How to Hire a Financial Advisor

The financial advisor hiring process is not easy, but it can be much easier than it’s made out to be. You do not need to fill out a convoluted sales funnel form on a, “SmartApp,” to be paired with a, “fiduciary,” advisor. And what does fiduciary even mean anyway? Spoiler alert: it’s both more & less than the marketing pieces from big advisory firms want you to think it is.

The good news is that you can actually do this on your own to find the right advisor for you. The, “for you,” is very important, because unless you do the search yourself, with your own situation in mind, the chances are fairly high that you will end up working with the advisor who is the best salesperson, or whose firm has the biggest marketing department, rather than the person who’s going to have your best interest in mind.

Flat Fee Advisors put together a list of questions & considerations for you to make the search process easier. We believe we’ve covered just about everything, but if there’s something missing that’s important to you, please let us know & we’ll update it.

I don’t live near you. Can you still work with me?

In today’s world of virtual meetings & almost universal WiFi coverage, the answer should be, “yes.” Firms can be regulated by states or the SEC, but RIAs should able to work with people who live anywhere in the United States. The more important issue here is for you: how comfortable are you working with an advisor in a fully virtual relationship. If in-person meetings are important to you, be sure the RIA or advisor is both willing and able to do so.

If I work with you, where would my money go? Do I have to move it?

Financial advisors often require clients to move their money to financial custodians, such as Fidelity, Charles Schwab, or Vanguard. More advisors every year, however, are departing from that model.

Advisors who charge based on the amount of assets under their management (AUM) need clients to custody their money with the advisor’s custodian to bill them properly. Flat fee advisors do not need clients to move their money for that reason. Still, some advisors will feel they cannot provide the quality of service that clients deserve without, “seeing,” client accounts at all times through their custodian data feeds. Ideally though, if you’ve made a decision that a certain advisor is the right person for you, where your funds are held should not be a stumbling block.

What’s involved in moving my accounts? Is it difficult? Do I have to tell my current advisor?

The total time required of new clients to deal with this is typically minutes. (There are infrequent cases that require more, but those are always due to a new client’s existing financial custodian requiring its own paperwork before transferring accounts.) No, in most cases, there is no need for you to speak with your current advisor, though it can be the polite thing to do.

What security do I have that you won’t steal my money?

This is a great example of a very candid & fair question more people should ask of financial advisors. The security you have is that an advisor cannot steal what they never possess. Clients should NEVER send advisors investment money. (Interesting detail of history: Bernie Madoff’s clients wrote checks to Madoff Securities. He was his own custodian. That’s how he pulled off his scheme.)

The only client money an advisor should be able to direct to their personal account is for fee billing, and custodians must approve billing requests before the advisor can transfer it from client accounts. Most custodians will not allow any request that is not in line with stated upfront fee charges, regular quarterly billing, or contract paperwork.

If you’re my advisor, what happens if you die?

In the event of an advisor’s death, you will likely have two choices. First, you may become a client of one of the advisors in place in a succession plan to take over the business in the instance of an advisor’s death. Second, you may interview new advisors. Or, finally, you may elect not to have an advisor at all and simply become a retail client of your custodian. In any event, nothing should change with your money. It should remain the same accounts, and you should retain all access to it as before. Make sure you’re comfortable with the advisor’s succession plan if that's a concern.

Why is the fee what it is? It’s comparatively low (or high) given my wealth, so can I expect it to increase soon after I become a client? When can I expect a change in fees?

An advisor should be able to explain what the fee is based on, ideally the time, energy, and expertise they deliver to a typical client in a typical year. For example, an explanation may go like this:

“Clients usually require close to 20 hours of time per year. Yes, during some years, certain clients may require more time, and others, less. In either case, that amount of time, multiplied by a wage that I feel is fair for my service and expertise, is how I arrived at $X per year.

Eventually, yes, of course you can expect a fee increase, similar to a cost of living adjustment, but not soon after becoming a client, and certainly not because “you did better so I did better,” and not in a large amount. I view my business very personally, and I take my clients’ best interest seriously, and it is not in a client’s best interest to overpay for advice. You also always maintain the power to say, “Thank you, no,” and to go elsewhere with your business, which is also not lost on me.”

Either way, you should be comfortable with the answers to your questions.

How do I pay your fee?

