You wouldn’t trust just anyone with your kids, your mental health or even your hair, so you should be just as picky when it comes to the person who manages your money. But with so many financial advisors out there, it can be tough to know if you hired the right person for the job.
One way to find out: Before you sign on, ask advisors a few probing questions to find out if they have your best interests at heart and understand what you need as a client. Here are nine to get you started.
1. How do you get paid?
There are many ways financial advisors get paid for their services, including commissions from selling certain funds, insurance commissions, charging a percentage of assets under management, flat fees and hourly fees.
“Understanding of how a financial advisor gets paid will help clear up whether they are working in your best interests or not,” said Charles Ho, a certified financial planner and the founder and CEO of Legacy Builders Financial. That’s because advisors who earn money by selling you certain investments or products will likely give you biased advice that benefits their wallet above yours. Fee-only advisors, on the other hand, don’t have any conflict of interest when it comes to managing your portfolio.
He added that asking advisors how they’re paid can help you weed out inexperienced professionals. “There are many financial advisors who are so new and still drinking the Kool-Aid of whatever firm they are at that they don’t have a clear understanding of how clients are being charged fees,” he said.
2. How many clients do you work with?
Finding out the size of an advisor’s client base can tell you a lot about what kind of service you can expect to receive. For instance, if advisors have a lot of clients ― say, over 200 ― they’re most likely financial salespeople and not financial planners, said Michael Mustian, an accredited asset management specialist and the founder of WisePath Advisors. They need to continually get more clients in order to make a living, which he said poses a conflict when trying to do what is in the best interest of the client.
On the other hand, if advisors don’t have many clients ― fewer than 40 ― they may be just getting started and may not have much experience. He said the sweet spot is 75 to 100 clients for one advisor, though a person can handle closer to 150 with a team for support.
“The big reason this is important is … if you are having someone put together a plan for you today, you really want them for the long haul to make the necessary adjustments,” Mustian said. “You don’t want to be seen as just a commission check for someone in sales or a guinea pig for someone brand new to the industry.”
3. How do you track success for your clients?
If you pay an advisor to manage your investments and grow your wealth, you want to make sure you’re getting results. When meeting with potential advisors, you should find out how they measure and track client success over time.
Jirayr R. Kembikian, a certified financial planner with Citrine Capital, said it’s important to look at not only the quantitative financial metrics but also the behavioral changes you’re working together to improve. “Review these metrics at least on an annual basis to determine if the relationship is successful or needs to be modified,” he said.
4. How is your money invested?
You probably wouldn’t want to visit a nutritionist who eats nothing but pizza and fries or a doctor who smokes two packs a day. So when it comes to financial advisors, you want to know that they practice what they preach. That’s why you should ask advisors how their money is invested.
“If they are not willing to tell you or show you how their own money is invested, then maybe they don’t completely believe what it is that they are telling you,” said Michael Troxell, the principal and founder of Modern Financial Planning. “That would be a good indicator whether to continue the discussion or not.”