5 questions to ask a financial advisor before hiring them

If you're thinking of working with a financial advisor, how can you be sure you are getting the right one for you? One who understands your situation, will put your interests first and help you achieve your goals?

If you were hiring a plumber, you would probably talk to friends and family to get recommendations, read some online reviews and do some research on company complaints. But when it comes to a financial advisor, what do you do? Here are five questions to ask potential financial advisors.

1. What are your qualifications and experiences?

It's important to know that someone you will be working with has the qualifications and experience to meet your needs. But just because someone doesn't have extensive experience doesn't mean they're unqualified or wouldn't be a great financial advisor for you. Only you can determine what level of qualification or experience you are comfortable with or can pay for. As with many industries, working with someone with more experience and more qualifications is often more expensive.

Education or financial designations

Designations or certifications are one way a financial planner can show their level of education and special areas of focus. One of the financial industry's top designations is the CFP®, or CERTIFIED FINANCIAL PLANNER™.^{See note1} I have a CFP® and can say that it's hard to get — the knowledge level required to pass the exam is very high, and there are rigorous continuing education requirements.

Other designations include the Chartered Retirement Planning Counselor,^{See note1} or CRPC® and the Certified Wealth Strategist,^{See note1} or CWS®. I'm not advocating one designation over the other, but it's important to realize that someone who holds one of these designations has taken additional steps to study, learn and pass an exam to be more qualified to help you. Most, if not all, designations have continuing education requirements to be qualified to continue to use the designation, along with ethical and behavioral standards.

In addition to designations, financial advisors can pursue licenses, which are controlled by the Financial Industry Regulatory Authority, or FINRA.^{See note1} For example, some advisors might list Series 7 or Series 6. These are not industry designations, but licenses to conduct certain securities transactions.

Business model and services

Understanding what business model the financial advisor operates under is also important. For example, you might encounter a financial advisor who works for a broker/dealer, a company that facilitates the transaction of securities on behalf of its clients or itself. This type of financial advisor, also called a registered representative in this case, can provide a great financial plan and advice, but the solutions they offer as part of their recommendations can be limited to the products the broker/dealer offers.

That could be a broad range of products, or just a few — they might sell someone else's securities or sell their own propriety mutual funds and ETFs. Remember that just because someone is narrowly focused on the product or solutions they offer, doesn't mean they're not providing sound financial advice and a solid product that will meet your needs.

Other financial advisors might work for a registered investment advisor, or RIA. An RIA is a firm that manages investments and is registered with either the U.S. Securities and Exchange Commission or state securities administrators. An RIA doesn't work for a particular broker/dealer or mutual fund company but does work for you.

Experience in the financial industry

The experience level you need is directly related to your financial situation. If you only need help with budgeting and basic investment advice, a financial advisor who is just starting out can probably serve you well since your needs aren't very complex. But if you have $100 million in the bank and need complex estate planning and investing strategies, you'll probably be better off with an advisor — or team — with more experience.

It's the same way I look for a doctor. If I'm just going in for an ear infection, I'm good with someone right out of medical school or a general practitioner. But you're not doing brain surgery on me your first day on the job and without adequate experience. I'm going to a specialist but will expect to pay more for a brain surgeon than a general practitioner. If I went to my brain surgeon for my ear infection, I'd be paying more for extra experience that I don't need for the situation.

Also, each financial advisor will have an area where they are more comfortable or where they've focused their work, while still being competent in many areas. My area of focus as a financial advisor is all things related to military finances. I came into that area of specialty because I'm a CFP® and a retired lieutenant colonel from the U.S. Air Force Reserves.

I have lived the military lifestyle and am trained as a financial advisor, so I understand service members' unique circumstances and needs, whether they're active duty or transitioning out of the military. There are intricacies that I understand because I've experienced them, so I am better prepared to help clients craft a financial plan that works for them. But that doesn't mean I couldn't work with civilians.

