I’ve been a CPA since 1981, and I spent more than 10 years as an investment advisor at Wall Street firms before I started Money Talks News. So I’ve sat on both sides of the desk.
Here’s what that taught me: the most important conversation you’ll ever have with a financial advisor happens before you hire one, and most of it comes down to three questions.
Ask them, and you’ll know whether the person across the table is legally bound to put your interests first, how they get paid, and what their advice will cost you over a retirement that could last 30 years. Skip them, and a fee you barely noticed could quietly take six figures out of your nest egg.
Want to skip ahead and talk to advisors who already meet the standard below? Get matched with fiduciary advisors, free.
Question 1: “Are you a fiduciary 100% of the time, and will you put that in writing?”
A fiduciary is legally required to act in your best interest. Registered investment advisers owe their clients that duty under the Investment Advisers Act of 1940. Many people who call themselves “financial advisors,” though, are brokers or insurance agents.
Brokers are held to a different rule, the SEC’s Regulation Best Interest, which took effect in 2020. It’s stricter than what came before, but it isn’t the same as an ongoing fiduciary duty.
The catch is that some professionals wear both hats. They may act as a fiduciary when they manage your portfolio and as a salesperson when they recommend a product.
That’s why the wording matters: “100% of the time, on every account and every recommendation.” A good advisor will say yes without hesitating and sign a short letter saying so. If you get a long pause or a speech about how “we always do what’s right for our clients,” you have your answer.
How to check: Look up any advisor for free on the SEC’s Investment Adviser Public Disclosure site (adviserinfo.sec.gov) and on FINRA BrokerCheck. Both show registrations, employment history and any disciplinary actions.
Don’t want to vet advisors one by one? SmartAsset's free matching tool connects you only with fiduciary advisors, who are legally required to act in your best interest. You simply answer a questionnaire that takes about 10 minutes, and most advisors offer a free first meeting. There’s no obligation to hire anyone.
Question 2: “How, exactly, do you get paid, and by whom?”
How an advisor is paid shapes the advice you get. There are three basic models:
- Fee-only: You’re the only one who pays them, usually as a percentage of the assets they manage, a flat annual fee or an hourly rate. They earn no commissions on products they recommend.
- Commission: They’re paid by the companies whose products they sell, such as annuities, insurance or certain mutual funds. The advice may be free to you up front, but the incentive is to sell.
- Fee-based: A mix of the two. Despite the similar name, this is not the same as fee-only.
None of these is automatically bad. A commission can make sense for a one-time purchase. But you deserve to know which model you’re dealing with so you can weigh every recommendation in that light.
Ask for the advisor’s Form ADV Part 2A, a plain-language brochure every registered adviser must provide. It lists fees, conflicts of interest and how the firm is paid.
Prefer to start with advisors who answer this question on paper? See which fiduciary advisors match your situation.
Question 3: “What will I pay in total, in dollars, every year?”
Percentages hide the real cost. An asset-based fee of around 1% a year is common in the industry, and on $500,000 that’s $5,000 in the first year. The fee grows as your account grows. Add the expense ratios of the funds inside your account, and the total can be well above the headline fee.
Here’s a hypothetical illustration of why it matters. Suppose $500,000 earns 6% a year before fees for 20 years. With 1% in total annual costs, it grows to about $1.33 million. With 0.5% in costs, it grows to about $1.46 million. Same investments, same returns, and a difference of roughly $132,000. (This is an illustration, not a prediction; actual returns vary and can be negative.)
So ask for one number: total annual cost in dollars, including advisory fees, fund expenses and any account charges. Then ask what you get for it. A good advisor earns the fee with tax planning, Social Security timing, withdrawal sequencing and keeping you from expensive mistakes, not just picking funds.
What good advisors have in common
In 35 years of covering personal finance, I’ve noticed that the advisors worth hiring don’t flinch at these questions. They put the fiduciary pledge in writing, explain their pay in one sentence and quote their cost in dollars. And the people who end up happiest with their advisor are the ones who interviewed two or three before choosing.
Find a fiduciary advisor who fits you
SmartAsset's free matching service has helped more than 2 million people find financial advisors. Every advisor it matches you with is a fiduciary, legally required to act in your best interest.
Get matched with fiduciary advisors now
- What to expect: a questionnaire of about 10 minutes covering your age, goals, savings and comfort with risk.
- Your contact details: you’ll be asked for a phone number near the end. You control whether and when you respond to anyone.
- Cost: free to use, with no obligation. Nearly all matched advisors offer a free first meeting, so you can ask all three questions before you decide.
The bottom line
On a $500,000 nest egg, the difference between an advisor who costs 1% and one who costs 0.5% could be more than $130,000 over 20 years in the illustration above, before you count the cost of conflicted advice. Three questions protect you from both: Are you a fiduciary all the time, in writing? How are you paid? What will I pay in dollars each year?
The retirees who get this right don’t hire the first advisor they meet. They compare two or three, ask the same questions of each and choose the one with the clearest answers.
Ready to compare? Take the free 10-minute questionnaire and get matched with fiduciary advisors. There’s no obligation to hire anyone.
MoneyTalksNews is an independent personal finance publisher. We may earn a referral fee from partner services at no cost to you. Our editorial recommendations are based on merit, not compensation.
Add a Comment