Investors interested in engaging a financial advisor (FA) are guided to interview prospective candidates

By some accounts, 35% of Americans worked with a financial advisor as of 2022 while 57% said that they didn’t have a financial representative. The share of Americans approaching a financial advisor decreased slightly compared to the previous year.

Investors interested in engaging a financial advisor are advised to interview prospective candidates. In the process, it’s important to ask questions that will help you understand their expertise, approach, and whether they’re a good fit for your financial goals.

Ten core questions or actions to form the basis for an interview in advance of hiring a financial advisor

Here are ten core questions or actions that can be taken to form the basis for an interview when considering the hiring of a financial advisor.
1. Background, qualifications, and credentials of the financial advisor. Ask prospective FA’s regarding their backgrounds and qualifications, including licenses, tests, and credentials, such as Certified Financial Planner (CFP), or Chartered Financial Analyst (CFA), Certified Personal Finance Counselor (CPFC) or Certificate in ESG Investing, to mention just a few. The latter certification or related credentials are relevant for clients interested in pursuing a sustainable investing approach.
In addition, investors should also prepare for this question by conducting a current search for any recent updates regarding the individual FA or their affiliated firm. One way to do this is via Artificial Intelligence (AI), by harnessing, for example, an AI tool like Microsoft Copilot (an arm of OpenAI’s Chat GPT) or Google Duet, to get any latest available updates covering the individual financial advisor and or the advisor’s affiliated firm. Posing the following question or variations on this question should generate a recent update: What is the latest news regarding [the name of the individual and/or firm] financial advisor services?

2. Regulatory checkup. It is important to know if the financial advisor has had any regulatory issues in the past, such as complaints from clients or disciplinary actions. It is possible to view an individual financial advisor’s details through the Securities and Exchange Commission’s (SEC’s) Investment Adviser Search Tool that can be accessed at: IAPD – Investment Adviser Public Disclosure – Homepage (sec.gov). This tool is free to use. It will show a list of the advisor’s registrations and licenses, industry exams that they have successfully passed, details on their past employment, customer disputes and any regulatory or disciplinary events.

3. Is the financial advisor classified as a fiduciary. A “fiduciary” is a person or firm committed to acting in the best interest of their clients and putting their clients’ best interests before their own. They are required to avoid conflicts of interest and to provide all relevant facts to their clients.

4. Firm affiliation and resources. Is the financial advisor an independent operator or is he/she affiliated with a financial firm? Regardless, what resources are at their disposal? If a member of a full-service financial services firm, how does the firm rank in the J.D. Power U.S. Full-Service Investor Satisfaction Study ?

5. How is the financial advisor compensated? Some advisors are fee-only, which means they charge a flat rate for their services, or a fee based on assets under advisement. Fees could also vary based on the nature of the services provided. Still others may earn commissions on the products they sell , but this approach exposes investors to potential conflicts of interest. If you are unsure how your advisor is being compensated, simply ask them how they make money. If their answers are hesitant or opaque, that may be a red flag.

6. What services are being offered? Some advisors offer comprehensive financial planning, while others specialize in areas like retirement or investment management.

7. What is the financial advisor’s investment philosophy? Understanding how an advisor approaches investing and his/her philosophy around important topics will serve to align a financial advisor’s investment philosophy with the client’s desires and expectations. Considerations such as active management versus passive or index management, use of mutual funds, emphasis on fees/expenses, ETFs and/or individual securities, portfolio construction, monitoring and portfolio rebalancing are some of the considerations that should be explored during the interview process . At the same time, inquire about the financial advisor’s approaches to determining (a) your financial goals and objectives, (b) your risk tolerances and investment time horizon, and (c) sustainable investing preferences. In the end, investor should understand how these determinations are expected to be implemented in the form of a financial plan.

8. Performance track record. How will the financial advisor measure the performance results of their client portfolios and over what time period? What has been the financial advisor’s performance track record across various investing strategies, and in particular the recommended investment approach?

9. Can the financial advisor provide references? Speaking with current clients can give you a sense of an advisor’s strengths and weaknesses.

10. Monitoring and reporting. Regular check-ins can help ensure you’re on track to meet your financial goals. How often does the financial advisor meet with clients? In addition, what type of periodic monitoring reports are provided and at what frequency. With regard to a sustainable investing strategy, in part or in whole, what type of outcomes or impact reports are provided?

Keep in mind

It’s important to feel comfortable with your financial advisor. A financial advisor should be someone you can trust and communicate with effectively. Don’t hesitate to interview multiple advisors before deciding, and take the opportunity to expand on the questions presented here or modify these to reflect your individual circumstances and preferences. Regardless, responses should be compared and evaluated to arrive at the best possible candidate.

1. J.D. Power’s study is based on responses from 9,951 investors who work directly with a dedicated financial advisor or teams of advisors that were collected between January 2023 and January 2024. Preference should be given to financial advisors affiliated with firms that rank above the industry average. Refer to recently published article for a list of highly rated firms at: https://sustainableinvest.com/chart-of-the-week-march-25-2024/
2.  Alternative compensation arrangements fall into the following categories: 
-Commission-based. Commission-based advisors make money when you buy a product like life insurance or mutual funds from them. As a result of this model, these advisors have a financial incentive to steer you toward products that net them the most money—even if that product is not necessarily the right choice for you.
-Fee-only. Fee-only advisors charge hourly fees, annual fees or assets under management (AUM) fees, and they do not earn commissions of any kind. Advisors who are fiduciaries are required to be fee-only. The National Association of Personal Financial Advisors, or NAPFA, says the fee-only compensation structure is the “most transparent and objective method” for an advisor to use.
-Fee-based. Fee-based advisors not only charge an AUM or hourly rate to provide their advice and answer questions, but they also get paid commissions. This makes them a hybrid version of a fee-only and a commission-based financial advisor. Like commission-based advisors, fee-based advisors are not fiduciaries. In addition to being paid by their clients, they also receive commissions from certain products that they recommend.