Finding a good Financial Advisor can be hard, mainly because entering the field is easy. If you complete a few regulatory exams you can become a registered representative (which is the regulatory title) and no specific skills or experience is required to become a registered representative. If you are looking for a financial advisor do not choose the first one you find take your time and interview a few before you settle with one. Here are ten questions I think you should ask the advisor before hiring them:
- How are you different than any other advisor?
Look for something that makes the advisor unique, maybe they are located in your neighborhood or perhaps the advisor meets clients on evening and weekends making them more accessible. If they tell you about all the exclusive investments they have I suggest you get up and leave.
- How many times have you changed firms and why?
Since most advisor’s are commission based they often switch firms for better payout, so find out how many times they have changed firms and what the reason was. If you notice they switch often I suggest you look for another one because they put their interest before client’s and chances are they will walk out on you as well.
- What do you think about index funds/etf’s and passive investing?
If they are commission based you definitely want to find out what they think of passive investing and index investing. The biggest chunk of advisor’s income is from mutual funds so most advisor have some type of reason why index funds and etf’s are a good choice for investors. If the advisor lists reasons why he doesn’t think index and etf’s are a good option, than look for another advisor.
- What do you think about mutual funds?
This relates to the previous question, if you notice the advisor is a big fan of mutual funds and points out all the benefits of it and no downside than you should look for another advisor. I do not have a major problem with mutual funds however I strongly believe that an advisor should point out the costs and other downside of mutual funds if they don’t then they are not looking out for the best interest of the client.
- What percentage of your clients funds are invested in Mutual funds?
This again is tied to the previous two questions, depending on their answers to the above questions you might want to know what percentage of their clients money goes into mutual funds this will give you an indication of how your investments will be distributed, high mutual fund percentage could be a reason for further research.
- Does your firm provide services other than investing such as estate planning and insurance?
Most advisors are licensed for investments and insurance, they are not tax or estate experts however most firms will have an estate or tax expert available for clients if needed. This will indicate if the firm is willing to go the extra mile for clients, which can be a good indication of the firms customer satisfaction.
- What types of services do YOU provide?
This is somewhat of a broad questions and it’s main purpose is to let the advisor show what they are capable of doing for their clients. Do they provide educational seminar’s? are analyst reports available?
- Can you give me some references?
Checking references is probably the best way to learn more about an advisor and the firm. Ask if they advisor can provide you with references the good ones will do so gladly, just make sure they are not friends or family.
- Ask to provide for sample portfolio
A sample portfolio of a client can show you how much stocks, bonds and mutual funds the advisors uses as well as turnover ratio. Watch out for high mutual fund proportions and high turnovers (buy and sell of stocks), this could indicate the some conflict of interest.
- Check background and credibility
Last but not least is to check the advisor’s and firms registration with the regulatory bodies. In US this can be done through FINAR Check the background of Your Investment Representative. In Canada advisor’s are registered through their provincial securities commission and Investment Industry Regulatory Organization (IIROC) here is Member firm Registration Info Services or if you want a little more IIROC Further Research.
All the questions are rated 1 because I think they are all important to ask. This is just a short list of questions you should ask a perspective advisor, make sure you do your full due diligence and research before you trust someone with your money, even if they are family or friends. It’s your hard work money and you do not want to throw it all out.
Check out: Investment Adivsor’s Conflict of Interest; An Insider View
What other questions would you want to ask?
These are great tips for finding a reliable Advisor. I also found Suze Orman’s book Women and Money very helpful in this regard.
Really like this collection of tips. 🙂
Quick question: When you say to ask the advisor’s thoughts on mutual funds, are you referring to mutual funds as opposed to index funds, or mutual funds as opposed to individual stocks/bonds?
@ ObliviousInvestor……..I mean both since there are no hefty commissions with index funds and no trailer fees for stocks and bonds they well always have some justification on how MF is better……we actually would receive training on how to deal wit those questions i talked a little about it in another post http://financialhighway.com/investment-advisor-conflict-of-interest-an-insider-view/
Ah, cool. As an ex-financial advisor myself, I know just what you mean when you say “we actually would receive training on how to deal wit those questions.” Hehe.
Taking a look at your other post now…Randomly enough, I wrote about a very similar topic today. Noteworthy that it’s one that people who’ve been in the industry tend to regard as important.
the only question a prospective investor needs to ask a potential advisor is if the advisor understands the bond trading desk of their respective financial institution and how to productively work with the bond traders.
If someone wants to know if an advisor has the right skills to protect their capital and beat inflation, they need to know if that advisor understands how to create a 10-year max. laddered portfolio of investment-grade (BBB and above) corporate bonds.
the only problem- rich people are typically the only ones who get to work with the senior advisors, who have a large book of clients and don’t rely on big commissions from the various expenses associated with the traditional fund salesman/advisor.
@ Let’s Bond I think there is a lot more than just knowing if the advisor understands the bond trading desk and the ability of an advisor to create a 10 year bond ladder does not really provide much valuable information. There is more to investment than just bonds and fixed income.
yay, for it is factual that there is more to life than fixed-income. But woe is unto he who doth scorn the bond market. For turning an eye to the false idols of the stock market and their pagan investment advisors is a sin unto your capital. Woe is he who is led astray from the way and the truth, deceiving himself and his money into diversifying through professional management, when it is the bond market alone that will always provide prosperity so long as thou art faithful and obedient in your credit ratings and maturities.
Understanding the bond market (and how to give clients a 5-8% yield after fees) is the only essential question we need to ask of our advisors. Why? Because as we age our exposure to fixed-income typically rises (especially when we are old and wish to permanently retire). You, as retail investor, are likely to remain with the same advisor or with the same financial institution your whole life. If you begin your ‘investing career’ with an advisor who already understands buying and selling corporate bonds for their clients, you can be guaranteed a solid return from the beginning till your last breath with your money. You will also be confident about your returns if you ever need to be overly conservative (if someone gets ill and you need regular money…). Picking mutual funds is a crap shoot. being a successful fund manager is a crap shoot. making a lot of money in the stock market is a crap shoot. If investors know that they can do better than government bonds by an average of 3%, it doesn’t matter nearly as much if your advisor recommends your high-risk investments be in mutual funds, common shares, preferred shares, real estate or jell-o wrestling competitions (highly volatile but lucrative).