Typical financial advisors receive their fees by deducting it from your investment accounts, but that does require accounts to be at an advisor’s custodian. Because the flat fee model does not require advisors to force clients to use the advisor’s custodian, they may bill clients directly. Be sure you are comfortable with the way you will be billed.

Who are your ideal clients?

This is an extremely important question, because, “fit,” is such an important part of a client-advisor relationship. Some advisors specialize in small niches, such as certain types of medical specialties, or even tattoo artists. If you fall into a particular category that’s served by an advisor, you may enjoy working with them more. You may also feel that you’re just a regular person who needs some help. That’s ok too. Either way, you want your advisor to be able to give you an answer that makes you comfortable.

How many clients do you have? How big will your firm get?

Compared to many traditional advisory firms, flat fee advisors are often solo-advisors, working for their own RIAs. You may feel more comfortable with a larger firm, or you may prefer the personal touch that comes with a smaller firm. Do you want to know you’ll work with the same advisor for years, or are you open to working with multiple advisors, as long as they operate in the same way? The growth path of the advisor’s firm may be an important part of your decision process. Don’t forget to ask about it.

How often do you communicate with your clients? What can I expect if I become one?

It’s important to set expectations. If you need to hear from your advisor on a monthly basis for you to be comfortable, and they typically communicate less frequently, you may become unhappy with the advisor’s service. Conversely, if you trust your advisor and like a, “set it & forget it,” plan, then it may become annoying to hear your advisor asking to schedule quarterly meetings or calls. Be sure to think about what you want first, and then ask how the advisor works.

Are you a fiduciary? Will you sign a Fiduciary Oath?

A fiduciary, in the case of a financial advisor, is someone who is required in some way to act in your best interest. Unfortunately, “fiduciary,” is a word that, when used by a financial advisor to describe themself in marketing pieces, should appear as a red flag in the mind of any prudent person. People who are truly good people, or caring, or generous, never say that they are good, or caring, or generous, because they don’t have to. Their actions speak for themselves. What do we tend to think about people who describe themselves in glowing terms? I think we all know the answer to that question.

Some advisors will sign a, “fiduciary oath,” and there's nothing wrong with that if it gives you comfort, but in many cases it’s silly, patronizing to clients, and legally pointless. It should be completely clear to you that the way an advisor conducts their advisory business and the way they charge for advisory service give them no other incentive than to act in their clients’ individual best interests, which is the definition of a fiduciary. If, after doing your due diligence on a potential advisor, it is not clear that they act only in their clients’ best interest, then that someone is not a good fit.

What was your career path to becoming the financial advisor you are today?

Typically, there are two traditional paths that most people take to becoming a financial advisor. Many folks enter financial services through “the dark side” of the industry: part-time life insurance sales. Others begin by working for a bank or a broker dealer. Some then transition to work for fee-only Registered Investment Advisors. Advisory career paths can often be more varied than other professions. There is nothing wrong with an advisor being on their second, or even third, careers. The important thing is for you to be comfortable that they will do their best work for you.

What is my risk in signing on with you?

Many people worry about signing up for a long term relationship when choosing to work with a financial advisor. Read your contract paperwork! Usually, either party, advisor or client, can end the relationship at any time. Quarterly advisory fees are almost always charged in arrears, so in the event either party severs the relationship, you would only owe up through the day of severance. Therefore, your risk is the time spent, any upfront fee spent, and the advisory fees spent up until you are no longer a client. Do not let the fear of being, “on the hook,” for years of advisory fees stop you from taking a first step.

How, exactly, do you get paid? What are all the ways?

This is the single most important question you can ask a financial advisor. Sadly, very few clients of advisors can answer it correctly of their advisors. Far too few advisors have good answers.

Be sure the answer is as clear as possible, and with a flat fee advisor, it should be: from the flat advisory fee, and only from the flat advisory fee. Not a penny from any investments, products, or insurance policies which might be recommended. No matter how much money you have, no matter where the advisor recommends it go, the fee should be the same.

How much, in total fees and investment costs, will I pay to work with you?

This is the second-most important question you can ask a financial advisor. Again, it’s one that hardly anyone working with a financial advisor can answer correctly.

The ideal answer: The flat, clearly articulated, advisory fee, plus approximately X% in investment costs. Those investment costs should be computed as the average management expenses of the funds typically used for my client accounts. None of them should be paid to the advisor.

