When it comes to financial advisors, there is a lack of clarity on what financial advisors & financial planners do. Some of the common questions are – How much do they cost? What is the final product – a report and a set of actions points? Or do the advisors also manage the KYC, account opening and investing process?
To add to the confusion, advisors go by a lot of titles like Certified Financial Planner (CFP), Retirement Planner, Fee-Only Advisor, Registered Investment Advisor (RIA), Independent Financial Advisor (IFA).
When it comes to our money, how well our investments do is out of our control — as they say, past performance is not an indicator of future results. But, who we choose to manage our money is. Here is a set of questions you should ask an advisor to figure out if they suit your needs.
9 questions you should ask while choosing a financial advisor
1. How do you charge for your services, and how much?
The first and the most obvious one. Ask whether there’s an initial planning fee, whether they charge a percentage for assets under management, or whether they make money from selling you a specific product (through commissions). Not only should you know how much
the service will cost you, but it can help you determine whether they have an incentive to sell you things. Broadly speaking there are 2 revenue models for advisors – distribution/ commission based model and fee-only model.
(Read more about it here – How much does a financial advisor cost?)
2. What services do you/does your firm provide?
Advising you on mutual funds is just one of the responsibilities of a financial advisor. The basic idea is that they will help you invest your money to reach your financial goals. These goals could include retirement, saving for a child’s education, purchasing a house, minimizing tax burden, health/ life insurance, budgeting, debt reduction, loan transfer to reduce interest or generating income. It is good to work with an advisor who can guide you on all aspects of your financial life.
3. What types of clients do you specialize in?
Some financial advisors have a niche. For example there are some advisors who exclusively advise NRIs and HNIs. This could be because they may have been NRIs themselves and have in depth knowledge of financial products suitable for NRIs. Some advisors specialize in advising soon-to-be retirees. Most advisors tend to focus on people within 10 years of their age. The answer to this question will tell you if the advisor is experienced in dealing with
clients similar to yourself.
4. How many clients do you have?
While choosing a financial advisor, it is reassuring to know if the advisor has many clients. Most of the advisors get clients through referrals from existing clients and so having a high number of clients is an indicator of their performance.
5. How does the process work? How often do you engage with the client?
Some advisors have 2-3 meetings/calls before presenting a financial plan. Some may follow up a month or so after the plan was presented to check how the implementation is going.
Advisors also review the plans periodically. Usually the review is done annually, but some advisors may do six-monthly or quarterly reviews.
6. Can I contact you with questions?
As you educate yourself about personal finance, you may have questions from time to time. Or the market may have moved up/down by a significant amount and you want the advisor’s opinion on what you should do about your investments. With some advisors a financial plan and an annual review is all you get. Others might engage more frequently with you.
Keep your expectations realistic. Don’t expect the advisor to answer questions every week or engage every time the market moves by 0.1%.
7. What is your investment philosophy? Which instruments do you majorly rely on in equity and debt part of the portfolio?
If you have a strong preference for a particular philosophy, ask the advisor what his or hers is. For example, some advisors may prefer recommending low cost funds like ETFs, while others may prefer more actively managed funds. Aggressive and/or younger investors may have a higher allocation to equity. Everything depends on the client’s risk tolerance and goals. Alignment of investment philosophy can provide a certain level of comfort choosing while choosing a financial advisor.
8. Can you share financial planning case study?
There is no set structure for a financial plan. Different advisors have different formats.
However, all plans essentially cover these 4 things – term insurance, health insurance, emergency funds buffer and long term financial goals. Some advisors might give you 50 pages of stuff you don’t understand like charts and graphs, and another planner might provide a five-page summary of your financial situation. This will tell you what output to expect from the planner.
9. Do you provide a rationale for your recommendations? Will you run me through the financial plan through a call or a meeting?
The rationale will give you confidence when implementing the plan. You will also understand the assumptions being made behind a recommendation, and correct the assumptions if required. About running through the plan – usually advisors do this, but it is better to ask.
If you get a 25-30 page report, it will help if the advisor runs you through the report and points out the action points for you clearly
This is a guest post written by Subodh Malgonde.
Subodh is the founder of DhanWise, a platform to interact with verified financial advisors in India. On DhanWise, people can ask questions or reach out to advisors for a paid