9 Questions to Ask Before Hiring an Advisor
David L. Blain, CFA, CEO of BlueSky Wealth Advisors, and author of "Invest In Your Life, Not Just Your Portfolio," addresses the following questions to ask before hiring an advisor:
- Are you a Fiduciary?
- What are your qualifications?
- How are you paid?
- Do you work as a team?
- Do you follow evidence-based investing strategies?
- What services do you provide besides investment management?
- Will you help implement your recommendations?
- Do you have clients like me?
- Do you follow the same strategies that you recommend?
Transcript of: 9 Key Questions to Ask Before Hiring a Financial Advisor
(00:01) - 9 Key Questions to Ask Before Hiring a Financial Advisor
Hi, I'm David Blain, CEO and founder of BlueSky Wealth Advisors. If you're like a lot of people, you may be wondering what questions you should ask when hiring a financial advisor. It can be a big decision and one that you don't make on a routine basis. So today I'm going to give you a list of nine key questions that you should ask before hiring an advisor. And I say before because sometimes people come to us and they've already hired an advisor and had a really bad experience. So hopefully these questions that you get some answers to before you hire that advisor.
(00:36) - The Importance of Hiring a Fiduciary Financial Advisor
Number one is, are you a fiduciary? What is a fiduciary? A fiduciary is someone that is required by law to put your interests as the client above their own. So some people that work in the investment world are fiduciaries similar to a lawyer. If you hire a lawyer, they're required to put your interests, what you are trying to do above their own. Same thing with a trustee of a trust. Well, some financial advisors are a fiduciary, others are not. Stockbrokers are not. And so make sure you really understand whether that person's a fiduciary. A registered investment advisor is a fiduciary, all of them, they're required to do that.
(01:22) - Assessing an Advisor's Qualifications: Degrees and Certifications
Now, that doesn't assure that the person you're hiring is ethical. Bernie Madoff, if you go back to those of you old enough to remember Bernie Madoff, he was a registered investment advisor and he stole a bunch of money from people. But at a minimum, you should start with someone that's a fiduciary.
(01:41) - The Importance of Background and Experience in Financial Advising
Number two, you want to ask what are your qualifications? Do you have a degree in financial planning? Do you have a master's degree? We have a bunch of advisors here at BlueSky that have degrees in financial planning, they have master's degrees in financial planning, they have master's degree in tax and all sorts of things. There's also a bunch of professional certifications out there that advisors can get.
(02:07) - Navigating the World of Financial Advisor Certifications and Education
There's what I call the big four. Number one, the CFA, charter financial analyst, which is what I am. It's kind of like a PhD in investing. The CFP, certified financial planner. Number three, CPAs are not all good financial advisors, but if you find one that's has a PFS, personal financial specialist designation, that tells you that that CPA specializes in personal finance-related matters. And then of course, I also like the EA designation, which is an enrolled agent. It's a designation given out by the IRS for people that have demonstrated expertise in tax items. There's a million other letters that people have after their names. Some of them are okay, some of them are an outright scam, but besides the certification and education, I like to see what background a person has. Do they have experience in another field? Have they been successful at business or in industry or type of things like that? Or has their only experience been they got a degree in something in college and been out and selling financial products for the past two years, 20 years, whatever? It doesn't matter.
(03:21) - The Benefits of Financial Advisors with Diverse Career Backgrounds
But look at that experience. Experience in another field in finance is actually not bad. It can be very beneficial when an advisor has knowledge and understanding of other fields. Some of the greatest financial advisors that I know started in a different field to begin with.
(03:41) - Assessing the Experiences of Younger Financial Advisors
Now, as you get into the younger generation, those folks, you want to look for those people that went to school. If it's their first job or second job, their relatively young, a lot of those people have degrees in financial planning or investments.
(03:57) - Understanding the Different Ways Financial Advisors are Paid
Okay, number three, big question. How are you paid? There's a couple ways that advisors are paid. Number one is commission. They're selling you a product and they receive a commission based on that.
(04:11) - Why Commission-Based Financial Advisors Should be Avoided
Look, in today's day and age, there should be no reason whatsoever to go to a commission-based advisor. There's a massive conflict of interest. Not saying all those people are bad, but the system that they operate in is very difficult for them to put your best interest above theirs. And in fact, they are most likely not, well, they are not a fiduciary if they're selling you a product.
(04:37) - The Pros and Cons of Asset-Based Financial Advisors
Number two is advisors that either charge a percentage of assets, it's called AUM. So if you have a million dollars, they charge you 1%, they charge you $10,000 a year. Nothing inherently wrong about that. We don't think that's the best way to pay for financial advice, but there are some decent advisors out there that charge AUM. It can get a little bit pricey, especially in the upper reaches of assets. If you have $50 million or something, there's no reason you should ever be paying 1% of assets.
(05:18) - How BlueSky's Flat Fee Works for Comprehensive Financial Planning
The third way to pay, and we think it's the best, is how we charge at BlueSky, is a flat fee. We charge a flat retainer fee based on the complexity of your situation, a couple of data points of your life situation. Over the years, we've figured out we have a pretty good idea of what we're going to encounter in terms of complexity and tax planning and estate planning and education planning, investing, all those different topics, retirement planning. And so we just charge a flat fee that doesn't go up and down based on the value of your accounts.
