Introduction
When it comes to managing your finances, having the right financial advisor can make all the difference. The right advisor not only helps you reach your goals but also ensures you’re making informed decisions every step of the way. But with so many different types of advisors out there, how do you choose the one that’s right for you?
In this guide, we’ll walk you through the essential checks to make when interviewing a financial advisor. Whether you’re considering a commission-based advisor, a fee-for-service planner, or a fee-only (advice-only) planner, these steps will help you make a smart, confident choice.
Step 1: Understand How Advisors Are Paid
The way a financial advisor is paid can affect the advice you receive. Here’s a quick breakdown of the three most common compensation models:
- Commission-Based: Your advisor earns money by selling financial products like mutual funds, insurance policies, or annuities. While this model is common, it’s important to be aware that some advisors may have an incentive to sell certain products, which could influence their recommendations.
- Fee-for-Service or Fee-Based: These advisors may charge a flat fee or hourly rate for their services. They could also earn commissions or referral fees from financial products or investment managers they recommend. While they may offer more objective advice than commission-based advisors, you’ll want to confirm the exact fee structure to avoid conflicts of interest.
- Fee-Only (Advice-Only): This model is considered the most transparent and unbiased. Your advisor receives no compensation from third parties. Instead, they are paid directly by you, which ensures that their advice is solely focused on your best interests.
Step 2: Verify Experience and Qualifications
Experience and qualifications matter when choosing a financial advisor. Make sure to ask the following questions:
- How long have you been working in the financial planning industry?
- What certifications or designations do you hold (e.g., CFP® – Certified Financial Planner)?
- What is your educational background?
A qualified advisor will have a proven track record and a commitment to staying up-to-date on industry trends and best practices. By asking these questions, you can ensure that you’re working with someone who’s both experienced and well-educated in the latest financial strategies. I say, work with someone who is a CFP® at a minimum!
Step 3: Ask About Their Compensation Structure
How your advisor gets paid is critical to understanding the level of objectivity you can expect. Advisors who earn commissions from selling products might have a financial incentive to recommend specific products, even if they’re not the best fit for your needs. Fee-only advisors, on the other hand, tend to provide more objective, unbiased advice since they aren’t tied to sales commissions.
Don’t be afraid to ask your advisor about their compensation structure upfront. A transparent conversation will give you confidence in their advice and help you avoid potential conflicts of interest.
Step 4: Evaluate Their Financial Planning Tools
Good financial planning isn’t just about investing. It’s about creating a comprehensive strategy that includes tax planning, estate planning, risk management, retirement planning, and more. Ask your advisor about the financial planning software they use.
A high-quality tool can model different scenarios to help you see how your financial plan might change over time. Ask to see a demo of the software in action to get a feel for how it tracks your progress and adapts to changes in your life.
One thing you can be sure of with your financial plan is that it won’t go exactly as planned! Life has a way of being unpredictable, and often, it presents us with detours, like major life transitions, that require adjustments or even a completely new plan. A solid financial planning tool will help you anticipate these twists and turns by modelling alternative scenarios to account for the unexpected.
But remember, financial planning isn’t a one-time task. It’s an ongoing process that needs to evolve as your life and goals change.
Step 5: Understand the Fees and Their Impact
High fees can eat away at your investment returns over time. In Canada, we often pay some of the highest investment management fees globally especially if you are investing in mutual funds, but you don’t have to settle for that. Make sure to ask your advisor for a breakdown of all fees associated with your investments. This includes both upfront costs and ongoing charges. Here is a good Morningstar Study to review.
Additionally, ask how their investment portfolio compares to a benchmark. This will help you determine if their approach is cost-effective and aligned with your long-term goals. Remember, the goal isn’t just to manage money — it’s to grow your wealth efficiently.
Step 6: Get Clear on Their Investment Strategy
Understanding how your advisor plans to invest your money is essential. Do they favour active management (where the advisor buys and sells investments to try and outperform the market) or passive management (where investments are generally held for the long term to track market performance)?
Ask about the pros and cons of each strategy and how it fits with your risk tolerance and financial goals. Additionally, inquire about the costs associated with their strategy, as this can impact your long-term financial health and wealth.
Step 7: Consider Insurance and Long-Term Planning
Life insurance is an integral part of comprehensive financial planning. Be sure to ask your advisor about the differences between term and permanent life insurance, and how each option could fit into your financial plan. A good advisor will be able to use their planning software to show you the costs, benefits, and potential cash value of each type of policy. Get a second opinion if someone is offering you a whole life or a universal life product. I wrote a blog on this topic that can be reviewed here.
This is also a great opportunity to see if your advisor is addressing all aspects of your financial life, from insurance and taxes to retirement and estate planning.
Step 8: Ask About Their Client Capacity
The number of clients an advisor manages can affect the level of personalized attention you’ll receive. Typically, a traditional advisor can handle around 150 clients while balancing investment and financial planning responsibilities. Ask your advisor how many people they currently serve and make sure they have the time and resources to give you the attention you need.
Personalized advice is crucial to your financial success, so it’s important to choose an advisor who has the capacity to meet your needs.
Step 9: Be Cautious of Proprietary Products
Some advisors may recommend proprietary financial products — products that are created or sold by the company they work for. These products may come with higher fees or restrictions that could affect your financial plan.
Make sure to ask if any of the products being recommended are proprietary and how they fit into your overall strategy. You want to ensure that any products you invest in are genuinely the best option for your goals, not just because the advisor or their company stands to gain from selling them.
Final Thoughts
Choosing the right financial advisor is a crucial step toward securing your financial future. By understanding how they are compensated, evaluating their experience, and ensuring they have the tools and strategies that align with your goals, you can make an informed decision. Don’t hesitate to ask the tough questions — your financial future depends on it.
The right advisor will help you navigate your financial journey with confidence, ensuring your decisions are aligned with your long-term aspirations.
Visit our Contact Us page to get in touch and see how we can support your financial goals.
