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How to Interview a Financial Advisor
You finally are making some money and you are ready to start interviewing financial advisors.
You figure that you need some help managing investments and you need to hire any old advisor.
So, you go down the street and hire the first one you meet because they are all the same. Right?
That is the worst possible way to hire an advisor.
Today I am going to cover some of the different types of advisors and questions you should ask them in order to pick the right one for you.
Different Types of Financial Advisors
If you scour the internet, you will find many different opinions on what the best type of advisor is.
Some people think they are all the same. Others believe you should hire fee only advisors. Another group might think that you should never hire an advisor who uses insurances.
The opinions go on and on. But here is the secret – pick the right one for you.
The one you trust the most. Who you know will be there when you need them. The one who does right by you and gives you the time of day to really have a great long-term relationship.
This person will likely know more about your financial situation than anyone other than yourself. It is important that they have your best interests in mind.
After reading the different types of advisors below, regardless of which type you choose, make sure they align with your what you are looking for first and foremost.
Commission Only
Commission only advisors make money by selling you things.
These things may be mutual funds or insurance or annuities.
Regardless of what they sell you they get paid a commission. Or a percentage of the dollar amount of what they sell you.
If you buy mutual funds from them, you pay that commission (sometimes called a load fee). It can be as high as 5.75%. The same goes for life insurance and disability insurance.
If you purchase and annuity from them the annuity company typically pay the upfront commission, but you may pay an ongoing maintenance fee inside the annuity.
These advisors are not inherently bad, but they do tend to be more expensive in the long run. I have met some that are great people who do great work and others I would not send my worst enemy to.
Choose this type of advisor if you do not want a relationship. You have a need that can be settled in one ore few transactions. This will keep costs down and returns up.
Do not choose them if you want a financial plan or at least a plan done well. They are more likely to be transactional in nature and only interested in making a sale and not nurturing a relationship.
Fee Based
Fee based advisors get paid a fee each year for the percentage of the assets that they manage. This fee is determined for each client individually – more often than not it’s about 1% each year.
These advisors may earn a commission on a few products they sell, such as annuities and insurance contracts. But this is not a major revenue driver for their business.
These advisors often offer financial planning as well. They also tend to be quite good at it and deliver very detailed financial plans.
The plans may be a one-time fee or ongoing fee if you need advice each year. The more complicated your situation the higher your fee.
Hire this advisor if you value a relationship. These advisors are best used over a long time. They will meet you on a regular basis and make changes as necessary. The value is the relationship and what you share with them. The more they know the better your results.
Do not hire this advisor if do not want to pay an ongoing fee. Or if you feel that you can manage your investments yourself. Also do not hire them if you do not want to meet at least once a year.
Planning Fee Only
Planning fee only advisors are very unique.
They typically deal with more complicated situations and do not do investment management.
They will tell you how to allocate your portfolio but will not do it for you. It is on you to allocate your money to investments or outsource it to someone else.
The situations they deal with tend to be complicated and have many parties involved. There are many moving parts, and you would hire them to make sense of it all.
The fee for their plans tends to be the highest in the industry. But the level of detail they go into is much greater than what other advisors do.
Hire this advisor if you have a very complicated situation and you need guidance to navigate it. You also would value a relationship here where the advisor could update your plan as aspects change. These advisors tend to help wealthier people who do not need asset management advice but want unbiased input on their situation.
Do not hire this advisor if you want investment management advice. They will tell you how to allocate your portfolio but if you want them to manage it you are out of luck. Also do not hire them if you do not have deep pockets as they tend to be expensive. Finally, if your situation is relatively simple you do not need to hire them either.
Insurance Based Advisors
Insurance based advisors are just like they sound – most of their investment recommendations are insurance based.
They will urge you to purchase annuities and whole life insurance to manage your investments in. The big catch with these products is that they tend to be expensive over the long term.
They also may limit your returns. Better options are term insurance or universal life paired with fee-based advice.
If you absolutely have a need for whole life insurance or annuities they may make sense, but chances are the other types of advisors above have these products too.
What This All Means
At the end of the day, regardless of the type of advisor, hire the one that best meets your needs.
There are positives and drawbacks to working with each type. It is important to be aware of them for each and make an educated decision from there.
But what is more important is finding one who meets your needs as completely and efficiently as possible.
How did you choose your financial advisor?