Financial Planning

How to Choose Financial Advisor & Questions to Ask

Man and woman discussing financial advisor fee and signing papers

You wouldn’t take your car in for an oil change without knowing how much it was going to cost.  Yet, investors are woefully ignorant of the fees they pay their financial advisors.  One study found nearly one-third of investors thought they didn’t pay any fees or expenses or didn’t know how much they were paying.

If you’re interviewing financial advisors, it’s important to understand how your financial advisor will be charging.  

Advisors have many different fee options.  They can charge an hourly fee, a flat fee on a monthly, quarterly, or annual basis, or (and this one is very common) a fee based on a percentage of your assets under management (AUM).  Often, an AUM-based fee is tiered, with the percentage declining at certain levels of assets, so the fee percentage decreases as your assets increase.

Some advisors charge commissions, based on the type of product you purchase.  

Finally, others may charge a combination of fees and commissions.

What Questions to Ask When Hiring a Financial Advisor?

There are many helpful articles that will assist you in formulating the basic questions you need to ask about fees.

Is it worth hiring a financial advisor? If you really want to understand this, you will need to dig deeper and go beyond the obvious ones.  Here are some suggestions:

1.   Are lower fees available elsewhere?

In some states (like California) investment advisors are required to demonstrate that their fees are reasonable and to disclose that lower fees for comparable services may be available from other sources.  Check the laws in your state.

Here’s a cautionary note:  Just because fees may seem high, doesn’t necessarily mean they aren’t worth it.  Depending on the qualifications, experience and knowledge of the advisor, the value added may far outstrip fees paid.

Also, the fact that lower fees for comparable services may be available elsewhere doesn’t always mean you should make a decision based solely on the difference in fees.  An advisor with certain qualifications (like also being a CPA) may be well worth the additional cost to an investor with complex tax issues.

One study found those who work with a financial advisor have less financial stress. Another study found that those who obtained financial advice had a “demonstrable increase in the level of sustainable retirement spending.”

It’s important to put fees in perspective.

2.     Are your fees negotiable?

Here’s information that could save you a bundle of money.  

Investment advisory firms are required to disclose whether their fees are negotiable in their Form ADV.

They are under no obligation to do so, but, depending on many factors, they may engage in a fee negotiation.

These factors may include the services you require and an assessment by the advisor of the amount of time involved in servicing your account.  

You can improve your negotiating position if the advisor offers some services that you don’t want or need.  If you only need help with managing your investments, and don’t require financial planning (or you have modest financial planning requirements), an advisor might see a benefit in securing you as a client at a lower fee.

If your account requires significant work initially, but relatively little thereafter, you could consider suggesting that you would agree to pay the full fee for the first year if the fee was reduced after that time.


Choose Your Financial Advisor Wisely

It’s in your interest to have a full understanding of the fees charged by your advisor.

But you should recognize that fees are only part of the assessment you should make when evaluating an advisor.  There are many other considerations, including the knowledge and qualifications of the advisor and whether there’s a fit with your particular requirements.

If you want to know more about hiring a financial advisor, contact Allied Integrated Wealth.

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