market.”