Five Next-Level Questions to Ask a Prospective Financial Planner

16/06/2024

I can always tell when a prospective client has read a list of “questions to ask a financial planner,” because the questions are always the same.

“Are you a fiduciary?”

“How do you get paid?”

“What are your qualifications?”

Don’t get me wrong. These are all important questions, but almost all the answers can be found online. The intent of the “other questions” is to go a level deeper while you’re interviewing potential financial planners. Here’s a cheat sheet for the basics:

CFP® professionals are fiduciaries if they are engaged in a financial planning relationship. SEC-registered investment advisers and investment adviser representatives are fiduciaries. Where things get murky is with dually registered advisers of both an investment adviser and a broker/dealer. In those arrangements, the adviser may be a fiduciary only some of the time. It makes sense to clarify with the adviser here.

I believe that there is a place for every compensation model as long as they are transparent and straightforward. Certainly, some models are less so than others. My firm charges an assets-under-management (AUM) fee. AUM makes sense for our clients who receive tax planning, financial planning and investment management. DIY investors may be better served by an hourly planner who can reaffirm their plan. For those folks, we make a free version of our planning software available here. If you just need to buy an insurance product, there is nothing wrong with a commission-based insurance agent. My point is that there is a place for every model, depending on your need, so long as the planner can easily explain it to you. Often, fee models are on adviser websites.

The barrier to entry in the financial advice arena is low. I studied for, and passed, the Series 65 exam in one week, when I was 22. This is the exam that allows someone to charge for advice and investment management while affiliated with a registered investment adviser. The barrier to entry to becoming a CFP®, CFA or CPA are significantly higher than the Series 65 exam. These are designations or licenses that signify a different level of education and experience. Checking this box before you start interviewing advisers is a very good starting point.

OK, now on to the “other questions” to ask a financial professional you’re considering working with.

1. What’s your succession plan?

Because we know death and taxes are certain, knowing an adviser has a succession plan for their departure is important. The other important reason is less obvious. There is a massive consolidation in the wealth management space.

Firms with owners who are close to retirement are likely to sell to a much larger firm, which could be owned by private equity. I believe that certain buyers are good for the end client. They may have a broader scope of services and generally have more resources. There are other buyers out there who, may be, in my opinion, a bit less concerned about the clients and a bit more concerned with cutting expenses in order to resell the business down the line.

It’s important to find out what the adviser sees happening to the firm long-term.

2. What’s your average client age?

No, not every 65-year-old is the same. But almost every 65-year-old enrolls in Medicare Part A. Every 65-year-old is eligible to take distributions, penalty-free from a retirement plan, but none is required to. Last year, I met with a 76-year-old woman who had not taken a single RMD.

Since I work mostly with retirees, a large portion of my fourth quarter is focused on RMDs. It’s hard to imagine a scenario where an adviser who works with retirees messes up something as badly as hers did. Picking an adviser who works with clients around your age should greatly reduce the risk that they miss something significant.

3. What’s your average client’s net worth?

This is a similar theme to above in terms of the adviser’s expertise, but with a twist. In an AUM fee model, the smallest clients and largest clients tend to get the short end of the stick.

A client with $100,000 invested may pay 10% of what a client with $1 million invested pays. That $100,000 client, therefore, may not get the same service as a bigger client. On the higher end, it’s more about expertise.

If an adviser’s average client has $1 million invested and that adviser then lands a client with $25 million, they’re unlikely to be well versed in the tax and estate planning strategies necessary to serve such a client well.

Neither of these things suggests that the adviser is acting in bad faith. Often, businesses just develop this way over time. Our firm tries to avoid this issue by working with a small, homogenous group and referring out those who are not a good fit.

4. How do you invest your clients’ money, and do you invest your money the same way?

I have strong feelings on how we invest client money. We do not use mutual funds in client portfolios, instead opting for ETFs, individual stocks and bonds. A major reason for this is to reduce the client’s all-in cost. Because I feel so strongly, my money gets invested the same way.

An adviser should be able to clearly articulate their investment philosophy. I also believe they should eat their own cooking. Imagine going to a restaurant where the cooking staff wouldn’t choose to eat their own food. An obvious red flag. The same is true in the advisory space.

5. What’s your client service schedule?

More than one business consultant has told me to stop telling prospective clients that we follow a “dental schedule.” People hate going to the dentist, the consultant said. Here’s why I’ve stuck with it. It works.

For my clients, two times a year means we aren’t missing things because we’ve waited too long, and we aren’t talking about the weather because I met with them last month. Of course, there are certain years when we meet many more times, often when there are big decisions involved.

Issues arise when this isn’t clearly defined by the firm. I have had clients come to my firm because they haven’t heard from their adviser in (fill in the blank) months or years. I have had clients come on board because they didn’t get the advice they needed for a major decision. Having a regular meeting cadence, with the next meeting scheduled before you leave an appointment, like the dentist, alleviates both those issues.

It's not fun looking for an adviser, but I hope if you find yourself searching for someone new, these five questions will help you go a level deeper, so you never have to do it again.