Because no one can be an expert in every area, it's normal for many financial advisors to bring in someone with more experience in a particular area to help address your needs during the financial planning process. But it's still a good idea to go with a financial planner that offers most of the services and has the expertise that you need.

For example, if you need help setting up and funding a special needs trust, you might have the most success with someone who has experience in that area and is familiar with the complexities involved.

2. Are you a fiduciary?

A fiduciary is legally obligated to act in your best interest at all times. They're required to put your interests above their own in all matters. Brokers/dealers fall under the Best Interest standard where they're required to act in your best interest at the time the recommendation of a security or service is made.

Also, make sure to inquire about any conflicts of interest. If your would-be financial advisor refers you to someone for help with a specific portion of your plan, are they receiving a commission for that referral? Are they incentivized to promote one mutual fund or one life insurance product over the other? You want to be comfortable working with a financial advisor you trust to put your interests above theirs.

3. How do you charge for your services?

You should ask how the financial advisor gets paid. This will often highlight their motivation or any potential conflicts of interest. Here are some of the most common ways advisors get paid:

• Commission. This is common for broker/dealers. They get paid when they sell a product. The financial advisor might offer a retirement plan and then seek to fulfill that recommendation with the products their firm sells.
• Assets under management. A financial advisor might charge a percentage of your assets. For example, let's say they manage your $100,000 portfolio and their rate is 1%. That means you'll pay $1,000 each year for them to manage that portfolio.
• Fee only. This is one area to describe those who do not receive commissions for the sale/recommendation of particular products. There are many different types of fee-only financial advisors:
  • Flat fee. A flat rate for services. For example: $250 for cash flow analysis, $250 for life insurance need analysis, or $2,500 for a comprehensive plan.
  • Hourly. An hourly rate, such as $175 or $250 per hour.
  • Combination. A mix. For example, a financial advisor might charge a flat fee for one service (say, $2,500 for a one-time delivery of a comprehensive financial plan), an hourly rate for other services (for example, $250 per hour for one-topic analysis, like cash flow planning), or a package (like $5,000 for a yearly contract that includes a comprehensive financial plan, implementation assistance, monitoring and one year of monthly touchpoints).
  • Fee-based. This is like the combination method, but it can include aspects of commissions as well. The advisor might charge $2,500 for a plan and 0.5% for assets under management, but also receive commission based on the investments selected.
• Salary. This is often seen at larger firms. The advisor is paid a salary to provide financial advice and to sell the firm's products. While they might not earn a higher commission for selling one product over another, they might have yearly product goals they are striving to hit.

It's important to understand that you can find great financial advisors in all models — you just need to understand how you'll be paying for their services before entering a contract with them, so there aren't any surprises.

4. What types of financial services do you provide?

Can the financial advisor provide what you need? If you want a full financial plan but this financial advisor only focuses on life insurance planning, keep searching for someone else. Ask questions before committing to make sure the advisor you choose can meet all your needs.

Approach to investing and financial planning

Part of the conversation around services should include questions about how the financial planner handles investing and financial planning. Does their approach match yours? It's important to remember that they are the expert, which is why you're working with them, but your personalities and approaches need to match.

5. How do you stay updated with financial trends and changes?

I'll be the first to admit that it's impossible to stay on top of every single financial trend or change. That's one reason that continuing education is so important. It not only serves as a great refresher but also is one way to stay up to date with changes in regulations, laws and the current financial environment.

Ask the financial advisor if their designations are current — are they current on all their continuing education requirements? Don't be afraid to ask.

You should also feel comfortable asking about any financial news you've seen recently. Inflation has been in the news and is on top of everyone's mind. It's on my mind each time I visit the grocery store. Ask the financial advisor how recent inflation has affected their client's financial plans and actions they have taken. While the financial advisor doesn't control inflation, they should be able to answer how it's affected their clients' plans and the actions they have or have not taken, and why.

Working with a financial advisor is like working with a doctor. It can really benefit you if you listen to them, if they listen to you, if the personalities match up and if you follow their directions. Plus, an unbiased view of your finances can be "exactly what the doctor ordered"... pun intended.