Questions To Ask a Financial Advisor Before Becoming a Client

Written by: Deshawn Peterson

This topic came up because I have a very close friend who has built a successful business with his wife, and they are in a position where planning for themselves is no longer the best use of their time. With the new year being here, this is a time when people usually set financial plans and goals, so this is a bit timely in some regard.

My friend, let’s call him Vhagar, was going through the initial steps of working with an advisor. This advisor whom he was speaking with works for an insurance-based institution, is a CFP, and in all my accounts, was presenting in the best way possible. On paper and for the everyday individual, this advisor seems to be like someone to work with.

In retrospect, picking a financial advisor is a crazy task to take on because the world of financial planning and advice is vast and can be confusing. We as financial service professionals might take our knowledge for granted and not recognize that everyone doesn’t possess the same wherewithal. When you're given an ADV, a proposal with a bunch of numbers and figures, how can anyone navigate this process without any prior experience?

When choosing a financial advisor, it's crucial to gather information to ensure it is a good fit for your financial goals, personal alignment, and ability to work together because this is someone who will potentially be partnering with you for years to come.

Here are six important questions to ask a financial advisor before becoming a client. Now these questions aren't the end-all-be-all, but my goal is to help empower you in the decision-making process when choosing an advisor.

1. What are your qualifications? Qualifications can be subjective, but it’s important for several reasons.

Financial Planning designations like the CFP, CFA, and CAIA aren’t easy to earn. By achieving the designations, it reflects a long-term commitment to the profession in itself.  I only say this because there’s a lot of money being made in the world of financial planning in the form of fees, commissions, and retainers. The money can lure anyone into the space initially for the wrong reasons. Completing a designation just shows that this professional isn’t here for the short term and respects it enough to continue their education.

• CFP and CFA would be considered the most notable ranked designations in the financial advisor, but even this is subjective.

Series 65 vs Series 7

The difference in how a registered representative can get paid with a Series 7 or Series 65 license is largely tied to the nature of their roles and the services they provide. Here's a general overview:

• Series 7:

Commission-Based Compensation: Individuals holding a Series 7 license are typically associated with broker-dealers. Series 7 representatives often earn income through the sale of financial products such as stocks, bonds, mutual funds, and other securities. They may also receive bonuses or other incentives based on sales performance.

• Series 65:

Fee-Based Compensation: Individuals with a Series 65 license are often associated with advisory services and businesses. These individuals typically charge fees for the financial advice and services they provide to clients. This fee-based compensation model may include hourly fees, flat fees, or a percentage of assets under management (AUM). The latter is a common structure where advisors earn a percentage of the total value of the client's investment portfolio.

I am not saying one is better than the other, but you as a potential client should know the difference.

2. How are you paid?

There are multiple ways that an advisor may structure their business model. I’m not going to argue for nor against any of those choices, but as a client, you must recognize that advisors do and should be compensated for their services like anyone else. Knowing the difference between each model helps understand the “why” when receiving the advice.

Fee-Only: Advisors receive compensation only from client fees, typically based on a percentage of assets under management (AUM) or a flat fee. This structure minimizes conflicts of interest as product sales do not influence advisors.

Fee-Based: Advisors can charge fees based on AUM, but they may also earn commissions from selling financial products. This hybrid model combines fee and commission structures, potentially posing conflicts of interest

Financial Planning Hourly Retainer: Advisors charge clients based on the hours spent on financial planning services. This structure is transparent, and clients pay for the specific advice and time they receive, fostering a direct relationship.

Commission: Advisors earn income by selling financial products, such as stocks or insurance, receiving a percentage of the transaction value. This model may introduce conflicts, as advisors may prioritize products with higher commissions.

Each structure has its advantages and considerations, impacting how advisors align their interests with clients' financial goals. Clients must understand their advisor's compensation model to ensure transparency and a suitable financial.

3. Are you a fiduciary?

A fiduciary is a financial advisor who is legally and ethically bound to act in the best interests of their clients. The client’s interests are put above the financial advisor and their firm.

4. Who is your ideal client? Do you focus on a specific client base?

This question highlights if the advisor is a one-size-fits-all or curated and has experience with similar clients in a similar situation or financial point. If you're a couple with a joint income of $190K/ yr and just had your first baby, that's a significantly different situation than being in your retirement years debating on when to draw down your social security.

5. Do you have any referrals or client recommendations?

Have you ever lost any clients or been fired from a client? A great question to share is about their humility and times of things not working out.

6. What can happen if I want to fire you?

What happens if I decide to terminate our relationship? Are there any penalties or fees for ending the advisory agreement? How will my investments be handled if something happens to you or your firm? Play out the worst-case scenario.

These questions can help you gain a comprehensive understanding of the financial advisor's qualifications, approach, and how well their services align with your financial goals. It's essential to feel comfortable and confident in your advisor-client relationship, as it involves trust and long-term collaboration.

Related: What’s the Difference Between Private Equity and Private Credit?