You’ve got that workplace 401k. A few years ago, perhaps you signed up for a Roth IRA. Maybe you even set up an investment account for your kid. As a DIY investor, you’re checking the financial investment boxes. But there’s still a question in your mind … Am I doing this right? 

Well, you might be a candidate for a financial advisor. A professional who understands the stock market, knows different types of investments and someone who can help you create a plan that fits your personal situation. 

Sounds nice, right? 

Surprisingly, the majority of people don’t use a financial advisor. According to a study by Northwestern Mutual, only 37% of Americans work with a financial advisor.  Other studies I came across that weren’t financial advisor firms found this number to be even lower.

Why is this? My guess on the reason is threefold:

• Cost: We think financial advisors are expensive or we don’t have enough money to invest with them. 
• Time: We think it’ll take up a lot of our time and we don’t have a lot of that already. 
• Trust: It's a big deal to hand over the reins of our life savings to someone else. That trust is hard to create. 

I’d like to work with you on one area of that puzzle today. And that is the trust piece. 

When you understand the process of working with a financial advisor, you may feel more likely to want to work with one. If you know how they are paid and trust that is fair, working together may start to feel right.

Questions To Ask A Financial Advisor

So … if you are considering working with a financial advisor now or in the future, here is a list of questions I would suggest you ask. This may help you develop some more trust in financial advisors in general.

Are You A Fiduciary?

According to the Consumer Financial Protection Bureau, “A fiduciary is someone who manages money or property for someone else. When you’re named a fiduciary and accept the role, you must – by law – manage the person’s money and property for their benefit, not yours.”

If you’re going to work with someone and they are involved with your money, it would be good to know if they are legally obligated to work in your best interest … and not theirs.

How Do You Make Money?

There are a variety of ways financial advisors can be paid. Here are a few:

• A Percentage of Assets Under Management:  Advisors will receive a certain percentage in fees (typically 0.25% to 2%) based on the assets they are managing for you. As an example, if you have $500,000 in assets under their management and their AUM fee is 1%, then you pay $5,000 per year to have them manage your assets. 
• Commission Based: With this model, the financial advisor is compensated purely on what products they sell to their clients. They receive commissions based on funds their clients purchase (or funds they purchase on behalf of their clients). 
• Fee-Only:  With the fee-only model, advisors get paid for their services only, not for the products they sell. This can come in the form of hourly pay or payment for the creation of a financial plan.
• Advice Only: Another newer type of financial advisor service that I personally think pairs well with the DIY investor is advice-only financial advisors. These folks are paid to provide “advice only” and you manage your investments. You pay them for their time (say $150 – $300 per hour) and ask all the questions you want. 

Before working with your potential financial advisor, it is important to know how they are compensated. This can influence the type of relationship you will have with them.

Do You Have Any Disclosures?

Before you meet with this potential financial advisor, you want to make sure they haven’t done any shady stuff.  Fortunately, there is a great resource for this. It’s called FINRA Broker Check.

In fact, if you’re reading this and already working with a financial advisor, you should use this too.

This website allows you to look up any registered financial advisor, find out their years of experience, the states where they are licensed, their credentials, and any disclosures they have on their record. 

If you do some poking around, you may find information about forging signatures, using client funds without permission, and other shady stuff. Or you might find no disclosures at all. Either way, it's good to do your homework first.

If they do have disclosures, ask them to explain what happened. Everyone makes mistakes. Perhaps it’s something you can look past and create a relationship with the individual. 

How Would Our Relationship Together Work?

Based on those different fee structures, you are either looking for a hands-off relationship where your advisor does most everything for you or a supportive partnership where you're working with a guide. 

Either way, you want to know how your potential advisor envisions this relationship. Also, if they aren’t holding up their end of the bargain, you’ll know when to call them out for it.

How Do You Typically Communicate With Your Clients? 

People who are new to a relationship with a financial advisor might not be aware of how often you get access to them for financial advice. Get that out of the way in the beginning. 

If you’ve taken on a relationship where you are paying for an hour of their time, you will know not to expect more than that unless you’re paying for it.

With other relationships, time together might not be as clear. Find out more details. 

• Will our meetings be in person?
• On the phone?
• Can I text you?
• What type of reports will I receive?
• How do I know how my portfolio is doing?

These types of communication-specific questions are key to developing trust in this potential relationship. 

Final Thoughts On Questions To Ask A Financial Advisor

Deciding to work with a financial advisor is a big deal. You have worked incredibly hard to grow your nest egg and you want to make sure your advisor cares about it as much as you do.

In my opinion, I don’t think that’s possible. You will always care more about your money than other people will. With that said, you should continue educating yourself on your financial situation. And as you need support along the way, pay for guidance from licensed professionals who have signed a fiduciary oath.

My preferred form of financial advisor relationship is with the advice-only model. You pay for their time and they support you on your journey. No managing your money and no products sold. Just advice.  

I recommend Nectarine for this type of support. They are revolutionizing the financial advising industry with this simple model and making it easier for DIY investors to feel like they understand how they’re doing. 

Whether you decide to work with a financial advisor or not, always remember that you will always be your best advocate. Partnering with someone to support you doesn't replace you in the driver's seat of your ideal financial future.

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What do you think of these 5 questions to ask a financial advisor? Are you currently working with a financial advisor?

Please let us know in the comments below.

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