Financial Geekery

How to interview a financial advisor

August 5, 2018

Hopefully, you already know the basics of how to find a good financial advisor. Once you've narrowed the field to fee-only CFP® professionals with services, location, and fee structure you're happy with, it's time for interviews. What questions do you ask? How do you know what a good answer looks like? Below are a set of questions that will set you up for a successful interview.

 

What percentage of your accounts are similar to mine?

 

The field of financial planning is broad, covering investments, taxes, estate planning, debt, cash flow management, retirement planning, employee benefits, and a host of other topics besides. While a CFP® professional will have a good, broad-based knowledge -- similar to your primary physician -- it's impossible for someone to be an expert in every aspect of every topic of every domain!

 

The good news is that the financial services industry is starting to catch on to the idea of "niching" -- specializing in a narrow range of clients so as to provide the best service possible to them.  So: why not find someone who's in expert in working with people like you? Not only will they be more skilled at addressing your particular issues, they're also more likely to understand where you're coming from and be able to "speak your language", which is important when you're planning out your financial life!

 

Of course, "people like you" can mean many things. Which are most important? In terms of expertise, I would argue that your employment is foremost: physicians have student loan issues that engineers generally don't, while law-firm partners deal with financial situations very different from self-employed contract professionals. Age and/or career stage is very important, as well, as you'll focus more on student loans or Medicare depending on whether you're fresh out of college or in retirement.

 

After that, you can pick anything you like. Want some ideas? Take a look at the XY Planning Network Find an Advisor portal, where you'll see a wide array of specializations based on everything from profession, age, and career stage to culture, gender, and interest.

 

What is your investment management philosophy?

 

Like economics and religion, there are as many investment management philosophies as there are people -- and while it's very difficult to conclusively prove The Best One, there are many out there that just don't stand up to scrutiny. When probing an investment manager, it's good to have a decent understanding of portfolio theory. Also, I recommend taking a page out of financial expert Larry Swedroe's (literal) book and look for the following factors in an investment strategy:

 

Is it persistent? Does it hold across long and various periods of time, or has it just shown up recently?

 

Is it pervasive? Where appropriate, does it apply equally across various nationalities and asset classes, or does it break down when you apply it e.g. somewhere outside the US?

 

Is it robust? If you tweak the definition of the factor used to implement a strategy, does it still hold up? For example, you can measure a "value stock" by measuring price-to-earnings, price-to-book, or a number of other ratios. If you change the measurement slightly, does the outcome make sense, or does it change considerably?

 

Is it investable? How much does it cost to implement said strategy? If it involves frequent trading or carries a high expense ratio, it's likely not worthwhile!

 

Is it intuitive? Is there a logical reason why the strategy works -- and, more importantly, why it will continue in to work in the future, even as more people gain awareness of it? Or is the strategy based on a "secret sauce" that, once it's "out", will vanish? 

 

(A side note: if your advisor uses Dimensional Fund Advisors for their investment implementation, this is a good sign. DFA specifically looks at all five of the above questions before implementing any new strategy, and their discipline has served them quite well!)

 

Do you engage in tax planning? What strategies do you use?

 

There are a host of planning strategies an advisor can pursue in order to optimize your finances, and many of them revolve around tax planning. If your advisor doesn't do proactive tax planning, that's a large chunk of money being left on the table!

 

The tax strategies you need will vary greatly depending on your situation (see the above conversation on niches). For example, mid-career tech professionals can benefit greatly from a "backdoor Roth IRA" strategy. Those who donate heavily to charity may be interested in "charitable clumping" and/or donor-advised funds. Households in danger of crossing the estate tax threshold may benefit from gifting and credit-shelter trust strategies. 

 

Therefore, make sure that any advisor you work with not only does tax planning, but can outline strategies that are likely to benefit someone in your specific situation.

 

Can you give me a sample financial plan?

 

Speaking personally, it's a lot easier for me to understand something if I'm given an example. Given how vague the financial services industry can be (see "what does financial advisor even mean?"), a concrete example can go a long way towards showing exactly what they will do for you. Does it cover investments, employee benefits, estate planning, taxes, retirement planning, and more? To what depth? Is there an actionable executive summary, and are there analyses that show why the recommendations are what they are? A sample financial plan is an excellent way to get a preview of what the advisor can do for you.

 

Who might I talk to about what it's like to work with you?

 

While a sample plan shows the end result, references will give you insight into what the process is like along the way.

 

Now, an advisor may respond with something like, "I can't give you references due to regulatory reasons." This is because the SEC has very strict rules on testimonials and references; specifically, testimonial ads aren't allowed, and references are only allowed if the advisor doesn't "cherry-pick" the names. In other words, if the advisor wants to provide a list of references, they have to ask all of their clients if they want to be references, and give the name of every client who volunteers. Some advisors, in order to avoid this, just don't give references at all.

 

Once you get the list (assuming you do), you can work with the references to get a sense of what it's like to work with the advisor. Do they respond promptly when you send them a message? Do they communicate proactively, and in your preferred medium (phone/e-mail/text)? Are they well-organized? Do they work to minimize conflicts of interest, and highlight them when they (inevitably) come up? Do they explain concepts well? Are they friendly? And so on.

 

While these aren't the only questions you might ask -- everyone's situation and preferences are different, after all -- they'll give you a measurement for whether a financial advisor is a good fit. Good luck in your hunt, and if you have other questions on how to find a good advisor, drop a comment or let me know!

 

 

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.

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