What You Need to Ask Before Working with a Financial Advisor

There is a notion that financial advisory services are only for the super-rich or for financially illiterate. That could not be further away from fact.

Think of a financial advisor as a trusted guide and coach. Even the most successful athletes have coaches. Why? A good coach will guide them through the ups and downs, help them stay the course during tough times and guide them through logical and reasoned decisions. An ethical and competent financial adviser can bring similar value. Investing and emotions rarely mix well.

Prior to engaging with a financial advisor, there are important questions as you evaluate individuals and firms. Along with that, there is an important question to ask yourself: what you are expecting from such a relationship? In addition to establishing trust, it is also important to make sure that your advisor is aware of overall financial and personal goals so that you are both similarly aligned.

Having said all that, let us have a look at what you need to ask while evaluating a financial or retirement planning advisor:

Is your Advisor a Fiduciary?

If your advisor is a fiduciary, they may charge an asset management fee rather than receive a brokerage commission. If the advisor is a broker, they operate from a transactional perspective and, therefore, apply the “suitability standard,” asking is this specific product appropriate for the client, which may lead to potential conflicts of interest. Financial advisors must adhere to the fiduciary or "best interest" standard, which considers the clients complete financial condition and decides if implementing a particular strategy or product is in their best interest, overall.

While a fiduciary is a good check mark to look for, it is equally important to know whether these advisors are under the pressure of sales quotas.

This is one of the more difficult concepts to grasp during the evaluation phase, but an important one. An independent advisor adhering to the fiduciary standard is required to put the  client’s best interests first.

Third party custodian for assets: Most advisors that you will work with utilize third-party custodians.  What that means is that your adviser is not keeping your money at their firm.

Remember Bernie Madoff? Unfortunately, for his clients, they did not have a third-party custodian for their assets. The clients were told that their investments were doing really well and that it was really safe at the Madoff firm. We know how that ended. While there are many honest people in this business, it is good to have a third-party custodian while your adviser manages your assets.

Trust but verify: You can go to FINRA’s (Financial Industry Regulatory Authority) ‘Brokercheck’ website (or the SEC’s IAPD website) and check your adviser’s background. The key to look for is ‘disclosures’ as in whether there has been any complaints against the advisor. If there are disclosures mentioned, then it will be good to have the advisor explain the reasons why. This information has been made available to the general public to check on advisor or broker’s backgrounds. Trust is good, but it never hurts to verify.

What Makes a Good Advisor?

Financial advisers come from various educational and career backgrounds. While all of them have to take necessary exams before obtaining their certifications, a strong prior education and financial expertise are often indicators of a competent advisor. They may offer no guarantee of great performance, but the strong backgrounds at least shows that these people have taken the time and effort to invest in specialized education and have the capability to apply intellectual rigor and specialized knowledge to do the best for their clients.

What are the fees? Fees are an important consideration. If it is a managed account, will there still be trading fees in addition to the management fee? Be sure to get a proposal for the chosen risk profile (conservative, moderate, other) and an overview of the fund composition. You should also obtain a proposal that clearly shows the annual asset management fee in writing and that gets signed off both by you and the advisor.

Growth (Accumulation) vs. Retirement (Distribution) phases: It is important to note that while financial planning and retirement planning are closely related, your career at 25 is very different than at mid-career at age 45 – and again the needs are very different at retirement at 65 years of age! A retirement strategy should optimize social security benefits, safety nets for long term care coverage and Required Minimum Distributions (RMD) of qualified assets (401K, IRA, 403b and the like), to name a few.

Comprehensive services and not just money management: There is a saying that ‘if the only tool in the toolbox is a hammer, then everything will look like a nail’. A high-quality financial and retirement plan among other aspects, should also include a retirement income plan, asset allocation strategies, estate planning, social security income analysis, RMD strategy, as well as tax strategy and optimization. These aspects of successful financial and retirement planning are a lot more tightly connected than you would think.

What do YOU want out of this relationship? While it is very important to identify an ethical and competent advisor with the right questions and due diligence, self-awareness and a bit of introspection are important. What are your expectations from a financial/retirement planning relationship? It should not be just for the highest returns. Risk and reward go hand-in-hand, and a higher tolerance for risk could mean higher returns as well as significant losses!

Ask yourself what retirement you may envision for yourself and your spouse? And what kind of legacy and assets you want to leave behind for your beneficiaries. How important is guaranteed income in your retirement?

A well-planned retirement never happens by accident. It is never too late or too early to plan for the future!

Arvind Ven is Founder/CEO of the Capital V Group, a Registered Investment Advisory firm. He has an MBA from the MIT Sloan School and a Master’s Degree in Computer Engineering.

Arvind Ven is a Registered Representative with, and securities offered through LPL Financial. Member FINRA & SIPC.