When you are searching for a financial advisor, what you are looking for is a Chief Financial Officer to help you run your family’s financial affairs. You’ll want to interview several potential candidates, and make sure you find the right person for the job.
You can ask about credentials and experience, but since you are hiring someone that has expertise that you don’t have, it can be difficult to determine if they are just a good talker, or if they truly have the right qualities for the job.
To help you see through the “sales talk”, I’ve compiled a list of five practical interview questions. The questions are designed so that you can use the answers to determine qualities like integrity and communication skills; qualities every good financial advisor should have.
Below are the five questions I think people should ask every prospective financial advisor.
5 Questions to Ask A Prospective Financial Advisor
You can ask these questions over the phone, in about 15 minutes, and thus use them to help you prescreen potential financial advisors, so you spend your face-to-face time only meeting with one or two that have potential.
1. Tell Me About Your Ideal Client
Any good financial advisor will have an area of expertise. You want someone who has expertise working with someone like you. If you’re about to retire, and they tell you they work with young families, maybe this isn’t the person for you. Find a financial advisor whose ideal client sounds very similar to your situation in terms of age, stage of life, and asset level.
2. How Long Have You Been Practicing As A Financial Advisor?
Personally, I wouldn’t hire a financial advisor that has less than four years experience, working as a financial advisor. You’re talking about your life savings. A potential advisor may have years of experience as a CPA, or in the mortgage or banking industry, but that doesn’t mean they have expertise as a financial advisor.
Many professional industries require internships or apprenticeships before you can be recognized as a professional, but as of yet the financial services industry does not have such a requirement, so to protect yourself, you need to set your own standard. (For an advisor to receive the CFP® designation, they now must have three years of practical experience. Congrats to the CFP® board for raising the bar.)
Along with years of experience, you may wish to ask the advisor what subjects they are most interested in pursuing. Their answers should reflect subjects that are pertinent to their ideal client. If they say they work with retirees, but they are most interested in actively trading currencies, that should cause you concern. An advisor’s continuing education and professional interests should be aligned with the type of client they work with.
3. Ask A Potential Financial Advisor to Explain A Concept To You
What you are looking for here is, can you understand their explanation? If they speak over your head, or their answer makes no sense, then move on. You want to work with someone who can explain financial concepts to you in language you can understand.
Below are five concept oriented questions to consider asking:
- What is passive vs. active investing?
- How do you determine how much of my money should be in stocks vs. bonds?
- What is a laddered bond portfolio?
- How do you determine how much money I can safely withdraw each year without running out?
- What do you think of annuities?
4. What Assumptions Do You Use When Running Retirement Planning Projections?
A retirement planning projection helps you see how much money you will have available to spend each year, from now through life expectancy. The projection is based on assumptions about the rate of return at which your assets grow, the pace of inflation, and your personal spending habits.
You want someone who uses a conservative set of assumptions; after all, you’d rather end up with more than what they have projected, not less. A conservative set of assumptions would be growing financial assets at 7% a year, using an inflation rate of 4% (meaning personal expenses go up by 4% a year), and increasing the value of real estate assets on paper by 2% a year.
I have seen financial plans run using 12% rates of return on financial assets, while assuming a 2% inflation rate. While this set of assumptions makes the future look rosy, it’s make believe. You need realistic projections to make appropriate decisions.
5. How Are You Compensated?
The key here is to listen for an honest answer. A financial advisor should be willing to clearly explain all fees you will pay to them, and all expenses you will pay associated with any investment they recommend. Answers such as “My company pays me,” or “You won’t pay anything out of your pocket” are not acceptable.
Common sense tells you that a person’s primary loyalty will be to the hand that feeds them. If they are paid directly by fees from you, as in the case of a fee-only financial advisor, than they will have an incentive to provide advice and service that is in line with your goals. If they are paid by commissions, or fees that are filtered through a broker dealer, than they are first and foremost bound to the products their broker dealer prefers them to use.
Additional questions to ask a potential financial advisor:
From the CFP® Board: Questions To Ask When Choosing A Financial Planner
From the National Association of Personal Financial Advisors: NAPFA’s Financial Advisor Checklist and Financial Advisor Diagnostic Tools