(05:54) - Why Choosing an Advisor with Transparent Pricing is Crucial
Now, there's a certain minimum amount that it takes to deliver that kind of high quality service. So for people at lower asset levels, sometimes a flat fee can seem a little bit expensive. But make sure you understand how the advisor is paid. Once again, with the fee only and a flat fee, the you're going to know transparently exactly what your fee is. If you're not sure or you can't figure it out, then I would say go to a different advisor.
(06:26) - The Benefits of Working with a Team of Financial Advisors
Number four question is, do you work as a team? Is the person in business, are they the only advisor or the only employee? Nothing wrong with that. I certainly started out that way. But they're probably not the best... In today's day and age, you want to look for someone that works as part of a team. Everybody has to start out. But if you have significant wealth or a lot of complexity, you're going to want to work with a team of advisors where they have other advisors to draw in expertise in tax and estate and things if that particular advisor you're working with is not an expert in every area.
(07:07) - Ensuring Continuity in Your Financial Planning with a Team Approach
Also for continuity's sake. If you're working with a team of people and something happens to one of the advisors, they get injured or they pass away, or even just decide to go do something else, if you're working with a team, it's a much smoother process. Similar to nothing wrong with a doctor that is in, let's say, a single specialty practice, that owns their own single specialty practice, but generally, if you go to a multi-specialty practice where you can go and get your annual physical and maybe a EKG and different specialists in that office for a higher complexity medical situation can be an advantage. Same thing with advisors.
(07:54) - The Importance of Evidence-Based Investing in Your Financial Portfolio
The next item you're going to want to ask is, do you follow evidence-based investing strategies? Similar to evidence-based medicine, there's something called evidence-based investing. And this is where you're following the data, look at what actually works in investing. And it generally leads to what's called a passive strategy where you're not picking individual stocks. The data just does not support that anybody can reliably and consistently, over long periods of time, outperform a basket or index of stocks by picking individual stocks, not even Warren Buffet. In fact, Warren Buffet buys entire companies. He has made some investments in individual stocks, but he generally buys entire companies. And if you listen to him, he says buy an index fund.
(08:48) - Comprehensive Financial Advisory Services
Okay, the next question you want to ask is, do you provide services besides investment management? My opinion and my recommendation would be to find an advisor that also has a really strong grasp of things like tax, estate planning, insurance. They don't sell insurance, but they can provide you advice on insurance. Also, real estate. Real estate is one of the largest asset classes in the world, and I don't understand the advisors that are not able to advise on real estate investing.
(09:22) - Holistic Financial Planning
So make sure you ask. If they're just providing investment management, I don't know that that's the best thing in today's day and age. I'd like to see you find an advisor that offers a more comprehensive and holistic perspective on your finances.
(09:41) - Implementation Support for Recommendations
The next question you want to ask is, will you help implement the recommendation? It's great, maybe they do offer all these services. Hey, we'll tell you how much life insurance you need. But then they're not able to help you execute on that. You're left on your own to go find an agent.
(09:59) - Full-Service Implementation
We like to see firms that can help implement. We don't want them selling you the product necessarily, but they should be able to help implement it. Either provide a recommendation to a trusted professional that they work day in and day out with, or for some people that maybe pay a little bit more, they're going to help implement that right alongside you.
(10:22) - Estate Planning Support
For example, estate planning. We don't just provide recommendations to an attorney. We walk with clients that pay us a certain amount of money. We walk with them and we help them get those documents executed so they're not out there on their own. But make sure you understand, if the advisor's going to help you implement or not implement, the recommendations that they make.
(10:45) - Finding a Financial Advisor who Caters to your Unique Needs
The next question I'm going to ask is, do you have clients like me? Once again, kind of going back to my early days when I first started, I would work with just about anybody that came through the door. Nothing wrong with that for an advisor just starting out. And if you have a relatively simple situation, not a lot of complexity, and you trust the person, and they meet the other criteria, nothing wrong with that.
(11:13) - Choosing a Financial Advisor who Works with Clients Like You
As you get more complexity, maybe a little bit more money, we're going to want to make sure that the person that you're hiring works with clients like you, in your profession, in the amount of money that you have in the tax situation that you have, business owner, not business owner, the age of the client that you are. Generally speaking, you're going to want to have that advisor that works with clients like you.
(11:41) - The Importance of a Financial Advisor who Practices what they Preach
And the last one that I like to ask and recommend that you ask is, do you follow the same strategies that you recommend? If you look in my investment account, you will see the exact same investments that we recommend to clients, both liquid investments, ETFs, index funds, as well as my real estate investments, the exact same investing style. I use the same law firms. I use the same estate strategies as we recommend to our clients. I use the same tax planning strategies. Most of the things that we recommend to clients, your advisor should also be taking advantage of, or certainly on the investment side. Sometimes they may not have the same net worth or complexity, and so they don't need to do the same tax or estate strategy, but certainly on the investment side, you want that advisor to be eating their own cooking.
(12:39) - The 9 Essential Questions to Ask before Hiring a Financial Advisor
So that's it. Those are the nine questions that we recommend you ask before hiring an advisor. Are you a fiduciary? What are your qualifications? How are you paid? Do you work as a team? Do you follow evidence-based investing strategies? What services do you provide besides investment management? Will you help implement my recommendations? Do you have clients like me? And finally, do you follow the same strategies that you recommend? Do you eat your own cooking?
(13:09) - Expert Advice on Selecting the Right Financial Advisor for You
So we'll put these questions in the description of the video, but if you have any other questions, please don't hesitate to reach out and we'll be happy to talk about how you should select a financial advisor.