A surprising question you should ask any financial advisor you hire – their answer can be a huge red flag
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Planning your financial life can be a lot to manage on your own. If you’re paying off your debt, how much should you invest in your Roth IRA? Should you buy or keep renting a home while building some liquidity? A certified financial planner can help you organize and formulate a plan for your money, but how do you know who to trust and if they are right for what you want to achieve? (Use this tool to find a planner that fits your needs.)
When you meet a certified financial planner, here are the 15 questions to ask them to make sure they are trustworthy, experienced, and want your best.
1. ““What is your definition of a financial planner?”
The definition of a financial planner is very broad and can include everything from investing and retirement to insurance and taxes. You want to make sure that the financial planner you work with defines their job in a way that matches what you expect them to do. Some may just want to handle your investments, others may take a holistic approach and even get to the heart of your budget – make sure the planner you hire can do exactly what you need. Use this tool to find a planner that fits 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 help with taxes, a certified public accountant (CPA). Just because someone says they are a financial planner doesn’t mean they have passed the exams that qualify them as a certified financial planner or CFP. They may have other licenses, such as the Series 7, that allow them to sell financial products, but they are not the same.
“Know the difference between an actual qualification designation and what is a list of tests a person has taken to sell stocks and bonds,” explains Katie Brewer, a Dallas-based certified financial planner and founder of Your richest life.
To become a certified financial planner, you must complete financial planning educational courses, pass an exam with a historical pass rate of approximately 60%, meet ethical requirements, have 6,000 hours of professional financial planning experience or 4,000 hours of internship experience, and keep up with secondary education. Becoming a CFA also requires rigorous education, exams, and more.
“Don’t be afraid to ask your financial planner when they received their CFP® seal and how long they’ve been in the business,” explains Brewer. “Believe me, we’re used to it.” You should also check a CFP’s credentials on CFP.net.
You should also ask other questions, such as how long they’ve been practicing, what their typical client looks like, and their personal philosophy about financial planning.
3. “How do you get paid?”
Ideally, you want a pay-only financial advisor, as they don’t receive any commissions or other payments from the financial institutions whose products they recommend, and instead are paid directly by you, their client. Usually you pay them either an hourly rate or a fixed amount, or a percentage of the assets under management. “It’s important to know how people are compensated so you can be alert to warnings like self-service advice (e.g., earn a commission when they buy or sell certain securities) versus making the best choice for your situation,” Brewer says.
4. “Are you ‘fee only’ or ‘fee based’?
While it may sound similar, they’re actually not. A fee-based planner works with commissions and can be an incentive to recommend or prioritize a product over other actions or items in your plan, such as saving for a rainy day. A fee-only planner is paid solely based on what you pay him for his time, strategy, and money management.
5. “What’s your fee structure?”
Planners should be candid about their pricing structure and should never make you feel like you’re playing a game of “how much do you cost” versus “how much do you have?” Consultants charge either an hourly rate, a project rate, or a flat rate for a plan or a percentage of assets under management. You have the right to have all of this explained to you and which plan, if options are offered, will best suit your needs and budget.
6. “How much should I pay you per year?”
Just as a senior barber will charge more for a haircut than a junior stylist, prices for financial planners can vary depending on the city they’re in, how much experience they have, and the amount of assets you need to manage. A typical fee for a planner might be 1% of assets under management, but as you get more assets, they can lower this fee. At the same time, a financial planner may work on a sliding scale or charge an hourly rate. Depending on the city you live in and the business, you can expect a pay-only hourly rate from a CFA that starts at around $200.
7. “Do you sign an agreement about your compensation?”
No matter what, a fee-only planner should feel comfortable sharing and signing an agreement detailing their fee and services that will be provided before you sign up with them.
8. “Do you receive ongoing fees from any of the mutual funds in the form of 12(b)-1 fees, trailing commissions, or other payouts?”
You can also ask if they receive ongoing fees from any of the mutual funds in the form of 12B-1 fees, trailing commissions, or other payouts. Sounds too technical? Sure, but that’s kind of the point. But it’s a yes or no question that can help you figure out how this planner gets paid, rather than just asking if they’re a fiduciary, a person who works with your best financial interests in mind.
You can also ask if they receive referral fees from lawyers, accountants, insurance
professionals, mortgage brokers or others and then have them explain how this would or would not affect their advice to you.
9. “Will you sign a fiduciary oath?”
Asking someone if they are a counselor is not always enough. People can ‘skate’ around that terminology and give vague or unclear answers to that question. Instead, consider asking them to sign a fiduciary oath.
“If someone is only paying compensation, they should have no problem signing a document stating how they are being compensated,” she said. “For example, if someone is a broker-dealer who works on commissions, they probably shouldn’t be signing it.”
10. “What kind of people do you usually work with?”
If the answer is “everyone,” that’s a red flag, Brewer said. If they brag about how they work with everyone from freelancers to hedge fund CEOs to athletes, it could mean they’re really versatile — or they don’t have a specialty at all and just throw spaghetti at the wall to make a profit. new customers. “I would recommend a financial planner who specializes in or at least has experience in the stage of life you are in,” she said.
11. “Can you repeat that so I can understand?”
Personal finance can contain a lot of jargon, yes. But that doesn’t mean your advisor should talk over your head or create an atmosphere where you feel like you’re asking a lot of ‘dumb questions’. “If you come in and someone gives you a ton of jargon and it’s beyond you, or you feel like they’re being condescending, then you don’t have to put up with that,” Brewer said.
Use this tool to find a planner that fits your needs.
12. “Are you a member of paying-only financial associations?”
Check if they are members of a financial planning organization such as NAPFA: The National Association of Personal Financial Advisors (NAPFA) or XY scheduling network, both of which are well-regarded, paid associations of planners. While this isn’t a necessity to hire someone, it can show a dedication to their field.
13. “Do you have any limitations?”
This may seem like you’re trapping them, but actually you’re asking them if they would refer you to someone if there was an area of financial planning that was beyond their expertise.
For example, you want a consultant who admits to not being an expert in debt management or complicated estate planning. If they say “I can do anything” or give a vague answer like “I’m sure we can fix it,” that’s a red flag that the planner may not want to admit that they’re not an expert at everything.
14. “How often should we talk to each other?”
This may depend on your age, your goals and the complexity of your financial situation and wealth portfolio. For example, if you are 35 and need someone to set up a plan for you and manage your investments, a chat with them twice a year may be sufficient. That said, if you want to be more hands-on and make sure you can get in touch with questions between visits, that should be part of the service.
Your planner should contact you within a week between set check-ins, so you’re never left with a question.
15. “Can I speak to some of your former or current clients?”
Financial planners should feel comfortable giving you references from clients whose money they’ve managed. If not, this could be a red flag.
Questions to ask yourself after meeting a potential advisor:
Does this person spend enough time understanding my financial goals?
Is this person forcing me to make decisions that I don’t feel comfortable with?
Is this person speaking to me in a condescending tone?
Does this person give me vague answers about the payment structure?
Does this person exude a “used car salesman”?
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