If you think hiring a financial advisor is something you want to explore, what do you need to know? Unfortunately, finding an advisor who is a good fit for you can also be intimidating. Our industry has not done a good job of eliminating its problems. There are conflicts of interest. Getting a license doesn't require an advanced degree. And there are often incentives that don't always encourage good behavior. Here are 4 key questions you should ask.
0:00 - Intro
0:52 - Question 1: How do you make money?
3:26 - Question 2: What are your qualifications?
5:32 - Question 3: What is your philosophy about money and investing?
7:45 - Question 4: Where do you add value?
9:29 - It's all about the human side
12:33 - Outro
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Question 1: How do You Make Money? - Commissions vs. Fees, Fiduciary vs Suitability standards
40 years ago, the financial industry was primarily a transaction-based business. You bought a product. The company providing the product paid the broker or agent a commission. Broker-dealer firms and insurance companies still rely on transaction-based revenues. Without transactions, these companies cannot generate revenue. Many people feel this can provide incentives to do things that don't always align with the clients' best interests.
Over the last twenty-five years, fee-based business models have gained popularity. These arrangements are offered by Registered Investment Advisory Firms. In these relationships, clients pay their advisors directly for advice and investment management. Fee-based relationships differ from firm to firm. Many firms in our area rely on asset management fees. Other firms use hourly fees, subscriptions, or fixed retainers.
A common term used in our industry today is "fiduciary." A fiduciary has a legal obligation to put the needs and interests of the client first at all times. A Registered Investment Advisory firm has a fiduciary obligation. Broker-dealers and insurance companies operate under a different standard of care called suitability.
Are fees better than commissions—or vice versa? You can argue the pros and cons of either method. The most important thing for you is to understand how your advisor is paid for the services they provide.
Question 2: What are your experience and qualifications?
There is technical knowledge you learn in a classroom. And then there is the application of that knowledge in real-world situations. Both make a tremendous difference in the quality of advice you receive.
The events during an advisor's career shape their beliefs and opinions. An advisor who experienced the dot com bust or the Great Recession has a different opinion about investing than one who did not. Helping a client deal with the death of a spouse is something that improves with experience. You can read about tricky pension situations but until you help a client through one, you don't really know how it works. Experience matters.
On the surface, the easiest way to determine if an advisor has both the technical knowledge and experience is to look for a designation. The most prominent marks in our industry are the CFP® or Certified Financial Planner™ designations. The CFP® marks require detailed coursework and three years of experience. There is also an ongoing education requirement each certificant must meet.
Question 3: What are your beliefs and philosophies about money?
Each firm and each advisor has different beliefs and philosophies about money and investing. You need to be comfortable what they believe and understand how they approach things. Does the prospective advisor focus more on investing or how much your account is worth? Do they only want to talk about guarantees and products? Do they focus on you and what you want to accomplish?
These are important questions to consider as you try to find the right fit.
Question 4: Where do you add value?
Most firms in our area will want to manage your investments and retirement savings. It is the primary way they make money. This often shifts the focus of the conversation to investment management. But the investment management side is not where an advisor adds the most value to you. Generating superior returns depends more on luck than skill, and doing it consistently is next to impossible.
What about taxes, estate planning, or generating retirement income? When is the right time to start Social Security benefits? Do you need life insurance? Personal finance goes much deeper than your account value. Is your advisor going to provide guidance on these and other areas?
