Questions You Should Ask Your Financial Adviser

Working with a financial advisor can be one of the most important decisions you make for your financial future. A good advisor acts as a trusted guide, helping you navigate complex financial matters, plan for your goals, and make wise investment decisions with your hard-earned money. But not all financial advisors are created equal. With so many options out there, how can you find an advisor who is truly qualified, has your best interests at heart, and will be a good fit for your needs?

The vetting process starts by asking the right questions. Here are some essential queries to pose to any potential financial advisor before entrusting them with your finances.

What are your qualifications and credentials?

The financial services industry has many different titles and designations that advisors may hold. It’s important to understand what qualifications really mean in terms of education, examination requirements, experience levels, and ethical standards.

There are three certifications you’re looking for here. One certification is plenty, more are better. The first is a Certified Financial Planner (CFP). This certification requires extensive training and education in areas like investment planning, tax planning, estate planning and retirement planning. CFPs must pass a rigorous two-day exam covering nearly 100 topics, as well as meet experience requirements and commit to a code of ethics.

The second certification is a Chartered Financial Analyst (CFA). This certification focuses on portfolio management and is generally considered the most difficult certification to obtain of the three. Many CFA charterholders manage large investment portfolios for institutional clients but they can also manage portfolios for individual investors.

The third certification is a Certified Public Accountant (CPA). CPAs are best at tax advice and can often handle tax preparation services for individuals.

What services do you provide and what is your advisory process?

Understand exactly what services are included and how the advisor works with clients. Do they take a comprehensive approach covering all areas of your financial life, or do they focus more narrowly on investments alone? Find out about their particular specialties as well, as some advisors concentrate more on certain areas like retirement planning, estate planning, tax planning, risk management, business planning, or investment management.

Ask questions to get a feel for their overall philosophy and financial planning process. How do they develop a customized plan for each client’s goals and circumstances? What methodology do they use to make investment recommendations?

What is your investment philosophy and strategy?

Take a close look at an advisor’s investing approach to ensure it aligns with your own goals, personal values, and tolerance for risk. You’ll want to thoroughly understand how they build and manage client portfolios.

Ask them to walk you through the specifics of how they construct and monitor portfolios. What criteria do they use to select investments? What tools and research do they leverage? How often do they rebalance? How often do the evaluate the performance of their model portfolios? Does the advisor create model portfolios themselves, or does the firm have a separate team for that?

Many advisors take a modern portfolio theory approach, building diversified portfolios tailored to a client’s risk profile while also considering tax efficiency. Increasingly, advisors are utilizing low-cost, evidence-based investment strategies that rely on time-tested academic research rather than speculative stock-picking.

Pay close attention to any advisors who use more active trading strategies or seem to be chasing investment fads or making concentrated bets based on economic predictions. While no advisor can guarantee results, you’ll want to feel confident their philosophy and strategies make sense logically and are suitable for your situation. In fact, I’ll go further and say you should just not hire an advisor that uses any active strategies.

How are you compensated and what are the costs involved?

This is one of the most important areas to scrutinize closely, as an advisor’s compensation structure can create potential conflicts of interest that may not be in your best interests as the client. It’s crucial to understand all fees and costs associated with working with a particular advisor.

Historically, many advisors received commissions from the sale of investment products, creating an incentive to potentially “churn” accounts or steer clients toward costly products that pay the advisor a higher commission. I strongly recommend against working with an advisor that is compensated through any form of commission.

Today, many of the most reputable advisors operate on a fee-only model, which means their compensation comes directly from the client as a percentage of assets under management, fixed fees, or hourly/project rates. Fee-only advisors do not take any commissions or compensation from investment product companies, which aligns their interests with yours as the client.

Make sure to get clarity on the specific fee structure as well as any other costs like transaction fees, custodian fees, or fund management expenses. Compare the total costs of potential advisors to ensure you’re not overpaying.

What is your client experience like and what resources do you provide?

Find out how the advisor works with clients on an ongoing basis. Will you have a dedicated point of contact? How often do you meet? What kind of reporting and statements do they provide? How many clients do you manage?

Also ask about value-added services and client resources beyond just portfolio management. Do they provide financial planning software or educational materials? Do they coordinate with other professionals like accountants, attorneys, and insurance agents? Assessing the level of overall client support can help determine if the working relationship and service model will be convenient and a good fit for your particular needs.

Who is the custodian that holds client assets?

It’s standard best practice for investment advisors to use an independent, third-party custodian like Charles Schwab, Fidelity, TD Ameritrade, or Interactive Brokers to physically hold and safeguard client funds and securities. This crucial separation of duties prevents the advisor from having direct access to client money. The advisor simply has discretionary authority to manage investments through the custodian based on the strategies you’ve agreed upon.

While some smaller advisors may utilize lesser-known custodians, make sure to only work with advisors who engage with large, well-established custodial firms that provide additional oversight and protection for your assets.

How do you work to avoid conflicts of interest and put clients first?

Reputable advisors these days operate as fiduciaries, which means they are legally and ethically bound to put their clients’ best interests first above all else. They have an obligation to provide advice that is fair, transparent, and free from conflicts of interest.

However, fiduciary duties are not a silver bullet, and advisors should be able to articulate clear processes for identifying and mitigating any potential conflicts that may arise. Ask explicitly how they structure their compliance procedures and operations to safeguard against conflicted advice.

Many of the industry’s top advisors align with fiduciary principles like fee-only compensation, using low-cost investments without sales charges, maintaining an independent custodian, and taking a holistic planning approach aligned with your goals.

Read the firm’s disclosure documents thoroughly

All SEC-registered investment advisers are required to provide documentation that goes into detail about their advisory services, fee structures, strategies, professional backgrounds, disciplinary history (if any), and potential conflicts of interest.

The two key disclosure documents are:

• Form ADV Part 1 -The initial filing that provides background information on the advisory firm and types of clients served.
• Form ADV Part 2A – The “Brochure” that serves as the main narrative document providing additional details about the advisor. Pay particular attention to the descriptions of services, fees, disciplinary information, and conflicts sections.

Any reputable financial advisor should freely provide these documents when asked. Make sure to closely read through them in their entirety before making a decision.

Ask yourself if the advisor is a good personality fit

Beyond all of these substantive questions, don’t overlook the importance of strong rapport and a good personal connection with your advisor. You’ll be sharing intimate details about your family, goals, and finances, so it’s crucial to have an open line of communication and compatibility.

Does the advisor take time to truly listen and understand your unique circumstances? Are they approachable about providing explanations or answering additional questions? Do they communicate in a clear, patient way that aligns with your preferred style?

Your advisor becomes a long-term partner in managing your financial life, so you should feel comfortable and confident in the working relationship. Properly vetting both an advisor’s professional expertise as well as the personal fit will go a long way toward a successful advisory engagement.