5 questions to ask a financial advisor
IIf you’re considering working with a financial advisor to make your money goals a reality, it’s wise to do your research beforehand and make sure it’s a perfect fit.
A financial advisor is someone you will work closely with on one of the most personal aspects of your life. Before deciding who to work with, here are five questions to ask a financial advisor before hiring.
1. Are you working under fiduciary duty?
Asking a financial advisor whether he or she is operating under fiduciary duty is perhaps the most important question to ask.
The law requires agents to put their clients’ best interests above their own. They are not allowed to earn commission from any investment products they recommend to clients, which makes them more trustworthy in recommending products and services that you will benefit from, rather than only doing so when they can earn money.
Financial advisors who work for brokerages generally do not operate on a fiduciary duty – which means they can offer themselves products with higher fees and higher commissions. To find a credit financial advisor, you can use databases from reputable institutions, including the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network.
2. What are your qualifications?
Social media has made it easier than ever for people to share their input on investing and financial planning, even when they are not legitimate and formally educated financial advisors. The amount of poor financial advice available means that it is necessary to be upfront and ask about the qualifications of a potential advisor. A person who says most of their knowledge stems from their own research and experience is not formally trained to be a financial advisor.
Aside from the phony advisors dealing with the chaos on the Internet, there is also a confusing series of titles to describe the different financial advisors. For example, there are certified financial planners (CFPs), investment advisors, brokers, and wealth managers. All of these are different in their own unique ways, and some are more specific in their experience than others.
For example, co-financing partners have a fiduciary responsibility to their clients and can create tailored financial plans to help you achieve your goals. An investment advisor also works under a fiduciary duty and makes custom plans but focuses specifically on your investment portfolio, rather than helping with your entire financial picture.
Also, be sure to review the advisor’s ADV form before hiring them. This disclosure document will list the services the counselor provides, explain their fees, details their education and work history, and include any legal or disciplinary actions taken against the counselor. You can also use BrokerCheck to find this information.
3. How do you make money?
As with any service you pay for, you will need to ask a financial advisor what their fees are and how they are paid. Some financial advisors charge a flat fee, while others charge an hourly fee or an asset-based fee. The most common types of payments are fee-only, fee-based (a combination of commissions and fees) and commission-based.
If a financial advisor reveals that he makes money based on the commission of the products he sells to you, that means he doesn’t have to work under a fiduciary duty. The products they recommend may not be suitable for your goals or risk tolerance – so proceed with caution, or find a financial advisor acting on fiduciary duty elsewhere.
4. How are assets allocated?
Having a diversified asset class can help your portfolio withstand market volatility in the short term and prepare you for long-term success. That’s why it’s important to ask a potential financial advisor how to allocate assets.
A good asset allocation usually includes having investments in a mix of categories, including stocks, bonds, and cash.
Another important aspect of asset allocation is the associated risk tolerance, which refers to your ability and willingness to lose some or all of your investment while looking for a return. It is essential to ensure that you and a potential financial advisor are on the same page when it comes to taking risks. If a potential advisor is making you uncomfortable by making you take more risks than you are willing to take, then it is not for you.
Keep in mind that taking at least some risk is beneficial; Not including enough risk means that your investments may not yield a return large enough to meet your financial goals.
5. What are your investment values and principles?
If you are someone who takes pride in investing in ethical companies or those that align with your ethical values, you should ask a potential financial advisor about their investing values and principles.
Not all financial advisors are interested in investing in ethically responsible companies. By asking before hiring an advisor, you can both be on the same page about where your money should be allocated. Some financial advisors specialize in ethically responsible investing.
It is also important to ask a potential financial advisor how they will measure progress toward your financial goals. You’ll want to make sure you’re comfortable with the risks and the pace of their presented strategy.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.