So, for a client with $2 Million in investments, total annual fees and costs might be $8,000 (for the advisory fee) plus approximately $1,000 (typical investment costs of low fee index funds), or $9,000 or so total per year.

If that seems like a lot of money to you, let’s compare that to the typical AUM financial advisor’s fees of 1%, plus another 1% in investment costs (for high-cost funds that are certain to underperform the index). That’s 2% of $2 Million, or $40,000 per year. And for that, many large firm asset gathering AUM financial advisors do little to no income tax planning, and no substantive financial planning for their clients.

This is why it’s no wonder financial advisors never reveal what the dollar amount of their fees actually is. Instead, they deceive their clients and prospects by speaking only in percentages (purposely ignoring the investment cost information). This is why Flat Fee Advisors dot Org exists.

Doesn’t an advisor lack the incentive to grow my investments if the advisory fee is flat (and not a percentage of my investments)?

Percentage-based fees do not create an incentive for advisors to grow their clients’ investments. Market returns, not advisors, are what provide investment growth. Advisors have no control over markets. Nor can advisors consistently know what parts of markets will perform best. Crystal balls don’t work. So, why would someone pay so much for an incentive that doesn’t exist? The reason is because they get duped by advisors who lack integrity.

A flat fee advisor’s incentive is to keep their clients happy so that they want to remain clients. Your advisor should keep you happy by always acting in your best interests. Given a flat advisory fee business model, flat fee advisors cannot not act in their clients' best interests. And that is why they stay happy and choose to remain clients.

What’s an advisor’s strategy to “beat the market”?

Beware the advisor who tells you their strategy to beat the market, because trying to do so is a fool’s errand. An advisor’s job is to match the returns of broad stock and bond markets as closely as possible, by 1) using funds that closely match broad markets (primarily index funds) and by 2) keeping clients’ investment costs to the bare minimum. That is the surest, most reliable approach to investment success over the long run.

I can buy index funds myself. Why would I pay you to do that?

You can indeed buy index funds yourself, so you shouldn’t pay an advisor just to do that. Clients should pay someone to be their financial advisor, not simply their investment manager. Investment management is but a part of being a true advisor. It’s for all the parts together that you would pay an advisor, not for simply choosing your investments.

If you’re “fee-only” and don’t sell insurance products or investments that pay commissions, then aren’t you limiting my options?

In a sense, yes, in the same the way a doctor would limit a diabetic patient’s food options by forbidding high-sugar junk food such as soda, cookies, and cake. Is that patient better off or worse off with such “limited” options? Most would say better off, much better off. In reality as well, that patient’s, “good,” options are not, in fact, limited.

Your advisor should act similarly.

With very, very few exceptions (term life insurance and some income-only annuities are two), products that pay the salesperson a commission or other up-front payment are absolutely not in the client’s best interest. They are clearly in the salesperson’s and product provider’s (i.e. life insurance companies, fund companies) best interests, and by a lot.

Moreover, today, virtually any product or fund that pays a salesperson a commission (or sales load) is also available in a commission-free (or load-free) version. Commission-free products are far more in the client’s best interest (if advisors using them don’t tack on heavy fees to make up for the lack of commission, which happens a lot). Commission-free products have much lower internal expenses, precisely because there is no commission to pay, therefore the client receives far more, “bang for the buck.” That is why flat fee advisors usually bias towards commission-free products for clients who want or need insurance protection, for which they charge nothing extra.

All financial advisors have conflicts of interest with their clients. You’re one, so what are yours?

The major conflict of interest problem other financial advisors have is that they are paid some percentage of their clients’ assets, either smaller percentages annually, or large percentages up-front as commissions. Because flat fee advisors are only paid their flat advisory fee, they have none of those conflicts. They are free to advise the client on what is in the client’s best interest, because they don’t get paid more or less for however much a client invests anywhere, wherever a client invests, or whatever a client buys.

There is a clear conflict of interest pre-advisory relationship. If you ask whether an advisor thinks you should become their client, and they want you to become a client, clearly they stand to benefit financially from having you as a client. As a result, they cannot give you advice on that decision without a big conflict of interest. Once you are a client, however, a flat fee advisor’s only incentive is to do excellent work for you to make you happy so that, candidly, you keep paying them the advisory fee quarter after quarter, year after year, to be your advisor.

So while it’s correct that all financial advisors have conflicts of interest with their clients, unlike almost all other financial advisors, a flat fee advisor’s is mainly only pre-relationship.