Ten Questions to Ask When Hiring a New Advisor
Ten Questions to Ask When Hiring a New Advisor
Finding the right wealth advisor is a consequential decision and one that shouldn’t be rushed into. It’s a relationship that will hopefully last for years and have a big impact on your long-term financial well-being. And because it’s a big decision, your search to find the right person can seem overwhelming.
In my opinion, one of the most important aspects of choosing the right person comes down to fit. And fit covers multiple areas - personality, communication style, approach to risk, and investment style. I’ll give you a quick example; if you’ve listened to my podcast or follow me on social, you’ll know that I believe successful investing is a long-term process that takes patience and discipline. I’m not a trader. If someone was looking for a stockbroker who is up to date with say, the hottest gold exploration company, I wouldn’t be right for them, regardless of how great a fit we might be in other areas.
So, before you meet with anyone, the first thing you must do is be clear on what you’re looking for. Do you have more straightforward financial needs and goals, with perhaps retirement savings from registered plans and employer-sponsored plans? Or do you have complex financial needs that require much more comprehensive management with a team of other professionals, such as your accountant and lawyer?
Once you’re clear on what your needs are, you can ask the right questions to determine if the fit is there. And on the flipside – an advisor should also be asking you a lot of questions. If they’re not, it could mean that you’re talking to someone who is willing to be all things to all people.
Below is a list of 10 important questions that are designed to help you determine what an advisor does, how they do it, and the type of clients they work with.
1) What services do you provide?
This question will help you determine if their services align with what you’re looking for and provide a broad sense of whether their offering is a good fit with your needs.
Financial advisors often offer a wide range of services, including:
1. Retirement strategies
2. Trust and estate consideration
3. Tax mitigation opportunities
4. Education savings
5. Risk management
6. Cash flow strategies
7. Charitable giving
8. Business succession options
2) How would you describe what you do?
This is an excellent question because it’s open-ended and you’ll learn a lot. When I started in the profession in the early 90s, everyone was a stockbroker. And that was pretty easy to describe. We bought and sold stocks. Then, as we started providing advice in other areas of finance, some took on the role of financial advisor. It was more holistic and the advice included things like savings strategies, budgeting and tax minimization. Now, there are some, like myself, who are wealth advisors. The services are highly specialized and include complex tax strategies, retirement and estate planning, trust services, insurance integration, and philanthropic planning. So, when you ask them to describe what they do, ask yourself, “does that sound like what I am looking for?” If not, you probably don’t need to go any further.
3) Tell me about your process
This is an important question to ensure an advisor has a process and can articulate it, because just like when you go to the doctor, you don’t want a prescription before the examination or tests. In fact, I think process is so important that we named ours, our 3D process - Discover, Design, Deploy. When it comes to wealth management, we begin with discovery. You can’t begin to make recommendations, much less deploy a strategy before going through a thorough discovery. That means learning everything about where you are today. What are your assets and liabilities? What are you earning? Spending? Saving? What’s your risk tolerance? Time horizon? Goals? Past experiences? The list goes on. Process can cover a lot of ground, and some of the questions later on will shine more light on process. But simply asking an advisor to describe theirs is a great start.
4) What's your investment philosophy?
Find out if your potential advisor favors one style of investing or a particular type of investment. If you’re a more experienced investor, you’ll know pretty quickly if their style suits your comfort level and objectives. If you’re new, don’t be afraid to ask how their philosophy would benefit you. You should ask how they address risk and manage for it. Certain styles and investments may be well-suited for some investors but completely inappropriate for others. Also, if you believe a financial advisor has a one-size-fits-all approach, and you are looking for something more customized, it’s a good indication there isn’t a fit.
5) How will you take into account my assets you aren't directly managing?
A good financial advisor knows that your net worth may not exist only in the assets invested with their firm. You could have a Group RRSP through work, or you may have a large percentage of your net worth tied up in rental properties and your principal residence. If that were the case, for example, I would certainly need to know that. If I didn’t, and we decided to include, say, real estate stocks in your investment portfolio, and the real estate market took a big hit, the amount of your net worth exposed to that downturn could be quite high. Same thing if you work for a tech company and have a lot of shares. Your investment portfolio should provide balance that takes into consideration outside holdings. It helps to avoid what we call concentration risk.
6) How are you paid?
For some reason, this is a question many are reluctant to ask. But you shouldn’t be. Not only is this question important in understanding what you’re going to pay, but it also tells you something about transparency. Financial advisors use a variety of fee structures, so you’ll want to know how they are compensated. Do they charge a flat percentage of the assets managed? Do they collect performance fees? Are they commission-based? Our team, for example, uses a tiered percentage based on assets, meaning that as the assets under our management go up, the percentage charged goes down. And we never collect any 3rd party compensation. Some are commission based and charge transaction fees. There are some who charge an hourly rate or a combination of approaches. A good financial advisor will be candid about how they’re compensated.
7) How will you measure success and performance?
It’s important to understand not just HOW they measure performance, but what they are measuring. And what are the benchmarks? Is it just investment returns? For most clients, it’s not. If you consider the breadth of things involved in wealth management, even if our investment portfolio outperformed the benchmark, but we accomplished nothing in terms of helping to reduce taxes, increase savings, address your estate planning goals, and all the other wealth management objectives that are high on your priority list, I’d hardly call that success. Ask your financial advisor what success looks like when it comes to your specific financial goals. The answer will help you learn what they value. Then, consider if their values align with yours.
8) Who do you work with?
Ask about their typical client. Our team, for example, works with a smaller number of households, who tend to be approaching or in retirement. They’re high-net-worth and they have complex wealth management needs. I know of one advisor who specializes in working with IBM executives. She knows everything about the company pension plan, their group benefits, and she follows the stock religiously. She is a niche specialist. Other financial advisors are generalists. They cater to a wider variety of clients at different life stages and with varying needs and goals. As you learn about the advisor’s typical clients, ask yourself if your needs align with the type of clients they work with.
9) How will you communicate with me, and how often?
Communication is so important. But there’s no right answer when it comes to the amount and type of communication. In terms of frequency, some clients want to be in regular contact, and some are happy to review their quarterly statements and meet once a year. As to the type of communication, it comes in a lot of forms. Some goes out to all clients and some individualized. For example, in addition to one-on-one meetings, we send out a bi-weekly newsletter and host three or four client webinars every year. If regular contact is high on your list of priorities, ask the question. How often can I expect to hear from you? By email? Phone? Virtually? In person? If an advisor isn’t set up to meet your needs, it may not be a dealbreaker, but it’s something you should be aware of.
10) How do you work with other professionals like accountants or lawyers?
I think this last question helps bring it all together. This will tell you if you have a cohesive team on your side. If you're a business owner or have other complex financial circumstances, or you're looking to create a strategy for your estate, chances are other professionals will need to coordinate with your wealth advisor. It’s a good idea to ask for an example of how the advisor works with outside professionals as part of a broader team. It’s also important to ask what professional resources the advisor has within their team, particularly if you have more complex needs. And is there a cost to it? Do they have financial planning expertise? Trust and estate planning specialists? Tax? Insurance?
I hope this provides a good guide as you begin your search for an advisor. For more on this topic, listen to my Living Richer Podcast episode 21.