One surprising question you should ask any financial advisor you might hire — their answer could be a huge red flag
MarketWatch highlighted these products and services because we think readers will find them useful. We may earn a commission if you purchase products through our links, but our recommendations do not depend on any compensation we may receive.
Planning your financial life can be done a lot on your own. If you are repaying a debt, how much should you invest in your Roth IRA? Should you buy a house or continue to rent while creating liquidity? An authorized financial planner can help you organize and formulate a plan for your money, but how do you know who to trust and whether you will be right about what you want to achieve? (Use this tool to synchronize with a planner that meets your needs.)
When you meet with a certified financial planner, here are 15 questions you should ask them to make sure they are reliable, experienced and have the best interests at heart.
1. “‘What is your definition of a financial planner?’
The definition of a financial planner is very broad and can cover everything from investing and retirement, insurance and taxes. You want to make sure that the financial planner you go with defines their business in a way that matches what you will need. Some may just want to deal with your investments, others may take a holistic approach, and even get into the smooth little things with your budget – make sure the planner you hire can do exactly what you need. Use this tool to synchronize with a planner that meets your needs.
2. “What are your qualifications?”
When it comes to planning your financial universe, you probably want a certified financial planner (CFP) or, if you want tax help, a certified public accountant (CPA). Just because someone says they are a financial planner does not mean they have passed exams that qualify them to be a certified financial planner or CFP. They may have other licenses, such as the 7 Series, which allows them to sell financial products, but it’s not the same.
“Know the difference between an actual qualification mark and what a list of tests a person has done to sell stocks and bonds,” explains Katie Brewer, a Dallas-based certified financial planner and founder Your richest life.
To become a certified financial planner, you must attend financial planning education courses, pass an exam with a historical success rate of about 60%, adhere to ethical requirements, have 6,000 hours of professional experience in financial planning or 4,000 hours of internship and continue with continuing education. To become a CFA, you also need rigorous education, exams and more.
“Don’t be ashamed to ask your financial planner when they got their CFP® rating and how long they’ve been in business,” Brewer explains. “Trust me, we’re used to it.” You should also recheck the CFP credentials on CFP.net.
You should also ask other questions such as how long they have been practicing, what their typical client looks like, and their personal philosophy around financial planning.
3. “How is it paid?”
Ideally, you want a financial advisor with a fee, because they do not receive commissions or other payments from the financial institutions whose products they recommend, but are paid directly by you, their client. You typically pay them an hourly rate or a fixed fee or a percentage of the assets under management. “It’s important to know how people get paid so you can keep an eye on red flags such as helpful tips (e.g., collecting commissions when buying or selling certain securities) versus the best choice for your situation,” Brewer says.
4. “Are you“ fee only ”or“ fee based? “
While it may sound the same, they really aren’t. A fee-based planner works without commissions and may have an incentive to recommend or prioritize the product over other actions or items in your plan, such as saving for a rainy day. A planner who is paid only for a fee gets paid only for what you pay them for their time, strategy and money management.
5. “What is your fee structure?”
Planners should be upfront in their price structure and should never feel like playing a “how much do you cost” versus “how much do you have?” Game. The consultants will charge the plan by the hour, the rate of the project either as a lump sum or as a percentage of the assets under management. You have the right to be explained all this and which plan, if options are offered, would best suit your needs and budget.
6. “How much should I pay you annually?”
Just as an older hairdresser will charge more than a younger stylist, prices for financial planners can vary depending on the city they are in, how much experience they have, and the amount of assets you need to manage. A typical planner fee may be 1% of the assets under management, but as you gain wealth, they could reduce this fee. At the same time, the financial planner can work on a sliding scale or charge an hourly rate. Depending on the city you live in and the company, you can expect a CFA hourly rate to be around $ 200.
7. “Will you sign an agreement regarding your compensation?”
Nonetheless, a planner who only pays a fee should be comfortable sharing and signing an agreement describing their fee and the services that will be provided before you sign up with them.
8. “Do you receive permanent benefits from any mutual fund in the form of fees of 12 (b) -1, accompanying commissions or other payments?”
You can also ask if they receive permanent fees from any of the mutual funds in the form of 12B-1 fees, subsequent commissions or other payments. Sounds too technical? Sure, but that’s the thing. But the question of whether or not it can help you understand how this planner will be paid, not just ask if he is a fiduciary, and that is the person who works with your best financial interests
You can also ask if they receive referrals from lawyers, accountants, insurance
professionals, mortgage brokers or others and then allow them to explain how this would affect their advice or not.
9. “Will you sign the fiduciary oath?”
Asking someone if he is a fiduciary is not always enough. People can “slip” around that terminology and give vague or vague answers to that question. Instead, you can ask them to sign a fiduciary oath.
“If someone is paid only with a fee, they should have no problem signing a document stating how they will get the fee,” she said. “If someone, for example, is a broker who works on commissions, he probably wouldn’t be allowed to sign it.”
10. “What kind of people do you usually work with?”
If the answer is “everyone,” it’s a red flag, Brewer said. If they brag about working with everyone, from freelancers to hedge fund executives to athletes, it could mean they’re really versatile – or have no specialty at all and just throw spaghetti on the wall to make a profit for new clients. “I would recommend a financial planner who specializes or at least has experience in the life stage you are in,” she said.
11. “Can you repeat that so I can understand it?”
Personal finance can have a lot of jargon, yes. But that doesn’t mean the counselor should be talking over your head or creating an atmosphere where you feel like you’re asking a lot of “stupid questions”. “If you come in and someone gives you a bunch of jargon and it goes right over your head, or you feel condescending, then it’s like you don’t have to put up with it,” Brewer said.
Use this tool to synchronize with a planner that meets your needs.
12. “Are you a member of any fee-paying financial association?”
Make sure the members of the organization are like financial planning NAPFA: National Association of Personal Financial Advisors (NAPFA) or XY network planning, both of which are well valued, associations of planners who pay fees. While this is not a necessity of hiring someone, it can show commitment to their field.
13. “Do you have limitations?”
This may seem like luring them into a trap, but in fact, you are asking them if they would refer you to someone if there is an area of financial planning that is beyond their expertise.
For example, you should have an advisor who would admit that he or she is not an expert in debt management or complicated real estate planning. If they say, “I can do anything,” or offer an indefinite answer, like “I’m sure we can figure it out,” it’s a red flag that the planner may simply not want to admit they’re not an expert on everything.
14. “How often should we talk to each other?”
It may depend on your age, your goals and the complexity of your financial situation and asset portfolio. For example, if you are 35 years old and need someone to create a plan for you and manage your investments, talking to them twice a year may be enough. If you need more handshakes and want to make sure you can contact questions between visits, this should be part of the service.
The planner should get back to you between submitted submissions within a week, so you’ll never be hung with a question.
15. “Can I talk to any of your former or current clients?”
Financial planners should be comfortable giving you references to the clients whose money they have managed. If not, this could be a red flag.
Questions to ask yourself after meeting with a potential counselor:
Does this person spend enough time to understand my financial goals?
Does this person push me to make decisions in which I don’t feel comfortable?
Does this person speak to me in a condescending tone?
Does this person give me vague answers regarding the payment structure?
Does this person give the vibe of a “used car dealer”?