5 Questions To Ask A Prospective Fee Only Financial Planner

I’m a strong believer that with a little research, common sense, and discipline almost anybody can manage their own investments at least as well as the pros. For those who prefer to go the DIY route, investing in index funds, keeping costs low, and owning a variety of asset classes (not just stocks and bonds but also alternative asset classes like real estate, commodities, TIPS, etc) will serve you well; well enough to match or beat the performance of most professional financial planners.

But many (if not most) people just don’t want to go it alone for whatever reason. Maybe you don’t trust your judgement or know you’ll probably do something stupid when the market tanks. Or maybe you just don’t care about investing and doing the necessary research sounds worse than a trip to the dentist for you. Fair enough.

I Recommend Fee Only Financial Planners

There are a few different kinds of financial advisors. For reasons I could write a whole series of articles about (and probably will), I mostly just recommend using a fee only financial planner. Fee only financial advisors aren’t compensated with commissions so they have less of an incentive to put you into inappropriate investments just to make a quick buck. There are still conflicts of interests, of course, but they tend to be less several with a fee only financial planner than commission-based planners.

5 Questions To Ask A Prospect Fee Only Financial Planner

So how does one choose between all the fee only financial planners out there? A lot of it comes down to finding somebody you can trust and are personally comfortable with. At a minimum, that means you should do a background check on any advisor you’re thinking of hiring. But besides the basics, here are a few questions I think everybody should ask when interview financial planners in order to get a feel for how well the planner’s approach jives with common-sense investing best practices.

1.) How long have you been in the business?

You want a financial advisor with experience across a wide range of market conditions. Somebody who started their financial planning practice during the last great market crash may be overly-conservative with their asset allocation strategies while somebody who has been around mostly during bull markets might be overly optimistic about future returns. At a minimum, I would want to work with somebody with at least 10 years experience. That’s not to say a less-experienced advisor wouldn’t do just as well, but you have to draw the line somewhere.

2.) What certifications do you have?

There are a ton of different certifications in the financial planning business, some of them more useful than others. One of the most rigorous certifications out there is the Certified Financial Planner (cfp.net) designation. Planners with a CFP designation had to demonstrate their knowledge by years of dedicated study and by passing some pretty difficult tests. Other worthwhile designations are Certified Financial Consultant (ChFC), Chartered Investment Counselor (CIC), and Chartered Financial Analyst (CFA). This is not a complete list, so you should always research the designations earned by every fee only financial planner you interview and then verify with the appropriate designating authority they actually earned the designation they claim to have earned.

3.) How important is controlling investment costs to your investing approach?

If their response is anything other than “very important” run away as fast as you can. All else being equal, a lower-cost mutual fund will beat a comparable higher-cost mutual fund and low-cost diversification is as close to the optimal investment approach as you can get. Any sales pitch along the lines of “costs shouldn’t matter because I can choose superior mutual fund managers and beat the market” is a huge red flag.

4.) What’s your track record?

I prefer index funds, but plenty of individuals and many financial planners prefer active funds. And there’s nothing inherently wrong with that. But if your financial advisor insists on recommending actively managed funds, don’t you want to compare how their picks have panned out in the past? If your financial planner hasn’t been able to at least approximately match the performance of a basket of broad market indices in the past, what makes you think they will be able to do so going forward? And if they can’t do so going forward, you’d be better off in index funds.

5.) How does your investment approach account for taxes?

This isn’t a big deal if all your money is locked away in a 401k, IRA, or other tax-deferred account. But if you’ve got a lot of money in taxable accounts, you’re going to want to make sure your financial planner is investing in the most tax-efficient way possible. Furthermore, you want to make sure your planner is looking at your portfolio as a whole and not just a collection of different budgets. Proper asset location can make a big difference come April 15th.

Obviously, this isn’t an exhaustive list of questions you should ask. For more general info, check out the National Association Of Personal Finance Advisors (NAPFA) and their list of tough questions to ask.