A Comprehensive Guide to Vetting Your Advisor, Verifying Their Answers, and Spotting Red Flags

Choosing a financial advisor is one of the most important financial decisions you'll make. The right advisor can help you build wealth, protect your assets, and achieve your financial goals. The wrong one can cost you thousands in unnecessary fees and poor investment returns. Yet, most people spend more time researching their next smartphone than vetting the person who will manage their life savings.

According to a study by CFP Board, less than 40% of consumers verify their advisor's credentials, and fewer than a quarter review their regulatory records. This comprehensive guide will arm you with the essential questions to ask every potential advisor before you hire them, plus the tools and knowledge to verify their answers. Hi, I'm Zach Lundak, an hourly financial planner, and before we dive into these questions, let's be clear about what's at stake.

The advice industry has over 300,000 professionals with a wide variance in qualifications, fee structures, and ethical standards. While most provide great service, there are some bad actors out there. Asking the right questions is your best defense against excessive fees and conflicts of interest.

Section 1: Qualifications, Transparency & Approach

You are looking for a transparent and specific approach here. Any vagueness is a red flag.

1. "What are your credentials and how long have you been practicing?"

   • Listen for: Key designations like CFP, CFA, or CPA/PFS. These require significant personal sacrifice and indicate a high level of expertise.

   • Top Tip: Verify these credentials on the respective organization's website (CFP Board, CFA Institute, or state accounting boards) to ensure they are up-to-date.

2. "Are you a fiduciary at all times?"

   • Listen for: A clear and unequivocal "Yes." A fiduciary is legally required to act in your best interest.

   • Red Flags: Vague responses like "I act in your best interest" (without saying fiduciary) or an admission of being "dual-registered."

   • Verify: This information must be disclosed in the advisor's Form ADV Part 2, which you can request.

3. "What services do you provide versus what do you refer out?"

   • Listen for: An advisor who understands their limitations and when to bring in outside experts. It's a sign of a good professional.

   • Red Flag: If they say they do everything in-house, they may not be an expert in all those areas. Ask if they receive compensation for referrals (this must also be disclosed on their Form ADV).

4. "Who is your typical client and what's your minimum?"

   • Listen for: A situation that aligns with your own. While not a deal-breaker, if your situation is widely different from their typical client, you may not feel like a good fit in the long term.

Section 2: Investment Philosophy & Strategy

Your advisor's philosophy should be coherent and align with your own.

1. "What is your investment philosophy?"

   • Listen for: A coherent approach they can explain in plain English. If it's overly complex or filled with jargon, it may be a sign they don't fully understand it themselves.

2. "How do you construct portfolios?"

   • Listen for: A systematic process that considers your specific situation. You want to avoid a "cookie-cutter" approach that puts you into a model portfolio and forgets about you.

3. "How often do you rebalance and review my account?"

   • Listen for: Regular monitoring without excessive trading. Too much trading can incur direct and indirect fees that erode your wealth. Ask them what triggers a rebalance and how they prioritize taxes.

4. "What's your approach during market downturns?"

   • Listen for: A calm, steady hand with a clear plan. Avoid advisors who talk about moving to cash or trying to time the market. A great response would be, "We've stress-tested your portfolio and will communicate frequently to help you avoid emotional decisions."

Section 3: Fee Structure & