Even in the many years before I decided to start competing in the space of financial advisors, I noticed a paradox among financial advisors:
A. There were both enormous differences between what different people calling themselves “financial advisors” actually do, yet
B. Financial advisors have a hard time differentiating themselves from their competition
As a useful guide to both, I decided to list out 10 non-personal questions to ask when looking for a financial advisor that will help sort out how well one will likely help meet your goals. My next post will list 10 personal questions to ask your financial advisor to compliment these
Question 1: How do you get paid?
This is the simplest but probably most important question to ask any financial advisor. The most common answers are:
A. Get paid a commission / kickback / trailer on a financial product they sell you,
B. Invoice you an hourly or fixed fee for their time, or
C. Charge percentage or performance fees on investments they manage for you
Option A is not necessarily bad, but financial incentive is to sell products rather than provide the most objective advice, and most real estate / property agents get paid this way. Option B is more typical of lawyers and accountants, but used by some fee-only financial planners whose clients don’t mind writing a cheque. Option C is how many private banks and integrated money managers get paid, and this arguably provides the purest incentive to continuously work in your best interest.
Question 2: Are you a fiduciary?
A “fiduciary duty” is simply a fancy way of saying “required to act in your best interest”. Professionals not required to act in your best interest may be legally allowed and financial rewarded to steer you into products which pay them the highest commissions rather than best meet your goals. We don’t expect this of many professions (most property agents are not fiduciaries, and that doesn’t stop most of us from buying a house from one), but this is something to be aware of, such as when asking a barber vs a friend whether you need a haircut.
My earlier post on the fiduciary rule is here.
Question 3: How are you regulated? Do you have any other certifications?
Financial services are regulated in many places, and there are many different ways your advisor might be regulated. Some frequently seen ones include:
A. As a broker – this would be someone who has taken the “Series 7” exam in the US or has a “Type 1” license in Hong Kong, and this is a license to sell securities (mostly stocks, bonds, or mutual funds), often for a commission
B. As an insurance agent or broker – these are professionals who can sell insurance products, often sub-divided into life insurance and shorter-term insurance like health and property insurance. Some also try selling investment products as insurance, but I explain in earlier posts why this is almost always a bad idea.
C. As an investment advisor – these are called “registered investment advisors” in the US or have “Type 4” or “Type 9” licenses in Hong Kong, which are not licenses to sell securities, insurance, or any other financial product but rather to give advice or manage money, respectively, for a fee.
You may also also look for letters after someone’s name to see if they are a Chartered Financial Analyst (CFA) Charterholder or Certified Financial Planner (CFP) Professional.
Question 4: What areas of financial advice do you specialise in?
Financial advice is a very broad area where no one can master all the parts, though where financial advisors often differ from other finance professionals is in the ability to cover enough of a few different areas to be able to serve even, say bankers better than bankers would be able to manage their own overall finances without help. Financial advisors often have a certain background or focus around which most of their ability to provide additional useful financial advice, some of the most common ones being:
A. Investments – these specialists sometimes call ourselves “investment advisors”, as our primary expertise is in advising how to invest money to earn returns with the right amount of risk.
B. Insurance – these professionals often have a background in selling insurance products, and the best ones will understand how to best protect against hazards ranging from death, disease, disability and lawsuits to fires, theft, and natural disasters.
C. Tax – tax accountants often provide valuable financial advice, but approach investing and insurance from a very different angle than specialists in investments and insurance would.
D. Legal and Estate Planners – your lawyer or attorney can also provide financial advice, but as with tax accountants, their focus may be on protecting you from governments or creditors rather than getting the best risk-adjusted return from the market.
Question 5: What areas of financial advice are NOT your focus?
This question can be a bit of a sanity check to see how well a financial advisor understands their own strengths and limits. As much as we’d all want to be experts in all things, the best of us admit what we are better at and what we defer to other specialists.
Question 6: What geographic areas do you cover, both in terms of clients and financial products?
Financial advice is understandably a very local business as far as where the clients served are located, but the financial world is highly globalized, and a very common mistake of many financial advisors is having too much of their clients’ money concentrated in their home country and not diversified internationally.
Question 7: What is the profile of your typical or ideal client?
This is a borderline “personal” question to see how closely the financial advisor’s focus fits solving actual cases like yours.
Question 8: How do you make investment decisions / asset allocations?
These last three questions may be the hardest for many laypeople to test how well a financial advisor actually knows their stuff, but the point is more to see how easy the answers are to understand.
In terms of investment process, there is no one right answer, and many financial advisors who are not investment specialists use simple top-down models set by firms like Vanguard or Blackrock, while others can clearly answer why they might choose one set of investments for you but something else for a different client.
Question 9: What are some of the major risks I am exposed to, and what can I do about them?
A good financial advisor should be better than average at asking and preparing for “what if” questions. Better than many laypeople, they can assess how badly a job loss or illness may affect your ability to pay your bills or retire on schedule, or how much you need to worry about inflation.
Question 10: What is likely to happen to my investments if the market falls by 10% tomorrow?
This is an on the spot “stress test” question, where an investment specialist will have an easier time giving you a straight answer immediately than a non-investment specialist. If you are younger than about 45 years of age, or if the amount you are investing is not your main source of retirement income, you may be fine losing 10% or more of your net worth in a 10% market crash, otherwise, you should get a clearer picture on your market risk exposure.
Do send me a message through the form below if you’d like to discuss any of these questions with us.