Investment Must-Knows

20 Questions to Ask Your Prospective Financial Advisor (Part 1)

How do you find a financial advisor you can trust? An advisor who has excellent industry knowledge and sound investment strategy? An advisor who takes an active interest in your goals and needs? An advisor who does not adhere to misinformation nor use it to market their services? What's more, how do you find all of these things in one financial advisor?

This is what most investors want, what prospective investors try to find, and what current investors think (or hope) they have now. But how can you be sure?

Ultimately, prospective investors need to perform their due diligence by comparing and evaluating potential advisors thoroughly before investing with them. To do this you need to ask the questions that will offer you the greatest insight into who this advisor is and how they will handle your money.

Here are 10 questions you can ask that will reveal:

  • The qualifications of the advisor and/or their firm
  • The advisor's likely commitment to optimizing your portfolio
  • How the advisor will approach your family and other related considerations

We’ve combed through and developed a very thorough list of questions compiled from various sources on the web including Suzy Orman, Forbes, The Wall Street Journal and a few other major financial media sites, with additions form our unique stock market crash management experience.

  1. What are your licenses and credentials?

    An obvious place to start. What is their educational background? What licenses do they have? If they're a Certified Financial Planner (CFP) that could be an asset, although a CFP doesn't automatically make a person an outstanding advisor, or stock picker but it does show that they've put in the time to enhance their knowledge and qualifications.

    If they're a fiduciary, they'll need to have a Series 66 or 65 and a Series 63 license. Fiduciaries are individuals or organizations entrusted with the management of a person's assets for a fee. Fiduciaries have ethical and legal responsibilities and are held to a fiduciary standard that requires them to put the best interests of the client ahead of their own. Fiduciaries are regulated by the Securities and Exchange Commission (SEC) and state securities regulators and FINRA.

    To sell securities or commission products including stocks one needs a Series 7 license. In this case more is better than less.

  2. Do you get paid fees only, or by commission?

    Fees-only means you are speaking to a fiduciary, held to the fiduciary standard mentioned above. A person who is paid commissions is a broker or broker-dealer. Broker-dealers handle commission-based brokerage accounts, meaning they are paid commissions based on the products they bring to you.

    Broker-dealers are held to a suitability standard regulated by the Financial Industry Regulatory Authority (FINRA). In this case, "suitable" does not mean that the broker needs to place their interests below yours. It only means that the broker needs to reasonably believe the recommendations they are making are suitable to your needs, objectives, and circumstances.

  3. Can you sell me annuities, long-term care insurance, or private offerings in the form of REITS or private equity?

    Depending on whether you're dealing with a fiduciary or a broker, there may be limitations on the investment options that the financial advisor can offer. The items cited here can typically only be purchased through a brokerage account. This is where the question of fees-only versus commission loops back in.

    Often, fee-only advisors are put forward as the best option given the fiduciary standards they must observe. But just because a broker is paid commissions doesn't mean there is malice involved. In fact, there are many financial advisors and investment firms that can act as both an advisory (fiduciary) and a brokerage (broker). This hybrid option presents the best of both worlds: access to a full array of investment products AND an advisor that will be held to both the fiduciary and suitability standards.

  4. How many clients do you have?

    Often investors assume that larger firms are more established and more experienced, but the size of the firm and how much business they do is not the key issue. Consider this. There are approximately 240 working days in a year. If an advisor is managing 300 clients, how much time do they have to spend personally managing your account?

    A high number of clients may indicate this is an advisor who will be more likely to rely on passive investment strategies (like indexing or group investments) where asset management is done by firms other than their own creating another layer of fees in the process.

    We deem around 100 clients to be a more manageable number without more partners involved the business.

  5. What are your planning capabilities?

    What you're trying to ascertain with this question is whether or not the advisor or firm you're evaluating is capable of offering you a complete financial management strategy. Beware the firm that only includes in your plan assets that they can manage. For example, if the firm does not offer extensive financial planning, then they may not include real estate or annuity assets in your financial plan. They are assets correct? Then they should be in the plan.

  6. Do you use planning software?

    Ask if they have a planning department, and if so, how many people are in it. Are those people CFPs? If not, do they use some sort of robust planning software that helps to fill in the blanks? In short, do they consider every contingency, and can they act on them? If the advisor reviews your case and issues a lengthy report and mentions 200 or more different reporting options, you can consider that robust.

  7. Can you show me a record of returns?

    In the investment world success for a financial advisor is measured based on the revenue they generate and the total assets they manage, not the returns they make for their clients. SEC and FINRA require that returns be audited if they are to be used for marketing purposes. If an advisor has GIPS compliant track record that could be a bonus.

  8. Show me your pitch.

    It's important that you know how the advisor or firm markets themselves and their services. Particularly, you want to ascertain whether or not they use any or all of the 9 pices of Misinformation we have discovered, or Investment Myths to inform their practices (and to sell you on them). Squire has identified these myths, and the 9 charts commonly used to prop up the Misinformation they peddle.

    Remember, these myths have been so widely pronounced that many industry professionals hold them to be true. Their pitch may sound convincing, but any portfolio strategy based on these myths presents a Misinformation Risk™ that could be damaging to your investments over time.

  9. Have you asked to meet my spouse?

    This is not a question you need to pose to your advisor, but one you need to pose to yourself. A financial advisor should show a proactive interest in anything and everything pertaining to your investment. That means meeting your spouse, or at least asking about them and making an effort to understand their perspective on time horizons and risk tolerance as well as your own.

  10. Have you asked about my goals?

    The advisor should also have a list of questions for you about your financial goals, your health, and your long-term plans. They should ask about where your money is now and how it's invested so that they can assess how your current financial planning and existing investments do or do not address your needs.

This list of questions is a great place to start, and will help you assess the qualifications of the advisors and firms you're considering. However, you also need to evaluate your potential financial advisor's sense of strategy, their general skills, and their financial knowledge. To do that, check out 20 Questions to Ask Your Prospective Financial Advisor (Part 2).

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