Important Questions For Advisors

Steve Foldes

Steven Foldes, CFP®, JD, CMFC Vice Chairman

After a lengthy first meeting with a prospective client, whom we will call Beverly, she said to me, “Thanks for all of that information, Steve, but as I mentioned at the outset I want to meet other advisors in the area so I can compare and contrast and make the best possible choice.” I told Beverly that I applauded her decision to interview a number of financial advisors so she could understand what they do, how they do it, whose interests are being served, and how (as well as how much) they are compensated. Beverly then asked me to make a list of questions that I thought would be the most important when selecting the best possible advisor or advisory firm. I thought it would be a helpful exercise for all investors seeking a trusted advisor to ask the questions which would help them make the best possible decision. Below is the list I gave Beverly to help her feel confident in her search to select the very best advisor and advisory firm for her needs. I believe that any investor should ask these questions before entering into an advisory relationship.

Important Questions to ask of any Financial Advisor

1. Are you a fiduciary? In other words, are you legally obligated to put your client’s best interests first, ahead of all other interests? Our industry is rather unique, in that there is more than one standard of care used by the financial services industry. Registered Investment Advisors (RIAs) are required to operate under a fiduciary standard, putting their client’s interests ahead of their own. However, the brokerage world has another standard known as “suitability.” This lower standard holds that as long as the investment is “suitable” for the client’s needs, then that is sufficient. That is to say, the investment may not be the best or the most cost effective, but as long as the advisor deems it to be “suitable,” then the standard is met. In other words, it enables the advisor to be a financial salesperson, as opposed to one who can be trusted to put the client’s best interests first.

2. How do you charge for your services and how much do you charge? In the financial services industry, there are two main methods of compensation. One is a fee for service, typically based upon the assets under management. The other is commission. Since different products carry different commission rates, and human nature being what it is, there is the possibility of a conflict of interest. In this case, it must be asked whether the interests of the client and advisor are aligned, or is there a conflict of interest from the outset of the relationship?

3. What licenses, credentials, or other certifications do you have? How long have you been a financial advisor, and how long have you been with this firm? Personally, how many clients do you work with, and what is the total assets that you manage? Are you an owner of the firm? These questions are critical in assessing the education and experience of the advisor, not to mention how much time the advisor has to work with his or her clients. Finally, being an owner of the firm is important because owners typically stay with a firm longer while employees often leave, and the last thing a client wants is to follow an advisor who is jumping from one firm to another because of better compensation opportunities.

4. Do you provide comprehensive financial planning and retirement planning services, or are you simply an investment advisor that provides advice exclusively on my investments? Will you be looking at my financial situation “holistically” to provide the best kind of financial advice? If you do financial planning, could I see a sample financial plan?

5. What types of clients do you specialize in, such as retirees, professionals, small business owners, corporate executives, younger people who have recently sold their businesses, athletes, those with inherited wealth, et cetera? It is important to know if the advisor has a special expertise serving a specific niche.

6. What is your investment approach? In other words, please outline your methodology for constructing a portfolio consistent with my goals and objectives, risk and return parameters, and cash flow requirements from the portfolio. If you use mutual funds and exchange-traded funds, what would be the expected “expense ratio” of the funds used in my portfolio? Expense ratios relate to the cost of the mutual funds and exchange-traded funds used in the portfolio. If you use individual stocks, what is the methodology of stock selection? Is it something the advisor does, or do selections come from the home office? As to performance, what is the expected return of my portfolio over the longer term, and has the portfolio been stress-tested to show what I would lose during periods of substantial market volatility, such as 2000–2003 and 2007–2009?

7. How much contact do you have with your clients? How often will we be speaking/meeting to get updates on what is happening with my plan and portfolio specifically, as well as with the markets in general?

8. Will I be working only with you, or have you established a team to work with me? What happens to my account if you move to another firm or retire/die?

9. Who holds or maintains custody of my investments? Is there an independent third party to hold the investments, or are checks written to the advisor or advisory firm? No one thought Bernie Madoff was a thief, so having a firewall between the client and the advisory firm is a very good idea.

10. What about reporting? Is there online access to a secure web portal that puts together all the accounts that can be viewed daily? How often is performance reported to the client? Is there a formal structure set up to report the performance and meet with the advisor?

11. Can I get referrals from existing clients? Having these referrals and understanding the client experience from others in the community says a lot about meeting expectations

12. What makes your client experience unique? Are you really the trusted advisor I seek? Do you provide guidance and advice on things other than investments, such as buying vs. renting a home and home financing options, or buying vs. leasing a car and auto financing options? Is insurance part of the offering? If so, is it sold with a commission to the advisor, or is insurance something that the advisor consults on and avoids the product sale? What about guidance in estate planning, taxes, and setting up different kinds of retirement plans (e.g., defined benefit plans, 401(k) plans) and other ways of setting aside more money for retirement? If this is not done in-house, does the advisor assist with these topics? In essence, does the advisor serve as the quarterback of a comprehensive financial team?  

I told Beverly to take notes during her meetings, and have the prospective advisor answer each and every one of these questions in detail. In that way, she could truly make an informed comparison with all the others she would be interviewing. Happily, after Beverly interviewed several other CFP® practitioners and representatives from several brokerage houses, she selected our firm!

I hope that the list of questions above can help investors like Beverly make better and more informed decisions when looking for the right financial advisor based on their particular circumstances.

Feel free to contact Steve Foldes with any questions by phone 305.448.8882 ext. 240 or email: