Finding the right financial advisor for your particular situation can be incredibly tough and time-consuming. To help you begin to filter through the many financial professionals, numerous articles have been written about what questions to ask.
I even wrote an article on the subject and outlined five key factors to consider:
1. Education and Experience
3. Fees and Conflicts of Interest
4. Standard of Care
5. Working Relationship
A factor I didn't mention was inquiring about an advisor's own financial situation. I asked several financial advisors to weigh in on whether they thought their own financial situation would be relevant to prospective clients, and most agreed sharing certain aspects could be helpful. Here's what you may want to ask a prospective financial advisor about their own finances.
Are They In Control Of Their Finances?
Just as you may prefer to work with a personal trainer that is physically fit, you would probably rather entrust your life savings with someone that has proven they can successfully manage their own finances. Some questions are more helpful to ask than others to gauge this.
"I do not think it's fair game to discuss how much money the advisor makes or how much money they have saved," says Jamie Hopkins, a Professor of Taxation at The American College of Financial Services.
Many advisors agreed, especially with net worth figures, since those could be misleading. A large net worth may not be as a result of an advisor's sound financial planning at all, but rather a large inheritance or other windfall.
Hopkins continues, "I do want to know about how an advisor saves, what products they use, and their own financial philosophies."
Luckily, an advisor can tell a prospective client a number of things to signal they are financially secure without having to reveal their net worth or salary, or show actual account statements.
David Rae, a Certified Financial Planner, says, "When I get asked about my finances, I'm very open about what I'm doing. I'm confident that I am leading by example. I have a nice lifestyle, but I do it on a frugal and responsible budget." He adds, "It is important for my clients to know that I own my home, that my car is paid off, and more importantly, that I am on track to be financially free by 50."
Some other questions that may be helpful to ask an advisor are:
1. How many months do you have saved in an emergency fund?
2. Do you have any credit card debt?
3. What's the biggest mistake you've made with your own finances?
In addition to the above questions, you can go to BrokerCheck to review an advisor's background and profile. The report should note if the advisor has ever filed for bankruptcy or if another violation has occurred.
What's Their Thought Process Like?
Many advisors said it would be fair to ask a potential advisor about the types of investment accounts they have, the investment and risk management products they use, and their overall investment strategy.
While your particular situation and goals may warrant a totally different strategy, the advisor's response allows you to get a better understanding of his or her thought process, as well as potentially the individual's diligence and attention to detail.
Several advisors I spoke with suggested taking a slightly different approach if the advisor is in a different phase of life than you. Specifically, many recommended asking how the advisor would think about coming up with an investment strategy or outlining products or accounts they would use for a family member that was in a similar situation to you.
Do They Understand My Situation?
Knowing about a particular concept in theory or from an academic standpoint can be a lot different than actually applying that knowledge to real-life situations. Sharon Weaver, Certified Financial Planner at Mission Financial Planning, says, "As I have grown older, the real-life experiences of living through market fluctuations, financing a house, paying for college, and starting a business have provided great background that I can share with clients. If I were interviewing an advisor, I would ask whether they had experienced some of the things that I, as a client, wanted to address."
And if an advisor hasn't personally gone through some of the situations you're looking to tackle, you may want to follow up and ask if they've worked with other clients with similar goals and needs as you.
Will They Be Around For The Long Term?
Finding a financial advisor who is trustworthy, will treat you fairly, and specializes in your particular situation can be difficult. That's why when you've finally found that "special someone," you want to make sure their business will be around to help you for the long term.
Jim Marrocco, Certified Financial Planner at Thinking Big Financial, says this is "especially important if you are looking to work with a planner that is independent and not part of a larger institution. Clients should understand if an advisor's business has staying power."
Some potential questions to ask around this topic include:
1. How long have you been in business and what's your long-term plan?
2. What processes are in place in the event that you are no longer working in the industry?
Similar to finding any other service provider, finding the right financial advisor takes time. Beyond asking the standard questions about an advisor's background, their fee structure, and working relationship, don't be afraid to ask about the advisor's personal financial situation if you think it will help you make a better decision on how to move forward.
When asking an advisor about their personal finances, ask questions about how they have or would have handled particular situations or strategies they would use for a person in your situation. Focus more on an advisor's thought process and philosophy rather than actual net worth or salary figures.