7 Questions to Ask Before Hiring a Financial Advisor

Hiring a financial advisor is a big decision. In fact, on of the top questions I get after doing a talk is, “Do doctors need a financial advisor?”

My answer to that is simple. No. Doctors do not need a financial advisor to successfully manage their finances.

I am living proof of that.

While a financial advisor helped me and Selenid in the beginning, we do not use one now and manage all aspects of our own finances.

And we are successful. We took our net worth from -$400K to +$400K in 14 months. It now sits near $1 million.

So, why is my answer no?

My answer is “No” for the same reason that my answer is “No” to the question, “Do you need a car to get to the grocery store?”

Of course you don’t. You can walk, ride a bike, skateboard, etc. That doesn’t make it the best way to do it. But of course other ways are possible.

Regardless of how simple managing your own finances is, there will be doctors interested in hiring a financial advisor to help them.

The reasons why are many including a perceived lack of bandwidth, interest, or knowledge in managing their own finances.

I may not agree with these limiting beliefs, but if you feel this way and want to hire a financial advisor, that’s fine.

Or maybe you just need a push to get started…and that’s ok!

The important thing is hiring the right financial advisor

If you are going to use a financial advisor, you need to make sure you hire the right one.

You want to make sure you are getting good, sound advice. And that the price is reasonable and not overly prohibitive or costly to your wealth building. And you want to make sure that you gel well personally and philosophically with the person you are working with.

So how do you find these things out before hiring a financial advisor?

Well, you’re going to need to do some research on your own.

You will need to understand at baseline the simple financial principles and habits that promote wealth building that I’ve listed out here and here.

That way you can make sure your financial advisor is following a plan that fits you and you agree with.

The thing I always say though is that by the time you learn to tell good from bad advice, you know enough to just manage your own finances.

Anyway, I digress…

The other thing you will need to do to hire the right financial advisor is interview them, ask the right questions, and get the right answers before moving forward.

7 questions to ask before hiring a financial advisor

Here we go!

And I saved the most important ones for last…

1. How do you get paid?

It may seem rude to start with this. But it’s really the most important thing to understand.

If your prospective advisor can’t or won’t give you a straight answer, run away.

Advisors usually are paid based on:

Commissions,
An assets under management fee, or
A flat fee

If your advisor says that you don’t pay them, then they are paid via commissions. This is the worst model. There is a HUGE conflict of interest. I would not work with such an advisor.

An asset under management model means that they get paid a percentage, usually 1%, of the amount of money you invest. At least in this model, your incentives are aligned. The problem is that you should be investing via a passive approach. And 1% AUM over your investing career will equal hundreds of thousands of dollars. That’s just way more than necessary.

A flat fee is the best model. You pay a flat fee for a service. As long as that fee is fair, then you are good.

2. What is your preferred investment strategy?

Don’t reveal your cards too early.

Don’t share that you know that passive investing via low cost, broadly diversified index funds.

Ask how he or she invests money for their clients. What do they think is the ideal strategy?

If their answer indicates in any form that they use active management strategies, I don’t think you should be hiring that financial advisor.

Active portfolios underperform passive portfolios 80% of the time. Why would you pay more to lose 80% of the time?

Would you trust a doctor whose treatment failed 80% of the time?

3. What is their personal portfolio composed of?

This is the equivalent of a patient asking you, “What would you do for a loved one?”

If your financial advisor will not disclose this, that’s a red flag to me. And if they don’t invest their money the way that they are proposing to invest yours, that’s an even bigger red flag.

4. Do you have a fiduciary responsibility to me?

A fiduciary responsibility means that they have a legal and ethical obligation to put your financial interests first in any decision that they make.

Now you may be asking, “What a second, isn’t this a given??”

No! It’s not. Which is amazing and scary at the same time!

A non-fiduciary is legally allowed to put their interests or the interests of their group above yours as their client.

Do not hire a financial advisor like that! They are not a financial advisor. They are a salesperson!

5. What designations do you have?

Designations for financial planners need to be taken with a grain of salt. There are a ton of them and often it requires only a weekend conference to obtain them.

So don’t be impressed with someone because they list 20 letters after their names. Most of them frankly don’t mean anything.

The hardest ones to get and the ones that I guess matter the most are Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Chartered Financial Consult (ChFC), or Personal Financial Specialist (CPA/PFS).

These do not guarantee anything. But in my mind, they are a baseline minimum for someone to show they are committed to being a professional.

6. What do you do?

Before you meet with a potential financial advisor, you need to know what you want them to do.

Do not meet with them if you do not know what you want help with. That is a recipe to be taken advantage of.

Once you know what you want them to do, you need to make 100% sure that they actually will do that.

When Selenid and I were starting out, we were looking for a financial advisor to help us sort out our budget, etc.

We received one recommendation and met with him over the phone. He said he did not help do things like that but could invest our money in options and puts. We were reassured that this would beat the market.

Needless to say we went with someone else.

So figure out if you want someone to:

Help with a written financial plan
Help build a budget (You can download my free budgeting template here)
Get you started with a brokerage
Make sure you have enough to retire (Or use my FIRE calculator here)
Help you figure out an asset allocation
And so on…

7. What returns should I expect?

Nothing is guaranteed.

But you need to ask what returns you should expect on your investment.

And you want to catch an important nuance or two when you ask this question:

Do they quote you something outrageously high (I’m talking like 10% or greater)?
Do they tell you the after fee, after tax returns right off the bat?

The average S&P return since it went to 500 stocks is around 6-7% all time. This is a reasonable return to expect. If someone is quoting you 10% or higher, that’s a red flag. Maybe they got this recently. But that does not guarantee that those returns will continue.

In fact, regression to the mean suggests that they most likely will not as again, 80% of actively managed portfolios underperform passive portfolios.

Next, you want and need to know the after fee and after tax returns. If they are quoting you returns before taxes and fees, they are trying to artificially inflate them at best and trying to trick you at worst.

Don’t fall for it.

And just to reiterate a point, you may be asking, “Well, if they are quoting me returns of 6-7% which I can just get by investing passively in index funds and rebalancing only once a year, why do I need an advisor?”

And I say to you, “Bingo!”

In the end…

Use one if you wish, but make sure you take hiring a financial advisor seriously. To not do so is risking hundreds of thousands to millions of your dollars over your investing career.

And make sure you have a baseline financial education to make sure you are getting good advice for a fair price! You can use the resources here, learn about index fund investing here, plan your asset allocation here, and use my financial plan as a template to create yours here.