Choosing a Financial Advisor? Ask These Five Critical Questions

As someone who has achieved personal financial success, hiring the right team of wealth management professionals is one of the most important decisions you will ever make for yourself and your family. The right selection decision can be key to your future financial security. 

Unfortunately, many people don’t use objective processes when they select financial advisors. Rather, they make hiring decisions based solely on subjective criteria impacted by advisor personalities and sales skills.  With so many advisors offering similar services, how do you identify that one firm or professional you can trust to do what is best for you and your family?

The answer lies in asking the right questions. Documentation for important responses is also a good idea.

As a fee-only fiduciary financial advisor in St. George, we’ve compiled five important questions that you should be asking potential advisors so you have a clear understanding of qualifications, trustworthiness, and business practices. By asking these targeted questions, you can gain deeper insights into how an advisor operates and whether their philosophy and methods are consistent with your financial requirements.

Whether focused on goal-based financial planning or interested in evidence-based investing, understanding the clients they serve, what your experience will look like, and how they are compensated for their knowledge, advice, and services. 

What kind of clients do you typically work with?

Understanding the types of clients a financial advisor typically works with is important for several reasons.

Many advisors specialize in serving specific client demographics, such as business owners, retirees, or younger professionals. You may expect specialized advisors working with investors like you to deliver better results over longer periods.

Advisors often develop expertise in particular areas based on their clientele. For instance, an advisor who frequently works with retirees may have extensive knowledge about retirement planning and asset distribution.

Plus, advisors often tailor their advice and services to the needs of their ideal types of clients. Understanding who they usually work with can provide additional insights into their specialized knowledge and how it will help you pursue your financial goals.

Cogent Insights: The right match between your requirements and an advisor’s services can lead to a more productive and long-lasting professional relationship.

Watch our founder, Michael Evans, discuss our 2nd opinion service. 

What Should I Expect When We Work Together? 

Understanding what your experience will be like working with a particular financial advisor.

The advisor’s experience working with clients like you can make the advisor a source of specialized knowledge that will benefit you and your family. 

Because each advisor can have a unique approach to financial planning, investment management, and other services, understanding the traits of a typical client (e.g., net worth, professionals, available assets, etc.) can help you assess how well their strategies and philosophies match your requirements, expectations and comfort level.

Does the advisor have a clear process for developing these personalized insights about you? Does their process include specific milestone meetings and accountability procedures for both of you? Is the advisor’s team adept at creating individualized financial plans based on a deep knowledge of you and how you create your stellar earnings? Are they in synch with what your CPA, estate planning attorney, insurance agent, and business consultant are doing on your behalf … and vice-versa? All these and more are hallmarks of a quality client experience.

Cogent Insights: Our financial professionals at Cogent Strategic Wealth take pride in our listening skills, so our advice matches the needs of our clients. Through our Cogent Conversations, we better understand who you are, your financial concerns, and your goals.  We’ll provide the expertise you need to make the right financial decisions. 

How Are You Compensated?

Understanding how a financial advisor is compensated is crucial for several reasons.

For example, we agree with the saying: “There are no free lunches in the financial world.” One way or another, financial advisors have to be paid for their knowledge, advice, and time. The key questions are:

• Who is paying them – you or a third party?
• How are they being paid?
• How much are they being paid?
• What do you get in return?

Knowing how your advisor is compensated requires transparency in your financial relationship. It can help you understand if their compensation structures influence their advice and services.

Different compensation models may lead to different incentives for the advisor. For instance, commission-based advisors might be incentivized to recommend products that pay them the biggest commissions, which may only sometimes be in your best interests.

Understanding financial advisor fee structures also enables you to assess the cost-effectiveness of the advisory services. Considering the fees paid, this is important for calculating your overall net investment return.

Certain compensation models, like fee-only, may work better when the advisor’s interests are aligned with yours because they are compensated based on the quality of their and not the products they sell.

You can receive two types of investment advice: suitable or fiduciary. When the advice is considered secondary to a broker’s or agent’s primary transactional-based duties, the advice must be suitable for you. Still, it’s allowable if underlying interests influence it. It is in promoting one product over another – even if the recommended product is not in your best interests.

A fiduciary advisor, on the other hand, is in the business of offering you advice. As such, under the Investment Advisors Act of 1940, a fiduciary advisor is bound by the highest legal duty of care for your financial welfare. Their advice must always be in your best interests. Ask your advisor to show you their Form ADV, a required regulatory document if they act as a fiduciary.

Cogent Insights: We strive to provide our clients with transparent and trustworthy financial guidance. As a fee-only, fiduciary, independent registered investment advisor firm, our compensation is based on the market valuation of the assets we invest for you. 

What Are Examples of Other Costs I May Pay in Addition to an Advisory Fee? 

There are some other investment-related fees that you may be subject to. One example is a custodial fee. This fee is charged by the custodian who holds and safeguards your financial assets. It covers administrative services like account statements, transactions, reporting, and basic account maintenance.

If your financial advisor uses third-party money managers, you will also pay for their advice when managing your investments. These fees are usually a percentage of the assets that they manage.

Your portfolio may include third-party mutual funds or exchange-traded funds. They are compensated like the third-party money managers, although they may charge additional fees.

Cogent Insights: Unlike commissioned salespeople or brokers who can face potential conflicts of interest, our model puts your financial interests first. We do not receive any commission on the sale of investment products. Our clients pay us, not third parties (broker/dealers, mutual funds). Consequently, we have no hidden agendas or potential conflicts of interest based on how we are compensated.

How Would You Describe Your Investment Strategy? 

Another important factor in your relationship with a St. George-based financial advisor is understanding how the firm will manage your portfolio, especially during excessive market volatility. You need the right balance between risk and reward to pursue your financial goals in various market conditions.  

Trust and transparency are the foundation of an investor-advisor relationship, so being comfortable with how your money is invested is a key component for building a long-term relationship with the right financial advisor.  

Cogent Insights: By now, you should know the risks associated with investing in the securities markets. The risks can be considerable, and there’s little room for error. The last thing you need is to jeopardize your and your family’s security by following questionable financial advice that may not be in your best interests.

Pursuing financial success requires a well-thought-out plan and disciplined execution. The same can be said for selecting a financial advisor. You need a process based on the financial advisor’s knowledge, services, and trustworthiness.   

Minimize the impact of the financial advisor’s personality and sales pitch. Require documentation for key information when appropriate. It can be safer to trust what you see versus what you near.
At Cogent Strategic Wealth, our goal is to provide all of the information you need to select the right financial advisor for the right reasons. For an even deeper dive into asking the right questions of an advisor, see our consumer guide: 15 Questions to Ask When Choosing a Financial Advisor.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Cogent Strategic Wealth provides investment advice only through individualized interactions. Certain information is based upon third-party data, which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. © 2023, Cogent Strategic Wealth®