Hiring a Financial Advisor? Ask these Questions First

You’ve decided to hire a financial advisor. Now you find yourself sitting in an armchair in the investment firm’s waiting area. And you just can’t shake the feeling that you’ve forgotten something. 

The financial advisor emerges through a door, smiling. She invites you into her office for your initial meeting. From across her desk, she asks, “What questions do you have for me?”

There it is. That’s what you were forgetting.

If you’ve never hired a financial advisor before, the process can be overwhelming, even a little intimidating. How do you know if you’re choosing the right one? Is there a way to know if they’re any good at their job? 

Even knowing the right questions to ask can feel daunting. After all, you’re no financial expert. That’s why you’re sitting across the desk from this financial advisor, seeing if she’s the right fit for you, but drawing a blank on what you’d like to know.

Well, fear not. We’ve got 5 tips from a financial advisor on what questions to ask before you decide to hire one: 

 

1. How are they compensated?

No financial advisor is doing their job out of the goodness of their heart. It is a paid profession, and it behooves you to ask how, exactly, the advisor you’re interviewing earns their income. 

There are 3 main ways:

1. Commissions
2. Flat Fees
3. Fee-Based (percentages)

Depending on how they get paid, their approach to your account will vary — ranging between selling you products that manage your portfolio, to a hands-on, active management approach. We’ve written extensively on the difference between these types of compensation. Check out this post for more information on that. 

 

2. Are they independent or captive?

Captive advisors are, as the name implies, beholden to the broker-dealer firms for which they work. Their job is to match the client with the firm’s product that is most “reasonably” suited to them. For this service they make a commission. There is an intrinsic conflict of interest – do they do what’s best for the client, or what’s best for the firm?

In order to get paid, they must sell. That makes the firm their boss — not you.

In the colorful words of NEST’s investment manager, Sean McDougle, “Independent advisors do whatever the hell they want.”

Because they are generally fee-based, their income is in direct proportion to the health of your portfolio. That means they work for you to grow your investments. And the better you do, the better they do.  

 

3. What are their credentials?

You know, those fancy letters at the end of people’s names? Sometimes they really mean something. If you’re going in for a surgery, you want the surgeon performing it to have that M.D. behind their name. 

Similarly, when you’re hiring a financial advisor, look for designations showing your candidate has gone back to school post-bac and studied something specific to their area of expertise — or they have equivalent qualifying experience (which can sometimes be better).

Because there isn’t one particular credential that financial advisors must get in order to practice, the industry is ripe for malfeasance. To ensure you don’t become a victim of it, keep an eye out for the following designations:

• CFP® – Certified Financial Planner — considered the gold standard for financial planners. An advisor with these letters after her name holds a bachelor’s degree and completed the very difficult CFP exam.
• CFA® – Chartered Financial Analyst  —  a gold standard in financial management, analysis, and planning, and involves passing three levels of exams for certification.
• CPA – Certified Public Accountant — accountants and tax advisors for individuals and businesses, both large and small. This designation is also generally required for those working in auditing or public accounting.
• CIMA – Certified Investment Management Analyst — associated with The Wharton School of Business at the University of Pennsylvania

Conversely, keep an eye out for advisors who misrepresent themselves with false or exaggerated credentials. 

It’s also important to remember that even the most reputable designations are only one piece of the puzzle. Just because someone is a CFP doesn’t mean they are a skilled or experienced financial advisor.

 

4. Do they charge for financial planning?

There’s no such thing as a free lunch. And if you can’t even get a club sandwich without strings attached, you sure as heck ain’t getting financial advising services for free. 

It’s an old trick to get you in the door. Some financial advisors hang their shingle and tout promises of free financial planning services. And it all seems legit … at first.

Eventually you’ll learn that they’re making their money on the back end through a bunch of commissions. 

If you’re getting the service for free, they’re not working for you. You’re not the boss — you’re the mark.

You want to work with people who charge up front and honestly. Creating a comprehensive financial audit and plan is a lot of work, and having it done well by well-qualified CFPs is the foundation for your investment strategy. 

And when you pay up front, you know exactly what you’re paying for, and how you’re paying for it. You’ll never have to wonder if that service they’re selling really benefits you, or if your advisor is just trying to get paid for their “free” financial planning services. 

 

5. What’s their investment philosophy?

You might read this question and think, “I wouldn’t know a good investment philosophy from a bad one, anyway.”

So, we’ll make this easy — be on the lookout for words like “set models,” “modern portfolio theory,” “60/40 model,” or “static portfolio.”

These are all indicators that your financial advisor is setting your portfolio up according to a certain model and forgetting it. Essentially treating your investments like a Ronco kitchen appliance. “Set it and forget it!”

This is an approach that Sean calls “the lazy way of doing it.” They’re either selling you a product or charging you a fee, and then not really touching your investments. 

At NEST, we actively manage portfolios. Think of it as more of a risotto approach. If you’ve never made the Italian dish, just know this — it takes skill, technique, and a lot of attention.

To belabor the food analogy, it also takes good ingredients.

Where your advisor gets their data is critical. A good rule of thumb from Sean — “Anything that’s free is shit.” 

Beware of advisors who use mainstream media outlets as their source of intel for making moves with your investments. These mainstream outlets are owned by powerful players who most certainly have agendas of their own.

Ask your potential financial advisor what financial data subscription services, like Hedgeye or Quill Intelligence, they use to get their data. If they can’t answer, someone else is interpreting the data for them, and that someone has their own interests in mind — not yours.

 

Bonus question — Do I vibe with this advisor?

I know, we said we’d only give you five questions, but what the heck. 

This is a question for you to ask yourself. When it comes down to it, is this someone who seeks to help you navigate your financial journey? Or are they just out to make a buck? 

Now you’re really ready to start interviewing financial advisors. You’ve got a list of questions and a better understanding of what you’re actually looking for. 

Why not schedule a no-obligation call with NEST? We are ready and eager to answer any and all of your questions. At NEST we are passionate about helping Austin, Hill Country and Texas-based individuals, families, and entrepreneurs plan for their futures, and thrive in the now. Reach out to us at info@nestfinancial.net.

 

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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net. Learn more about our investment management services and Sean’s process, and then send us a note at info@nestfinancial.net.