The questions below are useful to ask a financial advisor. There are many bad advisors out there. But the right questions can help weed them out. A great financial advisor is worth their weight in gold…
Top Questions to Ask a Financial Advisor
If you have any questions, feel free to respond to my YouTube video. You can open it on YouTube to leave me a comment. I’ll keep a close eye out for your messages.
The best questions to ask a financial advisor focus on compensation. Here are a few questions to ask…
- How do you make money?
- Are you a fee only advisor?
- Do you make commissions on products?
This can reveal conflicts of interest. If a financial advisor makes money by selling certain products, they’re often not the best products. Advisors from big firms tend to sell annuities and insurance with lots of embedded fees. That’s one reason they’re able to get bigger commissions.
I wouldn’t recommend annuities to 99% of people!
Sure, you’re often better off than having not invested at all, but I wouldn’t recommend these to my family and friends. There are better ways to protect and grow your nest egg. And these conflicts of interest are one huge reason I didn’t take the traditional financial advisor route.
After double majoring in Finance and Accounting, many insurance companies tried to hire me. But they require you to build your own book of business. They want you to sell their products to your friends and family. This was a big no-go for me.
The questions to ask a financial advisor above are a great place to start. As you narrow your search for an advisor, here are some more tips to keep in mind…
Is Your Financial Advisor a Fiduciary?
This question ties into the previous ones. A fiduciary is a person (or business) that works in the best interest of their clients. This is an ethical and legal requirement. However, not all advisors are fiduciaries.
In 2017, the Department of Labor planned to start phasing in tighter fiduciary rules. And leading up to this, we saw a drop-off in annuity sales. Fixed annuity sales dropped close to 10% from 2016 to 2017. It was even worse for variable rate annuities.
However, the U.S. Fifth Circuit Court of Appeals shot down these new fiduciary rules in 2018. With billions of dollars worth of annuities on the line, I’m not surprised to see this stopped. As a result, we saw annuity sales hit new highs in 2018.
I’m sharing this recent history to back up why annuities don’t make sense for 99% of people. Segments of the insurance industry were quaking in their boots. With an easy search, you can find lower cost investments that provide better risk adjusted returns.
Overall, it’s good to ask a financial advisor if they’re a fiduciary. If that’s the case, they won’t likely recommend annuities. Or at least limit it to lower cost products.
This approach ties into one of the financial advisor questions above… ask if they provide fee only services. This means they shouldn’t make money off you by recommending certain products. Finding a fee only advisor can help limit conflicts of interest.
Signs of a Good Financial Advisor
After asking these questions to a financial advisor, you can move to the next step. Good financial advisors should gather lots of your info.
If you’re looking for thorough financial advice, advisors need to get a full picture of your financial situation and goals. It’s a good sign if they ask for records of income, past taxes, debts, investments, etc. On top of this, they should ask questions to find your short- and long-term goals.
From the financial advisor’s perspective, managing clients is the most challenging task. Everyone has a different ability and willingness to invest. Even with an optimal portfolio strategy, it might not be the best for the client. For example, seeing too much red might lead to the client selling investments at the worst time or switching advisors.
One key to investing is learning how to ignore short-term swings and play the long-game. Market downturns are inevitable. As a result, another good sign of an advisor is good communication, especially during a downturn. This can help clients avoid overreacting to short-term market moves.
Signs of a Bad Financial Advisor
On the other side of the coin, here are some red flags to watch out for…
- High fees
- False urgency
- Lack of communication
- Complex wording and obscurity
- Bad reviews online
- Lack of credentials
You’ll also often find poor performance as a sign of a bad financial advisor. However, it’s hard to measure performance without enough time…
Many people have reached out to me asking for advice on switching advisors. That’s often after seeing bad returns over a few months or a year. But depending on your investment strategy, these might be normal swings. And sticking with it for a decade or more still might provide better long-term results.
For example, I’ve seen one of my biggest retirement portfolios drop close to 30%. It wasn’t fun to watch, but I held steady with my strategy. And since, it’s gone on to hit new all-time highs.
By the time I’m tapping into these funds, I wouldn’t be surprised to see it 10x my total contributions. And this would far outpace inflation. Given enough time, compounding becomes a magical force. To learn how this works, check out my CAGR calculator.
Is a Financial Advisor Worth It?
You can go far managing your own money, but as your nest egg grows, it can become more complex. You might miss small investing or tax strategies that can have a huge impact. For example, simple tax moves can save you thousands of dollars a year. Not only that, but investing those savings can turn into hundreds of thousands.
For one big example, I’m 31 and did a Roth conversion last year. Since I wasn’t working and in a lower tax bracket, I converted $93,000. Check out the article link to learn more on why I made that move. You can take advantage of these tax strategies as well.
Over the years, I’ve been tempted but haven’t become a financial advisor. And once again, there are many good ones out there. If I do pivot towards financial advising, that’s what I’d strive to be…
I’ve thought deeply about investing and retirement planning. I double majored in Finance and Accounting, as well as passed the CFA exams. The core study material for the three CFA exams was 6,000 pages. To say the least, I’ve picked up some useful knowledge to share.
I hope my insight helps when asking questions to a financial advisor. And once again, if you have any questions, feel free to reach out.