Find the right financial advisor: 7 questions to ask

Roshani Pandey is a financial advisor and founder of True Root Financial. True Root Financial is located in San Francisco, CA and serves clients across the globe.

You may be looking for a financial advisor to help you invest and better manage your finances. The first step in deciding if you want to work with an advisor is to interview them to see if there is a fit.

Here are 7 key questions to ask when you conduct your interview:

1. Are you a fee-only financial advisor or a broker/ dealer?

Trust between a client and advisor is crucial. To build trust, it’s vital to know how your advisor gets paid. If they’re paid only by you, they’re solely accountable to you. But if they receive payments from other sources, there could be conflicts of interest. That’s why understanding the fee structure is crucial. Advisors generally fall into three categories (1) fee-only advisors, (2) commission-based broker/dealers and (3) fee-based hybrid advisors.

Among these three categories, the fee-only advisors have the least conflict of interest becasue they are solely paid by you, the client. Hence, this is the category of advisors you should explore in your search. Here’s a bit more detail on each category:

Fee-only financial advisors

As the name suggests, these advisors charge a fee for their advice and do not receive any commissions or payment from anyone else. They are essentially like a consultant you would bring in to give you expert advice on your finances. As a result, the law holds them up to a higher fiduciary standard where their advice has to be in your best interest. For example, if there are two products with the same exact benefit, but one is lower in cost than the other, a fiduciary advisor is required to recommend the lower-cost product. This is because they have to act in your best interest. So, their advice is essentially conflict-free.

Additionally, they do not earn any commissions and only make what you pay them. This is a very important distinction because this means that they have no incentive to recommend or sell you products you don’t need. Hence, your and their interests are completely aligned and you can rely on their advice.

Commission-based broker/dealers

These advisors may provide some consultation but it is generally done to sell you a product such as mutual funds, annuities and insurance. Each time you buy a product, they collect a commission from the mutual fund company or the insurance company. You may never see this commission but it may have a big influence over what products the broker recommends to you. Revisiting the above example, if there are two comparable products, the broker can legally recommend the more expensive product to you. This is because they are not held to the same fiduciary standard that fee-only advisors are held to.

They are held to a lesser suitability standard where the product just has to be suitable enough for you even if there are lower-cost products out there. Since the commission comes directly from the mutual fund or insurance company, you may never be aware of this. The advisor might also have incentives to sell you products you don’t need. Despite this inherent conflict of interest, many brokers might still act in your best interest and recommend good products. However, it’s undeniable that with this model, your advisor’s interests may not always align perfectly with yours. This could lead to doubts about their recommendations, occasionally muddying the client-advisor relationship.

Fee-based financial advisors

These advisors are a combination of the two models we discussed above. They may be registered as an investment advisor and also have a broker/dealer affiliation to sell mutual funds and insurance. A majority of large financial advisors and Wall Street firms fit into this category. These firms also have a conflict of interest due to commissions. Additionally, large banks and Wall Street firms will have multiples of conflicts of interest due to the various business lines and business interests that may compete with one another.

When choosing amongst these three categories of advisors, the fee-only advisors are the most attractive, given the lack of conflict of interest.

2. Can you describe your experience in working with clients like me?

When facing surgery, you’d prefer not to be the surgeon’s first, second, or even third patient. Experience matters. Likewise, in selecting a financial advisor, consider their tenure and expertise. Have they weathered market fluctuations? Your advisor should be a seasoned finance professional, not merely a salesperson.

At True Root Financial, we’ve helped many tech professionals and physicians retire early and make work optional. When choosing an advisor, it helps if your advisor has experience working with people just like you. Seek an advisor familiar with your background and needs for optimal guidance.

3. How do you invest the portfolios and what has been the result?

When evaluating the investment expertise of a potential advisor, most individuals default to just asking for the track record. While it is important to know what the advisor’s track record is, it is also important to understand their overall investment philosophy.

Investment philosophy

An advisor’s investment philosophy tells us how they construct and manage an investment portfolio. It is important because while past performance tells us what the advisor did in the past, investment philosophy tells us what they plan to do in the future. Investment philosophy can mean a variety of things. However, your advisor should be able to articulate theirs and tell you why they believe in it.

Advisors can either take a passive or an active approach. An advisor who believes in a passive approach designs your portfolio based on their long-term beliefs about the markets. Then, they will not change the portfolio much unless their fundamental assumptions change.

An advisor who has an active approach, on the other hand, will change your portfolio as market conditions change. They may pick individual stocks and bet on them. If your advisor takes a more active approach, again make sure to understand how they do this. How do they decide to change the investments or how do they pick individual stocks? Most advisors fit somewhere between a fully active and an entirely passive approach.

How diversified is the portfolio?

Within their investment philosophy, advisors may also hold their own beliefs on diversification. Generally, the more diversified a portfolio is, the better. Research shows that diversification not only reduces risk but also improves return. Assets that best diversify each other, move in opposite directions. For example, when stocks go down, high-quality bonds typically go up. So, they are great diversifiers.

The stocks and bonds you hold should be further diversified across types (value, growth, sectors) and geographies. In fact, the more diversifiers you can add to the portfolio, the better.

4. Do you offer financial planning services?

Integrating financial planning alongside investing not only increases your net worth, it can also empower you to live the life you desire. At True Root Financial, most of our clients come to us to enhance their investments and to plan for early retirement, seeking greater flexibility in their work and schedule. These decisions are pivotal, demanding careful analysis of current financial status and future needs. We guide clients through assessing their cashflows, assets, and liabilities, crafting comprehensive plans to minimize taxes, secure future savings, and mitigate risks.

For clients with children, we assist in setting up 529 plans and optimizing investments. Moreover, for those with stock options or RSUs, we offer guidance on tax-efficient saving and investment strategies.

5. What is your cost and what am I getting for it?

As we discussed above, there are three ways in which advisors get paid: fees, commissions and a combination of the two. Generally, the fee-only advisors have the least amount of conflict of interest and this is the pool of advisors you should start with.

If you go with an advisor who also makes a commission, be sure to understand its structure. You may not pay the commission directly but it may affect what the advisor recommends.

As for the fees, there are several ways in which advisors charge it. Some may charge a flat monthly fee. But the most common way to charge fees is to charge a percentage fee on the assets managed. So, your total fee consists of the advisor’s fee plus the fee of any investment funds such as mutual funds or ETFs. Be sure to ask your advisor not just for their fee but for the all-in fee, including those of the underflying investments.

The median all-in fee for a financial advisor is 1.65% for a portfolio that is $1 million in size. If your portfolio is smaller, the fee may be higher. If it is a lot bigger than $1 million, the fee will be lower.

6. If we decide to work together, what is your process?

You may be someone who does not have the time to manage your finances and would like an expert to help you. Or, you may be someone who wants to manage your finances yourself and only needs the advisor as a sounding board. Understanding how you will work with your advisor will clarify to you how their service fits with your needs.

Many advisors will kick off the engagement with a series of meetings to understand your personal situation, ask questions and collect any relevant financial documents. They will then come back to you with a financial and investment plan and will work with you to implement it. After that, you may meet quarterly to check in on the progress of those action items.

Some advisors may be more hands-off and meet less frequently. Some may not do any proactive financial planning but be available by phone to answer any specific questions. Asking these clarifying questions will help you understand if the service is the right fit for you.

7. Do you have any minimums?

Some advisors may only serve clients of a certain net worth or asset size. It will be important to know this upfront because they may not be able to best serve you if you don’t meet their minimum.

Find the right financial advisor: 7 questions to ask