A good financial advisor will ask you many questions during the early phase of the relationship, so it’s worth considering these questions beforehand. Advisors also spend a lot of time managing their clients’ expectations, so advance preparation will make their job easier and improve the quality of their advice.
Why Are You Here?
The first question to consider is why you want to hire an advisor in the first place.
- Are you looking for investment advice about your 401k or IRA?
- Need help setting up a college savings plan for your child?
- Planning for retirement?
Middle of nowhere, Arizona.
- Do you have difficulty budgeting and saving?
- A full-blown estate plan, including wills and trusts, so that you can pass on something to your adult children?
This should be the easiest question to answer, and it will tell you what kind of RIA you should hire. The more complex questions (like estate planning) are generally better handled by large advisory firms that have CFPs and lawyers on staff, or through a professional network that they make available to you. Simpler needs can be handled by smaller firms.
Advisory firms should have a list of services offered on their website, which will help you narrow down your search.
What Do You Believe?
The second question is to ask yourself what you want out of investing.
Do you want high returns without any risk? If you say this during a meeting with an advisor, a good one will either show you the door or attempt to educate you. A bad one will say, “No problem.” Return comes from risk. You can’t have one without the other, and one of your responsibilities as an investor is to accept that you might lose money in the short term. However, if you stick with a long-term plan, you are very likely to end up rich (or at least reasonably comfortable) by the time you retire.
Could you stomach watching 50 percent of your savings disappear during a recession? That’s what could happen to stocks, which have the highest return potential. If the answer is no, then you should accept that you should invest a certain amount into bonds, which will lower your overall return potential. There’s nothing wrong with that. The important part is being comfortable with the process and potential outcomes so that you can sleep at night.
Matching your investments with your personality is more important than reaching for the highest returns. Being comfortable with the process means you are less likely to make changes, which is the most common reason that investors fall short of their goals. There are legitimate reasons for changing your portfolio: being laid off, the birth of a child, increasing medical costs, etc. But wanting the “best” returns is not one of them.
Where Are You Going?
The third question is to ask yourself what you would do if your investments lost money while working with a financial advisor.
Would you fire advisor immediately? Shrug your shoulders and ignore it? Ask the advisor what happened?
Spoilers: Firing the advisor immediately is the wrong answer. Ask what happened, put in a bit of effort to understand what your advisor is doing and why she is doing it. You shouldn’t wait for a recession to ask these questions. Instead, build your understanding early on, when times are better, so that you set your expectations for performance during a recession. That way it isn’t a surprise. To paraphrase Ben Carlson at Ritholtz Wealth Management, you can give your money to an advisor, but you should never give up your understanding of what’s going on with your money.
If the advisor can’t answer these questions or can’t explain what she is doing with your money in a way that you can understand it, then you can think about firing the advisor. You shouldn’t fire the advisor for doing what you hired her to do, which is an all-too-common occurrence.
And remember: If you have zero interest in hiring an advisor, but are still interested in investing, a latter post will right up your alley.