The 5 Questions You Should Ask a Potential Financial Advisor

Finance is the least-trusted profession in the United States, according to the 2013 Edelman Trust Barometer.  You can blame it on the economic crisis of 2008, along with a generous helping of Wall Street maelstrom. America just doesn’t trust the financial services industry.

But good reasons to hire a financial advisor do exist. Maybe the wife just got a raise that puts your total combined incomes over the $226,850 threshold and into the next highest tax bracket. Perhaps you recently received a six-figure structured settlement and are pondering liquidating the future payments via a company like J.G. Wentworth. Maybe a parent passed, and you’ve inherited a large amount of money. Unless you’re extraordinarily financially savvy, you should get a financial advisor to help you make sound financial decisions. We’ve all heard the stories of lottery winners who mismanaged their money so badly they’re broke now.

This may be one of the most important business relationships of your life. Make certain you are working with the right person by asking these five questions:

1. Are you a fiduciary?

A family in the market for a new home wants to keep their monthly payment under a certain level and keep the interest rate fixed for the life of the mortgage. A financial advisor who practices a suitability standard will take this information into consideration, but he may ultimately recommend a mortgage product that will net him a commission despite there being a better product available for the client.

Financial advisors who follow the fiduciary standard have agreed to place the client’s interest ahead of their own. They are also registered with the Securities and Exchange Commission or another regulatory agency. The Certified Financial Planner Board lays out the rules of conduct necessary for an advisor to call himself a fiduciary. Only consider a fiduciary for the job.

2. How are you compensated?

An honest financial advisor should willingly and thoroughly explain all fees, commissions and other compensation he receives for his work. Vague answers like “I’m paid by my company” should be viewed as an effort to hide something.

A simple rule to follow: Gravitate toward advisors who are paid solely from fees that come from you. The fee schedule should be easy to read and simple to adhere to. Those who are compensated via commissions or broker fees may have ulterior motives. The National Association of Personal Financial Advisors has a database of fee-only financial advisors.

3. Will You Show Me Real-life Examples?

A confident advisor can show you quarterly earnings reports from other clients simply by redacting all personally identifying information. He should explain the rationale used for each investment line by line.

4. Any Questions for Me?

He should ask you about your health and current debt load without being prompted. The previous will determine how much should be invested in medical insurance and care, while the latter will help him determine short-term goals. He should also ask you about retirement planning and saving for your children’s educations, if applicable.

5. What Credentials Do You Have?

Many advisors have degrees and certificates hanging on their office walls to show their qualifications. Ask them what each piece of paper means and what they had to go through to get it. Selling annuities and mutual funds requires only a license to sell securities. This does not mean the advisor is knowledgable about the various markets, monetary policy and other factors that can affect investments. Avoid any advisor who grows tired of you asking questions.

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