10 Question to Consider Before Hiring a Financial Advisor

Author: Josh Colton

At Colton Wealth Management we are very aware of the level of trust that each of our client’s place in us. While we wish we could work with everyone, it is just not possible. However, just because we are unable to work with a client does not mean we don’t hope they get the absolute best service possible. Before you add a financial advisor to your trusted circle whether it be Colton Wealth Management or any firm, here are ten questions to ask yourself before signing any contract.

1. Do you like them?

Seriously, do you like the person who you met? Ideally, your financial advisor will be a part of your life from the day that you engage them until the day you pass away. That is a long relationship! I will discuss the more technical aspects below when considering a financial planner but consider if this is someone you are going to want to work with for the foreseeable future. Additionally, a financial planner is as good as the information they have, and because of this, working with a financial advisor will require you to be open and frank about your financial situation. Make sure your financial advisor is someone who you feel comfortable talking about the intimate details of your financial life.

2. Are they a Fiduciary?

A fiduciary is a person who is bound by law to act only in the best interest of their clients. You would think that every financial advisor should be bound by fiduciary law, but unfortunately, they are not. As crazy as that sounds, some financial advisors are bound by a suitability standard, which means that the advisor must only believe that the recommendations they make are suitable for the clients. A fiduciary advisor, however, is legally bound to act in your best interest rather than only reasonably believe that they are. This does not mean that an advisor who is not a fiduciary is a bad choice to work with, only that you should be extra careful in determining if you trust them with your money.

3. What certifications do they hold?

What makes an advisor credible enough to advise on all these different facets of your financial picture? First, an advisor who gives investment advice to their clients for compensation will need to hold one of only a handful of certifications. The most respected certifications in the industry are Certified Financial Planner (CFP) and Certified Public Accountant/Personal Financial Specialist (CPA/PFS). Holding one of these certifications do not guarantee a competent advisor, but it does show that they have gone through a rigorous examination and meet continuing education requirements.

4. What is their Fee-structure?

There are four main ways that an advisor will be paid 1) Fee-only 2) Retainer model 3) Fee-based and 4) Commission. Of the four listed, I prefer the Fee-only and the Retainer model because they limit conflicts of interest. A conflict of interest is when what may be in the client’s best interest is not in the advisor’s best interest. For example, an advisor who is selling Insurance A and B may be more inclined to recommend a client insurance A which pays him/her a 7% commission rather than insurance B which only pays a 3% commission even though B may have been both cheaper and better for the client.

How advisors using each model are compensated:

Fee-only: Charge a fee usually on the investments that the advisor manages for a client. For example, a 1% fee is typical in the industry, so any client with $1,000,000 invested with the advisor would be paying $10,000 a year. This model limits conflicts of interest because the advisor is not paid from the products he/she recommends but rather the value of your portfolio.

Retainer model: This model usually requires an upfront fee be paid to the advisor to prepare a comprehensive financial plan, which is then followed by a monthly subscription like payment for the advisor’s ongoing services. Similar to Fee-only, this model eliminates most conflicts of interest because the advisor does not make money from the products he/she recommends.

Fee-based: A hybrid between Fee-only and Commission, Fee-based advisors charge a fee for the investments they manage but also can make a commission off the products they sell to a client.

Commission: Advisors in the pure commission service model live in a world of “you eat what you kill”, or in other words they only make money if there is a transaction and you purchase a financial product they sell.

5. Do they consider tax implications in their investment philosophy and financial planning advice?

When meeting with an advisor, pose the question, “How is tax planning incorporated into my investments and financial planning?” The ideal answer is that 1)They consider taxes when creating your asset allocation and 2) They either are a CPA or will work with your CPA when the time comes to determine from which accounts to take distributions (Assuming you have tax-deferred, tax-free or taxable accounts) 3) They consider the implications of taxes on your overall financial plan (social security planning, rental properties, selling of a home, Roth vs IRA contributions, gifting strategies, etc).

6. How will you and How often will you communicate?

Different advisors have different schedules to both meet with their clients as well as communicate with them. Typically, what I have seen is advisors meet with their clients between 2-4 times a year. Some advisors are always in person, some are completely virtual, and others offer a hybrid between the two. Knowing how often you will need to meet with your advisor as well as your preferred communication method can quickly help narrow what advisors you would be willing to work with.

7. Do they consider the assets they won’t be managing?

You may have a portfolio that does not need to be managed by your advisor. I have seen clients with multiple financial advisors as well as portions of their portfolio that the advisor cannot manage. Some advisors will not take on clients who do not give them management of all the client’s assets, and others do not see it as a problem. When working with an advisor who only has a portion of your investable assets be sure first that they will consider your assets not held with them and two, you will need to provide them with the information about those assets. This is important because considering all your investable assets is the only way to build an asset allocation to your specific needs.

8. What will they do for you?

One of the most common misconceptions when it comes to financial planners is that people believe that they are purely investment advisors. A financial advisor is more than just a person who helps with investments. A financial advisor who only focuses on your investments would be ignoring other critical parts of your financial picture that should have an impact on the way your investments are allocated. Financial planning, at its core, is made up of seven key areas that every financial advisor should be addressing with their clients. Those areas are

1. Retirement planning
2. Cash flow planning
3. Tax planning
4. Investment planning
5. Insurance/Risk planning
6. Estate planning
7. College planning

Not only are each of these areas critical to one’s financial picture, but they are all interconnected in a way that ignoring one will reduce your ability to complete another fully. A financial advisor is much more than an investment coach or a stock picker, an advisor’s goal is to address your whole financial picture so that every facet of your finances can work in harmony with one another.

9. What is their investment strategy?

Different advisors will have different investment strategies. Broadly defined, there are two schools of thought, passive investing and active investing. Those who practice active investing try to beat the market by tactically choosing/avoiding investments that they believe are undervalued/overvalued. This strategy can be more of a roller coaster ride and many studies question if it truly does beat passive investing. Passive investing is a more systematic approach that believes in the power of diversification, low cost and the long-term term view of investing. A passive strategy will not eliminate risk, but the highs and lows are often not as dramatic. Either strategy can help you meet your investment goals so you should work with an advisor who has a strategy you are comfortable with.

10. Have you looked them up?

Use: https://brokercheck.finra.org/

Brokercheck.org is a site run by the Financial Industry Regulatory Authority (FINRA) website. At the top of the page is a search engine that allows you to search any broker, advisor, or firm by name, firm, or city. Once you have found the advisor, you will be able to see information such as if they have been suspended in any jurisdictions or any disclosures they have been required to make such as criminal history. This information can be critical in deciding who you feel comfortable working with..