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3 Things You Need to Know About Your Financial Advisor

A relationship with a financial advisor has to be a two-way street.  Indeed, an advisor needs to learn an abundant amount of information about you and your family in order to make well-informed decisions about your personal finances.  However, just as important should be a thorough understanding of your advisor and what makes him or her tick.  The more you know, the better you will be in learning whether or not you are a good fit, and whether they have your interest at heart.  

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Whether or not you are currently looking for an advisor, or have been working with someone for years, make sure you learn these 3 important items about them.  In doing so, you will arm yourself with the knowledge needed to pinpoint whether an advisor is truly working to help improve your financial world.


1. Their Compensation

Compensation structure is the single most important thing you need to learn about your advisor.  Knowing how someone is paid will paint a clear picture of their incentives and motivations.  There are two primary types of compensation structures in financial planning.

  1. Commission-based compensation:  This form of compensation is one in which an advisor makes their living based on sales on investment and/or insurance products.  They usually get a percentage of the total sales price of the product, and often an ongoing revenue trail.  I would recommend avoiding an advisor who operates under this structure.  You will never quite know whether a commissioned advisor is recommending a product based on what’s best for you or what has the highest commission.  The lucrative kick-backs on sales of some products are just too tempting and can often times lead to bad behavior, such as account churning.
  2. Fee-based compensation:  This is the type compensation structure you want your advisor to be operating under, as it helps to minimize conflicts of interest.  Just know that there are a wide variety of fee-only models out there.  The most common structure is one where services are provided in return for a set percentage of portfolio assets managed by the advisor (known as the AUM, or Assets Under Management model).  This fee usually hovers around 1%.  While this is an improvement over a commissioned-based fee structure, there are still conflicts posed that most in the industry tend to ignore (I address those in this piece under "Equitable Fees").  Learn these potentail conflicts of interest so you will better know how to pose your questions, and where you might stand in the eyes of your advisor.

Questions to ask:  How, exactly, are you paid?  Are you commission-based, or fee-based?  How much will you make off of me if I become a client, or buy a specific product you recommend?

2. How They Handle Their Own Money

Don't be afraid to ask your advisor these necessary questions

Don't be afraid to ask your advisor these necessary questions

This area is important because you want to make sure your advisor practices what they preach.  Are they recommending a financial product or investment plan that they don't own or adhere to themselves?  This could be a warning sign, so make sure they have a good reason for taking a different approach.

You also want to make sure an advisor has an interest and expertise in your area of concern.  For example, if you need help with your individual stock portfolio, it wouldn't make sense to work with someone who doesn't have an interest in stocks, or isn't well-versed in this area.  That same philosophy goes for all areas of the financial planning arena:  charitable giving, portfolio construction, real estate investing, wealth preservation, etc.  Make sure to find someone who has experience and enthusiasm for that area in which you have a strong conviction, or need assistance.

In all, don't get yourself in a situation where you and your advisor are butting heads about the manner in which your money is deployed to work for you.  Rather, an alignment of interests can create a healthy and collaborative relationship in which you both benefit.

Questions to ask:  What is something you do differently with you own money that you are not recommending I do?  How do you invest your own money?  Do you have all the same products, accounts, and products that you are recommending for me?

3. Their Background and Experience

I've met a lot of people over the years who introduce themselves as a financial advisor, then I have come to find out that they are brand new to financial services.  Don't be fooled by a title; rather, experience is the golden ticket in your hunt for a quality financial coach.  I recommend using online platforms and services, such as LinkedIn or the FINRA BrokerCheckto research an advisor's background.  Does their track record line up with what you would prefer in your advisor?  Are there any worrisome items listed on their FINRA report?

Also, don't ignore the educational background and credentials someone has under their belt.  All show a desire for improvement, and most well-respected designations (such as CFA®, CFP® and CPA) promote a higher standard of care.  An advisor should show a need to take their profession and integrity seriously before you do the same with them.  You should be looking for guidance from a high-caliber fiduciary of wealth, not from someone who is seeking to get by on minimal effort.

Questions to ask:  How long have you been a financial advisor/planner?  What is your educational background, and do you have any certifications?  Do you act as a fiduciary to your clients?


Like NBC's long-running service announcement, The More You Know about your financial advisor the better off you will be in choosing a partner to help strengthen your financial position.

So how does your advisor (current or potential) stack up when evaluating the three topics above?  If any of the three give you pause, maybe it's time rev up the search for a better match.