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Wednesday, February 28, 2024

10 questions before hiring a financial advisor

10 questions before hiring a financial advisor 

06.08.2023

Whether you’ve been investing for years or are just getting started, a financial advisor can be a valuable ally to have by your side. This trusted individual can help you make investment decisions that align with your financial goals, as well as take on some of the heavy lifting when it comes to managing your investment portfolio. 

But how do you go about choosing the right advisor? The person you choose will be managing your money, so you’ll want to find someone you can trust and feel comfortable with. 

To help you narrow down your options and identify advisors who might be a good fit, here are 10 questions to consider asking your prospective financial professional. 

1. Should I do it myself? 

Before you sign a contract, think through the areas where you’re seeking financial guidance. Some people feel comfortable managing their own investment portfolios, but a financial advisor could be the right choice if: 

  • You’re ready to start investing but aren’t sure where to get started
  • You’re looking for insights on cash flow, spending, and budgeting
  • You’re interested in exploring strategies like building a more tax-efficient portfolio 

Only you can decide if a financial advisor is right for you. It may be helpful to meet with a few to see what services they can offer that match up with preferences and goals. 

2. Are you a fiduciary? 

A fiduciary is someone who has a legal and ethical duty to act in your best interests. Many professionals, including financial advisors, can be held to a fiduciary standard. 

When you’re searching for a financial advisor, consider someone who is a fiduciary. A non-fiduciary, while still held to some standards, must only recommend products that are suitable for you. Because of this, they may recommend a product that’s suitable and has a large commission rather than the product that’s really best. 

A fiduciary, on the other hand, must recommend products that are in your best interest, even if that means putting your needs ahead of their own. 

All Empower Personal Wealth advisors are licensed, registered fiduciary advisors, so they’ll have your best interests in mind. 

3. What are your qualifications? 

Just like in any other business relationship, it’s important to know someone’s qualifications, strengths, and weaknesses before working together. As you ask questions about your potential advisor’s qualifications, here are a few things to listen for. 

Experience 

Some advisors specialize in different areas of financial planning, such as retirement planning, estate planning, or tax optimization. Most have particular interests and can help you meet your specific goals. Check in with who else they serve, like high net worth individuals

Licenses 

The required licenses are Series 7 and Series 63, but many advisors get additional licensing, which can be a big perk depending on your financial goals. 

Certifications 

Additional certifications are common among financial advisors. A great one to look for is the CFP® or Certified Financial Planner certification. The CFP® board has some of the highest standards and ethics codes, so this is a great way to know you’re working with a knowledgeable and trustworthy advisor. 

4. How do you get paid? 

One of the most important questions to ask prospective advisors is how they get paid. There are generally two primary ways financial advisors make money: fees and commissions (or a combination of the two). 

Many advisors make money from the fees they charge their clients. Fees are often based on a percentage of assets under management (AUM), with a common fee being about 1%. For example, clients of Empower Personal WealthTM pay one all-inclusive annual management fee with no trailing fees or trade commissions. 

For primary and premium clients 

 

First $1M 

0.89% 

For private clients 

 

First $3M 

0.79% 

Next $2M 

0.69% 

Next $5M 

0.59% 

Over $10M 

0.49% 

 

The other way advisors can make money is through the commissions they earn when they recommend certain investment products. In this case, the money comes from the investment company rather than you as the client. 

5. How often will we interact? 

It’s important to know upfront how often you can expect to speak with your financial advisor and what kind of access you will have to them. 

Some financial advisors may offer to meet just once per year or when there’s a significant change to your financial situation. Other advisors may be willing to speak whenever you need, but only with a scheduled appointment. Finally, some advisors may be happy to answer questions via email or phone whenever they come up. 

Before hiring an advisor, think about what line of communication you would like to have with them, and make sure to choose someone who can accommodate that. 

6. What is your investment philosophy? 

An investment philosophy is a set of principles that guide how someone thinks about the market and approaches investing. It’s important to understand an advisor’s philosophy before you work together since it will guide how they manage your portfolio. 

Here are some different philosophies an advisor might have. 

Active vs. passive investing 

One of the most important decisions an investor or advisor must make is whether to take an active or passive investing approach. 

An active investment approach is one that involves regularly buying and selling securities to earn a higher profit and, ideally, beat the market. Active investing often tries to take advantage of short-term price fluctuations rather than long-term growth. 

Passive investing, on the other hand, involves buying securities (often index funds or ETFs) and holding them for many years to benefit from long-term growth. Passive investing can be cheaper and more effective in the long run. 

