Heritage Financial Planning

The Top Questions To Ask Your Financial Advisor

October 11, 2022

Few things are as important to your peace of mind and security for the future of yourself and your family as the management of your wealth. Increasing your income, and more importantly, preserving your cash flow throughout the years, is important for large purchases, retirement, and having enough to keep your family safe, secure, and well-financed. 

This is why it is often a good idea to consult a professional to manage your hard-earned capital. Working with a financial advisor could add between 1.5%-4% return to your portfolio, on average. The benefits don't just stop there, as a good advisor will also give you peace of mind, and maybe licensed for other advice, such as long-term planning.  

But in a world where Robo-advising and self-directed accounts allow you to take control of your finances, why should you entrust your entire wealth to a financial professional? The short answer is to that very question: they are financial professionals who have made your satisfaction and performance their #1 priority. In this article, we'll go over the top 7 questions to qualify your next financial advisor to see if they are serious and a good fit for your family.

1. Determine the nature of the relationship and its responsibility.

Financial advisors are not all created equally, and there are various titles that they can use to appear professional. Furthermore, a financial advisor can be more or less qualified in all areas of wealth management with the same title. The most important factor to determine is their responsibility to you. An investment advisor who holds a fiduciary duty to you will be responsible for the performance of your portfolio and will make the necessary changes. This is opposed to some retail bank branches advertising "financial advisors" who may only be trained in general funds and certain investment classes that are "deemed" suitable in their system.

2. What is your fee structure?

Generally, there are three different types of ways that advisors make their money from your portfolio: Commission, Fees, and Portfolio Management. It is a great idea to ask your advisor how they get paid and what their policy is on this. For example, it can be common for a commission-based advisor to charge you only for trades placed. It is also common for a fee-based structure to be between 1 and 2% of your portfolio. A managed portfolio could contain a different structure altogether, such as a monthly retainer for unlimited trades and performance. 

3. What are my initial, monthly, quarterly, and annual costs?

The sign of a good financial advisor will be if they are up-front about all your costs, even before you ask about them. This includes the initial fee for transferring any assets you may have and any regular costs. This includes trade commissions, retainer fees, and performance fees and may include overhead fees. Make sure to ask about the validity of any costs, as regulators are very strict on what they allow advisors to charge for.

4. Ask for their qualifications.

A financial advisor can have many acronyms to their name, including other areas that they may provide, such as insurance. A well-recognized industry standard is the CFP (certified financial planning) designation, but they may hold many others. Don't be afraid to dive deep, as a truly well-qualified professional will be more than happy to list their accolades.

5. Establish a cadence for your communication and contact, or if they already have such a structure in place.

Advisors generally already have a structure in place for client communication, and will let you know how often they will contact you, especially any ad hoc requests (such as material changes and account updates). There is a massive red flag if the advisor is unprepared for this question.

6. What is your investment style, philosophy, and approach?

Established advisors will have an approach that seems natural and effortless, as well as tailored to you. Advisors will determine your goals and risk appetite, including your capacity and tolerance. Knowing the difference is crucial, as risk tolerance is the measure of your appetite to stomach violent swings in the market, and capacity is your financial ability to "weather the storm."

A good advisor will be able to explain their philosophy very simply, including its asset allocation. If the advisor is also a licensed portfolio manager (PM), you can ask what their models look like and who develops them.

7. What metrics do you use for success?

If you've ever seen an advertisement regarding investment performance, there are usually many caveats, conditions, and fine print that you're not seeing. For example, if someone advertises a 14% annual return, this could mean during 200 years, on average, using only certain investments. This is why it is important to ask your advisor what the benchmark is for success, and what they will do to achieve it if it falls short.

How should I make my decision?

With the above questions, you will more than likely make the impression that you are serious about finding someone qualified and with a record of good performance. Ultimately, the advisor can answer every question correctly and similarly to others and you may see yourself at a crossroads.

Remember that these questions are just guidelines, and the advisor may already have the answers to these questions during their presentation, plus further demonstrations of their portfolios and their assets under management. 

To reach one of our financial advisors view our financial planning firms near you.

Written By: Heritage Financial Planning Team

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