By Ryan Ovenden, Wealth Advisor
Looking for a financial advisor or searching for someone to give you a second opinion on your financial plan can be overwhelming. The list of people in our trading area calling themselves a financial advisor is quite extensive. To help narrow your list, here are six questions you should consider asking a financial advisor before you enter into a business relationship.
When asking, How do you get paid? You should also be asking, What are the total costs associated with the underlying investment?
The answers may vary depending on if the advisor will build you a comprehensive financial plan or simply manage your investments. The answers could be hourly, a flat fee, or a fee based on the level of assets being managed or commissions. Make sure to ask the necessary questions beyond the advisor’s first answer.
For example: Two advisors may say they charge one percent, the only difference is one is assets under management and the other is assets under advisement. The first example is based on your investment portfolio, the second response is on your net worth.
The other item to understand is both may say one percent for assets under management. This is why it is important to include the second part of the question because a distinct difference will be which advisor will also provide a breakout of the underlying cost of the investment. By asking the question the right way, you should get the total cost of working with your advisor of choice.
What is a fiduciary and are you one?
There has been a lot of focus in the last couple of years highlighting the difference between advisory and brokerage and best interest requirements. It is important to note that not all advisors are fiduciaries and it is even more alarming to the consumer because we really shouldn’t need a rule that defines the following. A fiduciary must conduct their business relationship in a manner that always puts the consumers interest ahead of their own, and they must be fully transparent when it comes to the total fees being paid by the consumer in addition to the adviser fee. Another important item that is not always explained is, are there any conflicts of interest for the advisor or any member of their team.
Do you have account minimums?
It is unfortunate that the industry continues to send the message through account minimums or minimum level of asset requirements, that access to a financial advisor is reserved for the financial elite. Having a small number of clients could be because the advisor is new in the industry or that they work with an exclusive type of client. It is equally important that an advisor doesn’t have so many clients that access to the advisor will be restrictive. Inquire about other advisors on the team or if the firm consists of a single advisor, what will happen to you if something happens to the advisor. Does the advisor have a succession plan to make sure your plan will proceed without interruption?
How often will we meet?
Your advisor should be able to articulate their process. Their process should include the frequency and format of your meetings in designing, building, implementing and the monitoring of your plan. To keep things in perspective, a fiduciary is required to meet with you, provide you with a review opportunity, and document that review at least annually. That is a minimum standard, so if you feel you would like to meet more often than annual, make sure you are clear in your expectations so you will not be disappointed.
What is your investment philosophy and your process for determining my risk tolerance and evaluating or building my portfolio?
The investment philosophy should be clear, concise, and in a language that is easy to understand. When it comes to risk tolerance, most advisors should have a process for helping you discover your risk tolerance, which is the amount of risk you can handle or stomach. When you are looking for an advisor who has an approach rooted in financial planning, they should also help you understand your risk capacity. If they are not able to fully explain and demonstrate both, I would suggest you keep looking.
If you were my advisor, please explain how taxes and my financial plan come into play?
There should be a discussion that distinguishes between tax preparation (which is the process of filing your taxes with the IRS) and tax planning. Financial, Investment and Tax Planning each have an effect on the other. Generally, your financial advisor will not provide specific tax advice, but you may want to inquire if they have specific software as part of the financial planning process that can provide further insight into financial and investment planning.
These are just the first six in a series of questions we feel everyone should ask their financial advisor. If you are still not comfortable with your existing advisor or the team you are considering, we can provide the next four questions to help you gain confidence in selecting an advisor that aligns with what is important to you.
If you are evaluating your existing advisor or considering engaging the services of a financial advisor, these questions are just the beginning. We would love to share our answers to these questions and others we feel are fundamental to building a solid road map for your financial and life journey.
If you would like to schedule a complimentary, no-obligation meeting with one of our advisors, give us a call at 605.271.6023 or visit www.pinnaclewealth.com