The Four Questions You Should Ask BEFORE Hiring a Financial Planner

An interrogation of a potential financial planner doesn’t have to go like this!

“It is not the answer that enlightens but the question.”
–Eugene Ionesco

Let’s face it. I’m a Certified Financial Planner. I’m trying to convince you that, even if you think that you can do it yourself, it’s not worth the time, effort, energy, and risk to try to find all of the various bits and pieces of information from good and potentially questionable sources and apply it to your specific situation in your life.

There are a ton of what a fellow financial planner and friend of mine calls “personal finance hacks,” who are of the “I paid off $30,000 in debt and figured it all out and now I’m giving you financial advice, although I’m not really giving you financial advice because I’m in no way qualified to do so and by saying that I am, I’d get in deep sheep dip with the SEC” variety. They’re great to follow if you need inspiration and want to know that you’re not alone in the battle to overcome your own inner finance demons, but if you need to know whether or not SAFEMAX applies in your situation, they’re risky.

Getting a full understanding of how to make finances in your life is not as simple as going to some guru and reading their website or book. You’ll get the 80% of the Pareto solution – the 80/20 rule – which gives you the basics that you need to keep your head above the water. But the 20%? That part relies on the famous consultant’s quotation:

It depends.

It totally depends on your situation. Planning on retiring early or working until you drop? Own a business or work for one? Want to leave an inheritance or die broke? Travel around the world or build the dream casa? On and on and on.

So, you could spend countless hours and weekends and weekends scouring the Internet and reading books looking for the answers. If you value your time, then you’ll quickly hit the wall of diminishing returns.

If you decide to make that tradeoff and retain your most precious asset – your time – for doing what you want to do with it and decide to hire a financial planner, it’s important that you don’t go into it naively thinking that everyone has both your best interests at heart and the competence to actually provide you with reasonable guidance.

The Four Questions You Should Ask a Prospective Financial Planner

  1. How are you getting paid? Is your financial planner going to view you as a walking piggy bank and sell you loaded, high commission products or charge you a significant percentage of your assets every year just for the “privilege” of working with him? If that’s the case, walk away. Does the planner make more money from advertisements than from actual planning? That is probably a sign of what products and services he is going to push on you. Your prospective financial planner should be teaching you what you need to know so that you can make the right decisions and never have to come back unless there’s some exceptional change in your life’s circumstances, and should be a planner, first and foremost, not a glorified advertising agency or insurance product/loaded mutual fund salesperson.
  2. You’re going to sign a legally binding fiduciary contract, right? This means that the advisor is going to recommend products and services which are in your best interests rather than his best interests. Go ask a financial planner at one of those franchise financial planning firms to sign one of those before taking you on as a client and watch him first recoil in horror, and, after recovering, then sell you a load of crap about how it’s important to pay loads so you don’t sell too early while pulling out a bunch of chart porn in an attempt to get your eyes to glaze over.
  3. What is your net worth? You don’t take diet advice from someone who’s morbidly obese, do you? Why should you take financial advice from someone whose net worth is in the red?
  4. How did you get your net worth? This follows on to the previous question. If they got the bulk of the net worth by inheritance or through selling high commission questionable financial products (see #s 1 and 2), then it will show that they didn’t get there through sound financial practices. If they got there through some highly leveraged, risky options strategy, it means that they’re likely to push you in a direction which you’ll neither understand (collars…not just for your shirt!) nor likely have a risk tolerance to take, not to mention have no idea if it’s a replicable strategy or not. Simply put, you want to make sure that your prospective financial planner eats his own dog food.
  5. (Bonus Question) Are you a Certified Financial Planner? You could dump a can of alphabet soup into a bowl, spoon some up, and probably come up with a “certification” that someone is carrying around, which is probably as valuable as those college degrees you see offered in your spam folder in e-mail. However, the Certified Financial Planner (CFP) designation is one that is specific to personal financial planning. A CFP designation doesn’t mean that they can manage your money for you, necessarily (ask them about things like gamma and how to determine ROCI from a corporate balance sheet); in my opinion, CFAs are better suited for that, although some CFPs can do it as well. However, as we have seen before, the primary value of financial planning is not investment management.

This is just the beginning of the list of questions you should have before entrusting your financial well-being with a planner. While no financial planner can guarantee your financial well-being, a good one can at least reduce the likelihood of you falling off of the cart. You need to make sure that your interests are aligned together, the planner has the competence to deliver, and has a similar mindset and personality that you do. After all, if you don’t click with your planner on a personal level, then you’re going to throw a couple of stacks away getting a customized plan which will sit on your shelf or in your computer and never see the light of day.

Published by

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

2 thoughts on “The Four Questions You Should Ask BEFORE Hiring a Financial Planner

  1. Excellent stuff to remember! We need to get organized on that front and I might have thought to ask the first question. But that’s it. And thank you for pointing out the different goals that come with different priorities/plans. I for one plan to work until I can’t. I have an at-home job with a great boss, who I’m sure will keep me around as long as I want. That said, we have to decide whether to favor increasing mortgage or retirement. My instinct is to pay off the house first, and slowly raise our monthly retirement contribution. But it’s been suggested that we make smaller payments on the house and shunt the majority of our money into retirement. Comfort zone vs logic. Blech.

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