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Hiring a Financial Advisor? Do Your Homework.

Choosing a Financial Advisor or Planner (I will use “advisor” for consistency and simplicity) is an important decision and should not be taken lightly. Of course, you want to ensure this person is knowledgeable and has the right credentials and education, but you also want to feel comfortable with and be able to trust this person. You will be sharing intimate details about not only your finances, but your dreams, your desires, your values, your background, and perhaps even your shortcomings. A decision should be made only after careful consideration and with some good interview questions prepared.

But, before we get into the questions, you need to know about the types of advisors you may encounter. You will probably hear the terms “fee-only”, “fee-for-service”, or “fee-based”. “Fee-only” and “fee-for-service” are essentially the same. The advisor receives a flat fee from you. She receives no outside fees or commissions from anyone, so recommendations are based on your needs and not the needs of the advisor. These individuals typically have a CERTIFIED FINANCIAL PLANNER™ certification so they are fiduciaries, meaning they work in your best interest. They have met the education, experience, and ethics requirements to use the CFP® marks. “Fee-based” means the advisor receives a mix of fees and commissions, so there may be some perceived conflicts of interest.


Now, onto the interview!


1. Who do you work with?

If you are a 25-year old data scientist working in San Jose, CA and your advisor mainly works with pre-retirees, you are probably not a good match. Seems like a no brainer, but many people do not ask this question. A 25-year old is in the accumulation phase of her career and perhaps saving for a new home whereas the 55-year old is contemplating retirement and evaluating long-term care insurance policies and Social Security filing strategies. These two individuals do not have much in common and either does the advisor who serves mainly one or the other. Also, listen for the passion and the story behind why the advisor chose her niche client. She should be as excited to work with you as you are with her!

2. How are you paid?

This goes back to my previous point. You need to understand how and for what you are paying your advisor. If a portion of the advisor’s compensation is from selling products, you may question her motivation for recommending Fund X. Some firms are even relegated to only selling their firm’s products. This is a very narrow window of advice and it can get pretty expensive as these sales charges can be as high as 6% or more! No thank you.

3. Will I be working with you?

Imagine you had the greatest conversation with Lisa. You really connected, were satisfied with her answers, your spouse liked her, and so you signed up. You schedule your first meeting and Joe walks in. Who is Joe?! Trust me, it happens. Be sure you know who you will be working with and understand the dynamics of the firm and the team they employ. Some firms have multiple advisors, paraplanners, and associates who work as a team and pass off certain tasks to each other. Ask for an org chart! You want to ensure you know and like everyone.

4. What is your financial planning process?

This is a BIG one. A good advisor will be able to clearly state how they will work with you. This, of course, will vary from advisor to advisor, but you should feel comfortable with her service offerings, the topics she covers, her communication style, accessibility, the frequency of meetings, as well as your responsibilities in the process.

5. What is your investment philosophy?

Some advisors actively manage assets while others make recommendations for you to implement on your own. Regardless, you should be on the same page with your investment philosophies. Not only should the advisor ask you questions to find out where you stand, but also talk through some of your answers to get a better sense of your timeline, goals, and risk tolerance. If you choose an advisor who specializes in master limited partnerships, REITs, bitcoin (did I lose you?), and other alternatives, while you prefer a more liquid, passive, low cost investment strategy, you are going to be sorely disappointed with the advisor’s recommendations.

I could go on, but these are a few, critical questions to get you started. Some of these questions may be answered by simply reviewing the advisor’s web site or doing a quick Google search. The point is, do your research. You are putting your financial life into her hands and you could be working together for a very a long time. I consider my clients as friends and family. Heck, you may even invite her to your next dinner party or your wedding! Choose carefully and good luck. I am always here to help.

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