Choosing a Financial Advisor: The Questions You Need to Ask

(Originally published on Business Connect Utah Magazine.)

Keeping your investments secure is more important than your home, your car or even your current job. Just think about this—if you were to lose your home, car, or job today, they could eventually be replaced.

But a lifetime of investments? That’s something you don’t ever want placed in peril.

Where To Start When Selecting An Advisor

It may seem simplistic, but the first step is to really know what you’re looking for. Having a list of essentials and nice-to-haves can make your search much less difficult. What should be on that list?

Consider the common reasons one would enlist a financial advisor:

  • Retirement planning
  • College savings
  • Investment philosophy
  • Insurance and estate planning issues
  • Tax planning
  • Employee benefits and company stock issues

When first contacted, a good financial advisor will seek to discern your particular situation and needs. They will be proficient in answering common questions a client would likely ask. A competent advisor can determine where you would have the most interest and what your greatest needs will be.

Know How The Advisor Is Compensated

The next step in evaluating potential advisors is to understand how your advisor is compensated. The three main models of advisor compensation are commissioned, fee-based, and fee-only:

  1. Commission-based advisors are usually compensated for the sale of investment and insurance products, such as mutual funds and annuities.
  2. Fee-based advisors not only receive fees under a fee-based compensation system, they can also accept commissions from recommended financial products, including annuities and insurance.
  3. Fee-only advisors are generally paid based on the assets they are managing. This fee is usually all-inclusive—covering investment advice as well as any other professional advice. However, depending on the firm, a client can be assessed an hourly or flat fee. No commissions are received, nor are any products sold.

I’m biased toward fee-only advisors because I feel it eliminates a potential conflict of interest that can be inherent in the sale of financial products. Sitting across the table from a financial advisor that has no financial incentive—and is receiving no kickbacks—can change the dynamics of the conversation in a positive way.

Verify Your Gut

There are many resources available to assist you in evaluating and verifying the quality and trustworthiness of an advisor. In particular, you’ll want to establish that the prospective advisor is not in regulatory trouble.

FINRA’s BrokerCheck database of federally and state registered advisers gives you the capability to search by name, and lets you check up on firms as well. Several third party services, such as BrightScope, allow you to check an advisor’s regulatory record.

If the advisor is a Certified Financial Planner (CFP) you can also look up their information at the CFP Board’s website. This is not a complete guarantee, but is an ideal starting point.

Dig Into The Details

The last step is to begin meeting with prospective advisors. Call them, email them, and see how quickly they respond. Sit down with the advisor and discuss specifics to better understand how a relationship with them would work.

Questions I recommend asking: How often will you meet? What type of information will they provide? Have they worked with clients similar to you and with similar situations? Will they review your tax return?

Finding the right financial advisor is important, and it’s worth investing your time and effort. Understanding what you’re looking for and asking pertinent questions is a great start in this process.

By taking the time to understand the various types of advisors, their platforms, and philosophies, you can find the ideal fit the first time. Remember, when it comes to retirement planning, time is an asset you want on your side; it can be your best friend or your worst enemy.