5 questions to ask a financial adviser before you hire one

Couple washing dishes and discussing questions to ask a financial adviserImage: Couple washing dishes and discussing questions to ask a financial adviser

In a Nutshell

Do you know that so-called experts can call themselves financial professionals without actually having the credentials? If you’re thinking of paying for financial advice, you should do some homework to find a qualified professional that’ll treat you right. We’ve got a list of five questions to ask financial advisers as part of your search for a competent expert to help you handle your money.
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There are three big things you should know before hiring a financial adviser.

  • Whether the financial adviser is acting in your best interest
  • What that person’s qualifications and skills are
  • How the financial adviser makes money

Finding out these facts can be more difficult than it seems, especially with an almost-endless list of financial certifications that advisers can tout. Unfortunately, not all certifications are from federal or state regulatory authorities or come with the same level of oversight — which means you can’t use a certification as a shortcut to figure out if an adviser is any good.

That’s why the following five questions may be able to help you evaluate advisers.

Five questions to ask a financial adviser

Ask any financial adviser you’re interested in working with these five questions, and write down the answers so you can review them and verify anything you don’t understand.

  1. Are you acting in my best interest?
  2. What certifications do you have?
  3. What are your specific areas of expertise?
  4. How do you charge?
  5. How will you invest my money?

1. Are you acting in my best interest?

Good financial advisers should put their client’s best interests first. Financial advisers legally required to act in your best interest are known as fiduciaries, but not all advisers are held to the fiduciary standard. When you’re looking for a financial adviser, consider asking these questions …

  • Will you act in my best interest and put my interests, in managing my assets, above your own best interests?
  • How will you handle potential conflicts of interest?
  • Where will my money be held? How can I withdraw my money?

Any financial adviser you hire should be acting in your best interest when managing your money. But when you’re considering hiring someone ask them how they intend to work in your best interest. The CFPB recommends asking an adviser to put in writing any potential conflicts of interest.

2. What certifications do you have?

The Financial Industry Regulatory Authority has a list of more than 180 different designations issued to financial professionals.

Some of these designations require individuals to have completed certain coursework, show proficiency in their field, have practical work experience, and participate in continuing education.

Ask any financial adviser that you’re considering what certifications they’ve received and then research the organization that issued them to find out …

  • What level of training is required to become certified
  • What the organization’s standards are for issuing credentials
  • Whether you can file a complaint with the organization
  • How members of the organization are disciplined for violations

If the organization is accredited and there’s a complaint process, these are usually good signs. If you’re not sure where to start, certified financial planners are among the professionals who’ve fulfilled comprehensive certification requirements.

3. What are your specific areas of expertise?

Managing money requires a vast array of knowledge. An adviser certified in a particular area might not have strong experience handling the types of financial issues you need help with. If your primary goal is to get out of debt, hiring a financial professional with expertise in investing might not make a whole lot of sense.

Ask any potential advisers whether they have specific experience with the money matters you need help with. Some common areas of specialization include …

  • Insurance planning
  • Business planning and budgeting
  • Income-tax planning
  • Planning for retirement
  • Estate planning

You may decide to work with multiple professionals to get the most-comprehensive advice from a true expert in each particular field.

4. How do you charge?

You don’t want to overpay for financial advice because your adviser is padding the bill. That’s why you should find out how much a potential adviser charges, how fees are structured and what services are included.

There are a few common ways financial advisers charge.

  • Fee only: Advisers are compensated with a set fee regardless of what investments they make on your behalf. You might pay an hourly rate, a flat fee or a percentage of assets they’re managing for you.
  • Commission based: Advisers are paid when you buy or sell an investment, such as a particular insurance policy or stock. This can be problematic because advisers have an incentive to sell products for which they’re paid a commission — even if the products are not right for you.
  • Hybrid structures: These are sometimes described as fee-based models but aren’t fee-only. Hybrid models can also create the potential for conflicts of interest and could lead to abusive billing practices because these types of advisers typically also make commission.

Find out how any potential advisers are paid and ask the adviser to explain how charges are calculated. Also, make sure you know what you’re getting for your money. For example, will you pay both an hourly rate if you call your adviser with questions and commission on products you purchase?

5. How will you invest my money?

Finally, if you’re hiring a professional to actually manage your money for you, rather than just help you make a financial plan, it’s imperative you learn what the manager plans to do with your funds.

Some key things to consider include …

  • The adviser’s investment philosophy — Does the adviser prefer to buy and hold assets or trade regularly? Does the adviser think you should invest mostly in mutual funds or does the adviser pick specific stocks? Consider choosing someone who will talk you through the plans for your portfolio and expose you to the level of risk you are comfortable with.
  • What your adviser’s tax strategy is Some investments are taxable, but others aren’t. Your adviser should be strategic about minimizing your tax liability. If tax liability is a concern for you, you should consider consulting a CPA or tax attorney, too, for good measure.

Bottom line

Knowing what questions to ask a financial adviser is only the beginning. Doing your due diligence by asking questions of a financial adviser is important, but so is researching the adviser, reading reviews, and checking accrediting boards to ensure the adviser is a member in good standing. Remember, it’s your money and future at stake, so take the time to consider several advisers and find the one that’s right for you.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.