9 questions to ask a financial advisor as you near retirement

I’m cheating a bit in writing this month’s article. Okay, I’m more than cheating…I’m basically ripping off a blog post written by my friend and colleague, Mike Powers from Manuka Financial. It’s okay though, I asked his permission ahead of time, and he said I could!

On December 12, 2022, Mike wrote a blog post called 9 Questions to Ask a Flat Fee (or any!) Financial Advisor As You Near Retirement. As the name implies, the article gives nine questions that people who are nearing retirement and looking for a financial advisor should ask to the prospective financial advisor.

I’m going to mix it up a bit and share blocks of quotes from the article that recite what Mike said, and then I’ll layer in my own thoughts and commentary. For those of you considering hiring a retirement focused financial advisor, this is for you!

From Mike: Looking to hire a new financial planner to help you transition to retirement? With the flat fee financial advisor model being a relative newcomer within the financial planning industry, potential clients have a number of questions they tend to ask. Some that I get are unique to a flat fee financial advisor, while others could be asked of any financial planner you are considering working with. Here is a list of the 9 best questions I have personally been asked over the years that I believe are important, along with comments and answers for my own firm:

1. How many clients do you work with

From Mike: Some firms operate at scale and may serve hundreds of clients per advisor, while others prefer a more customized approach and therefore serve a smaller subset of families. Each approach can have its pros and cons, so it is important to understand how much time your advisor may be able to actually spend with you if you decide to work with them.

From me: This is important. At many of the larger household name advisory firms, advisors will often have hundreds of relationships they are responsible for overseeing. With that many clients to have to know and work with, it’s impossible to truly and deeply know each client and their respective financial scenarios well. If you’re looking for relatively lowtouch and high-level planning, this might be okay. But if you’re looking for comprehensive and truly in-depth knowledge and advice about your unique circumstances, you likely want to look for an advisor who keeps their number of client relationships well under a hundred.

2. What happens if you get hit by the proverbial bus

From Mike: No matter how young or old we are, none of us are going to live forever. It’s good to understand that there is a contingency plan in place in case something unexpected happens to your advisor.

From me: Many of the advisory firms who genuinely get deep in the weeds with clients are relatively small firms. Particularly those who charge flat fees; they’re likely even smaller firms. This is because most of the folks in the industry who want to legitimately focus on really in-depth planning and/or charge flat fees weren’t able to find larger firms in which to offer those things. So they had to split out on their own. And that means their firms are typically newer and/or smaller.

With that said, such firms may only be one or two-person operations. So be sure to ask them in detail about what their contingency plans are, and what happens to you and your accounts, if they are no longer able to be in the business for whatever reasons.

3. Do you have your own financial planner?

From Mike: I work with a lot of very financially savvy clients. Some of them even have the time, talent, and temperament to successfully manage their own investments. But whether they want to get a second opinion on their financial life or just want to have a trusted advisor in place for their spouse, they value having an independent third party to help them make financial decisions and quickly step in if they’re no longer able to continue managing their own financial life.

I can manage my own investments and enjoy implementing various financial planning strategies within my own life. But to me, it is incredibly valuable to know we have a trusted advisor in place that knows our financial situation well and can easily step in to help my family if I’m no longer able to do so.

From me: I’m indifferent on this point. I don’t personally have my own financial advisor, but I can see the potential benefit in it. In my opinion, I wouldn’t hold it against an advisor if they don’t have their own advisor. But, depending what their reasons are for having one or not, you may be able to learn something you otherwise wouldn’t have known about the advisor and/or their firm.

4. What is your investment philosophy?

From Mike: There are two main investment philosophies, active and passive, with many nuanced variations in between. Active investors watch the market and make moves trying to outperform it. Passive investors tend to focus on a proper allocation based on their risk tolerance and time horizon, keep their expenses low, and let the markets do the work. Historically, active management tends to underperform passive management over long time horizons. In fact, according to the most recent SPIVA Scorecard which ranks active fund managers against their appropriate index, over 95% of active U.S. equity funds underperformed their benchmark on a risk adjusted basis over the last 20 years ending December 31, 2021.

