Presented by BECU Investment Services
Choosing a financial advisor is a big decision. After all, you will be entrusting that person with your financial future. Here are 10 questions to ask when considering an advisor:
1. Why should I invest with you?
A professional advisor should be able to answer this question easily and with confidence, but not like it's rehearsed and robotic. What should the answer be? You have to ask yourself a key question first: What do you want in an advisor? The answer can vary from person to person:
- "I want someone younger who will commit to a long-term relationship with me."
- "I want someone older with a great deal of experience."
- "I want someone who is passionate about people, and who I can trust will be looking out for me."
- "I want someone who will help me plan out my future and help me avoid the potholes in the road of life."
For me, if the person's first response is about money or percentage of return—before he/she knows anything about you—I would be skeptical.
2. What's your experience, qualifications, credentials?
While I have a great deal of experience, I'd be careful using that as major criteria. Just because a person has longevity doesn't necessarily mean they are good at what they do. On the other hand, having experience can help during market downturns—if they've been through them before. Qualifications and credentials can shed some additional light. Credentials such as CFP®, CFA, and CIMA are among several designations that say a great deal about how much a person has invested in their career and clients.
3. How do you work with your clients? What can I expect from this relationship?
This is one of the most important questions. Define your expectations (to yourself) first. Then listen to see if the answers match what you are looking for. If you are looking for a holistic approach that goes beyond simple investment returns and the advisor focuses only on returns, they may not meet your needs. BECU members often are looking for someone who will not only take care of their initial need, but be on the watch for potential additional needs and changes in life that need to be addressed (such as birth, death, marriage, divorce, illness, etc.)
4. Are you a fiduciary?
You may have heard a fair amount about the so-called DOL Fiduciary Rule over the last two years. Whether or not the rule ever comes into play, it has changed the landscape already. Traditionally in the brokerage industry, advisors were required to put you in investments that were “suitable”. That is, the investment took no more—or less—risk than was suitable based on your risk tolerance, time horizon, financial status and investment experience. But that left a fair amount of wiggle room to provide an investment that gave the advisor a higher payout—and still be suitable.
In an advisory relationship, the advisor acts in a fiduciary capacity, and is required to only take actions that are in your best interests. Therefore, when facing comparable “suitable” options, the advisor would be required to choose the one that is in your best interest—which is often the less expensive one.
5. What financial planning services do you offer? What is your approach to financial planning?
We feel that every client deserves a comprehensive financial plan. Without one, investing is like driving down the road to retirement and simply guessing the correct turns to make, not knowing where the traffic jams are, and not having a map. A common maxim in the business is “people don't plan to fail; they fail to plan.” Without proper planning, a person may take more (or less) risk than is necessary and end up falling short of their retirement goal. They may not foresee how the cost of a college education for their children or the cost of taking in an elderly parent can severely impede their retirement goal. A plan should be reviewed at least annually to assess key “life” changes, such as pay increases/decreases/bonuses, births, inheritances, buying a larger home, or even downsizing. Taking the initial snapshot and not monitoring it is like using a map in the old days versus using GPS today. So, look for an advisor that is committed to meeting with you and reviewing your plan at least annually.
6. What types of clients do you typically work with?
This is important. If your advisor predominantly works with people willing to take more risk, his/her view of risk may be too aggressive for you. The reverse is true, too. Or perhaps the advisor works mostly with high net worth individuals and you worry that you might be lost in the shuffle as time is spent only with the more lucrative clients. From an experience standpoint, you should be working with someone who works with people like you—for a better understanding of your needs, wants, and wishes.
7. What are your fees? How do you get paid?
Traditionally, brokers have been paid on transactions with commissions. Today, more advisors are adopting “advisory” relationships. Let's examine the two:
Brokerage/transactional: The main positive is that in a long-term investing scenario, this may be less expensive, as you pay the commission and only pay more when you add to your investment or sell. On the negative side, if the advisor has invested your nest egg and there's little expectation of additional big funds, the advisor may become less visible as he or she looks for other new clients with money to invest. Any buying or selling typically results in the feeling of being nickel-and-dimed.
Advisory/fee based: Positives include the fact that once you sign on the dotted line in an advisory relationship, the advisor acts in a fiduciary capacity and is obligated to put your best interests first—including conducting an annual review. Most commissions and fees are waived, except for nominal transaction costs, as they are covered under the advisory fee—usually charged quarterly and based on an annual percentage of the dollars invested. So as your portfolio grows, the advisor makes more as well, giving him/her a vested interest in making you more money. Pricing in this relationship is also generally more transparent, and the cost may be used to help manage your taxes on investments. The negative is that advisory fees may make the relationship more expensive. Since that is the case, it's perfectly suitable—and important—to ask the advisor the next question.
8. What services are included in our relationship? What other services do you provide to me?
Again, the answer to this question is predicated on what you are looking for in an advisor. If you are looking for a low-touch brokerage account to park some investments that you have—or you like to call your own shots in investing—being in an “advisory” relationship may not be a good fit for you. On the flip side, if you are looking for a comprehensive financial plan to that aims to keep you on track and an advisor who will stay in contact and proactively review your situation and help you adjust your plan as life's changes arrive, you need to find someone whose approach fits that situation.
9. How frequently do you communicate with your clients?
This question is really an off-shoot of question #8. It boils down to your expectations, what the advisor is willing to deliver and what the advisor's reputation is in this respect. Do your research. Often you can discover a firm's stated approach on its website.
10. What's your investment philosophy?
Understanding an advisor's investment philosophy is important to whether or not that advisor is a match to your comfort zone. If you are very conservative and their philosophy is “all-in”, that is not a good fit. You may suffer many sleepless nights. By the same token, if you are fairly young and have 20-30-40 years to retirement and the advisor's philosophy is too conservative, you may not reach your goal when you want to.
In an interview with an advisor, perhaps the most important questions are not those that you ask; rather those he/she asks you. If the advisor is truly committed to your best interests and well-being, the first part of the conversation will feature the advisor asking you questions about your goals and objectives, comfort with risk, experience, etc. In fact, they may well ask many of the above questions back to you:
- "What services are you looking for?"
- "What would you like out of a relationship with me?"
- "What financial planning services are you looking for?"
The general rule of thumb in an initial interview is that the advisor should be listening 80% of the time in the early part of the conversation. If he or she instead goes straight to telling you all about why they are right for you—before they even get to know you—it's not likely they will be any better at listening to you further along the road.
It is important for both of you that you find the right fit. It should make for many fewer sleepless nights.
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