In the market for a financial advisor? Here are 8 questions to ask

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Know who you’re looking for.

© elnariz/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

When it comes to your finances, are you comfortable acting as captain of your own ship? Or would you feel better with a financial pro holding the wheel? If you’ve decided you would like (or need) to use a financial advisor, you’ll have to identify and choose one.

You can start by asking for referrals from friends or professionals such as an accountant, tax preparer, or attorney. You might even respond to advertising or look into the educational workshops and seminars that many advisors and firms offer.

You should schedule time to meet at least two and preferably three potential advisors. Even if you think you have a top choice, the perspective of other professionals can provide you with a better understanding of your situation and the relationship you’re pursuing.

When you meet prospective advisors, it’s important that you have questions to ask—not just for specific information you’re seeking, but to get a feel for how they interact with you (and your partner). Your comfort level and “chemistry” are important but often overlooked elements in selecting an advisor.

The client-advisor relationship should be a two-way street. The more comfortable you are providing honest and direct information, the more effective their guidance will be. You shouldn’t feel intimidated to use a specific advisor based on their qualifications or rankings.

Before you put together your list of questions, reflect on why you’re seeking the help of an advisor in the first place. Common reasons include:

With your reasons for using an advisor firmly in mind, you can choose the questions you plan to ask. There are usually no rigid right and wrong answers for these questions. What’s more important is how a prospective advisor answers them. Are they prepared? Is their reasoning sound? Do they speak in a manner that you understand, and are they comfortable with your follow-up questions? Or are they aloof, dismissive, or—worse yet—defensive when you grill them?

Here are eight basic questions you can ask prospective financial advisors.

Question #1: What is your investment philosophy, and how will you select my investments?

Some advisors (or advisor teams) may select stocks and bonds themselves, while others may use third-party managers, such as mutual funds or separately managed accounts. An advisor may have a philosophy of using index funds and passive investing. Advisors should be able to explain the process they use within a philosophy to select investments or investment managers for you.

Question #2: Do you specialize or have a niche that you focus on?

Many advisors have a niche that allows them to focus on certain types of clients and the unique issues they face from both an investment and a financial planning perspective. For example, an advisor might work with executives at start-up companies and own company stock or options. Another investor niche might focus on doctors and medical specialists such as anesthesiologists. Some advisors may focus on matters related to divorce. If you have unique or sophisticated financial planning or estate planning needs, you’ll want to know what experience the advisor has with similar clients.

Question #3: How often will you call me and meet with me (us)?

Regular contact with your advisor is critical to the success of the relationship. The frequency of contact may vary based on your needs, but it should include at least an annual in-person or video meeting review and update of your situation.

Question #4: How are your fees structured?

Fees come in many forms. They may be based on a percentage of the assets managed or commissions on transactions. There may also be layers of fees. For example, if you’re using an advisory platform that utilizes mutual funds or exchange-traded funds (ETFs), you’ll pay an advisory fee for the platform, but the underlying funds or ETFs will incur internal fees as well. Your advisor should disclose the total expense ratio (percentage) of all fees.

Question #5: How are you compensated?

Don’t confuse this with the fees you’re paying; your advisor should explain how they are compensated as well. Although industry transparency and regulation have improved over time, historically brokers may have received different payouts or rewards for using different products and services. This information should be part of the advisor’s required disclosure documents, but these are sometimes difficult to decipher.

Question #6: If I have to sell an investment tomorrow or three months from now, is there an exit fee or penalty?

Commission-based products such as annuities or mutual funds may charge a fee when they’re sold before a certain time frame (such as within five years). In the age of ETFs, index funds, and fee-based platforms, this isn’t as prevalent as it used to be. But it’s always prudent to ask: “What happens if I have to sell a month or a year from now?”

Question #7: Can you tell me a little bit about your background and experience as a financial advisor? How long have you been with the firm and why did you choose them? What professional designations do you have?

Of course it’s important to ensure that your prospective advisor is qualified. But don’t get too focused on whether the advisor is a long-time veteran. Ideally, you’re looking to create a relationship that will last 20 years or longer. You won’t be able to do that with an advisor who’s going to retire in a few years. If the advisor is approaching retirement age, be sure to understand the team environment they work in and the vision for their practice for the next five to ten years.

Question #8: Are you a fiduciary?

There’s an important difference between a fiduciary standard and the standard of providing “suitable investment recommendations.” However, there are plenty of great advisors who practice under the suitability standard. If your advisor is at a major investment firm, they will likely be registered as both a broker and advisor. They may operate under the suitability or fiduciary standard depending on the product or platform. So although the fiduciary responsibility may be preferred, it should not be a deal-breaker if the prospective advisor is trusted, qualified, and you have good chemistry with them.

You could create an endless list of questions to ask a potential advisor, but ideally many of them will be addressed before you get a chance to ask.

During an introductory meeting, the advisor should present information about themselves, their firm, and how they operate. In addition, they should ask you questions pertaining to your goals, objectives, your ability to handle the ups and downs of the market, and financial and tax information.

As mentioned, your relationship with an advisor should be a two-way street. Although it’s imperative to ask questions and conduct your due diligence, an introductory meeting is an opportunity for a good, in-demand advisor to evaluate whether they want to work with you as well.

This doesn’t mean you’re not entitled to ask questions and seek information, but a good interview should feel more like a conversation than an interrogation.

The Financial Industry Regulatory Authority (FINRA) provides information and resources to investors who are seeking the help of an advisor. BrokerCheck by FINRA offers regulatory information about advisors and firms as well as any disciplinary actions. If the information on BrokerCheck gives you pause, you can still meet with the advisor and give them a chance to discuss.

When choosing a financial advisor to work with, it’s important to meet with prospective advisors and ask them questions. Even if a particular advisor comes highly recommended, it’s a good idea to meet with another advisor or two to help you gain some perspective.

When asking questions, pay attention to how prospective advisors reply, and understand that most questions won’t have black and white answers. You can also turn to FINRA and its BrokerCheck tool to get information about specific advisors and firms to help your due diligence efforts.

And remember: Not everyone needs a financial advisor. You can get helpful insight, investment guidance, and even automated “robo-advisor” investing programs from top brokerage platforms, the custodian of your company’s retirement plan, and third-party information portals such as Britannica Money.