Your advisor doesn’t necessarily have to stick to just one of these strategies. They might combine both active and passive investing. 

High vs. low risk 

When you hire a financial advisor, it’s important that you’re on the same page about the level of risk you want to take on in your portfolio. While some risk is necessary to get solid investment returns, you don't want to be exposed to more risk than you have the tolerance or capacity for. 

Value vs. growth investing 

Value and growth investing are two different ways of choosing individual stocks. Value investing involves buying stocks that are underpriced with the belief they’ll rise significantly in the future. 

Growth investing, on the other hand, involves investing in companies you believe will grow at a faster rate than the market on average. Growth investors often invest in startups and other newer companies that have a lot of room to grow versus more established long-term corporations. 

Technical vs. fundamental analysis 

Technical and fundamental analysis are two ways of researching and selecting individual stocks. Technical analysis relies on previous price movements and historical data to predict the future stock price. Fundamental analysis, on the other hand, aims to determine the intrinsic value of a stock by examining its financial statements. 

7. How will you manage my asset allocation? 

Your asset allocation refers to how your funds are divided up in your investment portfolio. Your asset allocation is the percentage of your portfolio that is made up of stocks, bonds, cash, and other securities. 

When crafting your asset allocation, it’s important that you and your advisor keep diversification in mind. In other words, you shouldn’t put all your eggs in one basket and should consider spreading your investments across a variety of securities and asset classes. 

Your exact asset allocation is something you and your advisor should discuss, and it should match your risk tolerance and risk capacity. And over time, your advisor may need to rebalance your portfolio to ensure it sticks as close to your ideal allocation as possible. 

You can ask your advisor the following questions regarding your asset allocation: 

  • What asset allocation do you recommend?
  • When and why will you update my asset allocation?
  • How often will you rebalance my portfolio to maintain my asset allocation? 

8. Where will my money be held? 

When you have a financial advisor managing your investments, it’s important to understand where your assets are being held. 

Just as you would if you were managing your own investment portfolio, your advisor is likely using a third-party custodian to manage your investments. 

There are several reasons you may want your advisor to use a major custodian. First, it makes it easy for them to share information about your account with you. It also provides an added layer of security for you and reduces the chance of fraud. 

9. How will you manage taxes? 

Unless you’re only investing in tax-advantaged accounts, you can assume there will be some tax liability associated with investing, regardless of whether you’re using a financial advisor. 

First, ask your financial advisor what type of taxes you may be on the hook for based on your portfolio. Depending on what you’re invested in, you could pay taxes on capital gains, dividends, interest, and more. 

Next, ask your advisor what steps they take to reduce your tax liability. For example, do they choose more tax-efficient investments? Or perhaps use tax-loss harvesting to offset your investment gains. 

10. What other financial planning services do you offer? 

Some financial advisors solely help clients with their investment portfolios. But others are comprehensive financial planners who help you with all aspects of your personal finances. 

Some examples of services a financial advisor or planner may offer include: 

  • Cash flow planning
  • Debt management
  • Risk management/insurance
  • Retirement planning
  • Investment planning
  • Tax optimization
  • Estate planning

Even if you only need investment services today, think about the long term. When you go through major life changes — such as marriage, divorce, the birth of a child, or retirement — it may be helpful to have a professional who can offer more comprehensive services and advise you on your entire financial picture. 

The bottom line 

Choosing the best financial advisor for you is an important decision. The questions above can help you narrow down your list, but there may still not be an obvious winner. In that case, trust your gut. 

We’ve talked about how your relationship with your financial advisor is a lot like financial matrimony. At the end of the day, it’s important to have an advisor you feel comfortable with. 

Want a better way to manage your investments? You can use Empower’s free and secure online Empower Personal Dashboard™ to see all of your accounts in one place, analyze your investments, and plan for long-term goals saving for retirement. And if you’re looking for a financial professional, Empower offers access to fee-based financial professionals. 

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Erin Gobler

Contributor

Erin Gobler is a money coach who helps people pay off debt and reach their big financial goals without giving up spending on the things they love. She is a freelance writer for Empower.

Author is not a client of Empower Advisory Group, LLC, and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites. 

Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance. Investing involves risk. The value of your investment will fluctuate and you may lose money. 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. 

Advisory services are provided for a fee by Empower Advisory Group, LLC (“EAG”). EAG is a registered investment adviser with the Securities and Exchange Commission (“SEC”) and subsidiary of Empower Annuity Insurance Company of America. Registration does not imply a certain level of skill or training.