From me: It’s imperative that you and the advisor are on the same page with regards to investment approach. If you’re looking for someone who’s a stock picker trying to outperform the market, an advisor who follows a passive index-based approach will not be the right fit for you. And vice versa.

5. What fees will I incur working with you?

From Mike: Depending on the relationship, financial advisors can charge a number of different ways, and it’s important to understand any financial incentives they may have before making a decision on whom you should hire. If you’re looking for a flat fee advisor, be careful of financial advisors who advertise they are “flat fee” for planning and then end up charging based on assets under management once you become a client. Also note that some advisors will get compensated more by placing you in certain products, such as an annuity or permanent life insurance policy that may or may not be in your best interests.

From me: It’s important to be very direct and very blunt when asking an advisor what fees you will or may pay as part of the relationship. There will be fees you pay to the advisor directly for their services. If they’re managing your investments, their fee will most likely be deducted out of your investment accounts as opposed to you paying out of pocket. The advisor may also get indirectly compensated from third parties, such as by having you invest in certain funds or buy certain products, where they then receive commission or some other financial incentive from the product provider. Be very clear in asking “in what ways, and how much, will you be compensated in this relationship, whether directly from me or indirectly from others?” And also be sure to ask about what other fees, separate from fees you’ll have to pay the advisor, you may incur, such as from custodians, fund companies, etc.

6. Do you allow clients to manage their own investment portfolios?

From Mike: While the typical person looking for a financial advisor would like assistance with managing their investments, there are a number of people who are very comfortable managing their own investments. Which one are you?

From me: If you know you don’t want to hand over the direct management and trading of your investment accounts to an advisor, you will want to work with someone who’s “advice only” or “planning only.” While not yet common, there is nonetheless an increasing number of advisors providing advice only relationships.

7. What credentials do you have?

From Mike: The financial industry is laden with various credentials, some with much more rigor and effort than others. Within financial planning, the three big ones are Certified Financial Planner (CFP®), Chartered Financial Analyst (CFA), and Certified Public Accountant (CPA). An Enrolled Agent (EA) can also be helpful for knowledge about taxes.

From me: In my opinion, there are a few designations that hold a lot of heft and meaning because they are rather difficult and time-consuming to obtain. Then there are others that aren’t much more than sitting through a weekend workshop and paying a fee to get the designation. And everything in between. Like Mike said, some of the few big ones that hold heft are the CFP, CFA, CPA and EA. I’d also add the Chartered Financial Consultant (ChFC®) and Personal Financial Specialist (PFS) designations to that list.

8. Are you a fiduciary ALL the time?

From Mike: Many advisors are “dually registered.” Dually registered advisors can act as a fiduciary when providing financial planning advice, but might not be always acting in your best interests when trying to sell you an insurance policy, private REIT, or other financial product.

From me: I don’t like the “F” word – fiduciary – much. It’s unfortunately become a marketing buzzword thrown around by a lot of folks in the industry as they realize it’s a word that consumers want to hear. Many who claim to be fiduciary (i.e. legally required to act in clients’ best interests) aren’t required to do so at all times and/or aren’t actually required to do so at all! With that said, this is another question where you want to be very direct and blunt in asking, “are you LEGALLY required to act in my best interests AT ALL TIMES?” and see how the person responds. Generally speaking, advisors who hold licenses to sell securities and/or insurance products are NOT legally required to act in your best interests AT ALL TIMES. This doesn’t mean they’re inherently bad and should be avoided. But they shouldn’t respond “yes” when you ask them the question above.

9. Do you work with clients like me?

From Mike: Ideally, your financial advisor will understand the challenges you are facing and will have faced similar questions and situations with other clients in the past.

From me: I can’t agree more. The more an advisor has a focus and/or area of specialization, the more familiar and experienced they are in working with and planning around situations common to that focus or specialization. You ideally don’t want to have an advisor who has no prior knowledge or experience in your unique planning needs. Not to say the advisor can’t figure out the proper answer and approach, but you’ll likely get better advice from someone who’s been through it before.

That’s a wrap for my ripping off Mike’s article. 😊I hope you found it helpful. Thanks Mike!