Personal Finance: What To Ask Before You Hire a Financial Advisor

Working with a financial advisor can be a stressful decision. It requires sharing intimate financial details and implies a deep level of trust that takes time to build.  A reasonable assumption would be that the advisor on the other side of the table is required to act in your best interest; however, that is not always the case. Here are some questions to ask before deciding to work with a financial advisor. 

First, I recommend asking if the advisor is a fiduciary. It might be surprising to know that not all advisors are held to a fiduciary standard. Registered investment advisors are regulated by the SEC and are held to the fiduciary standard, which requires that they make recommendations based on their clients' best interests.

Second, ask the advisor how they are paid. Are they paid a fee directly from their client, or are they paid by commissions and/or mutual fund trails? If they are paid in a way other than a fee from their client, this can be problematic because it presents potential conflicts of interest. For example, that advisor may be tempted to make recommendations to earn commissions rather than what’s best for their client. You should also ask what kind of investment products they offer. If the advisor is primarily recommending proprietary products, or products from their company, this may also present potential conflicts of interest. In my opinion, it’s always best to avoid conflicts presented by compensation. Financial advisors should be paid by their client and not product providers.

Lastly, I recommend asking if the financial advisor holds any advanced professional designations, such as the CERTIFIED FINANCIAL PLANNER™ (CFP®) or Chartered Financial Consultant® (ChFC®). Many financial advisors choose to earn professional designations to set themselves apart from other practitioners by having a foundational financial education background. Having a strong background not only benefits clients through being able to offer sound advice, but it can also boost advisor marketability in an often-crowded marketplace. The American College of Financial Services first started offering the ChFC® in 1982 as an alternative to the CFP® designation. The CFP® is the more popular designation of the two; however, the ChFC® actually requires more coursework. The CFP® requires seven college-level courses, while the ChFC® requires eight. The topics covered are alike; in fact, the first seven courses under the ChFC® program satisfy the CFP® educational requirements.  Additionally, the ChFC® includes modern topics not currently covered by the CFP® such as behavioral finance and planning for same-sex couples, divorcees, and blended families.  The main difference between the two is that after completing the course requirements, CFP® holders are required to take and pass one comprehensive board exam, currently offered only three times a year, while ChFC® practitioners have to pass individual tests for each subject. The American College of Financial Services provides a free designation check through their website, https://www.youradvisorguide.com. One can also search the website for financial advisors with designations available in their area.

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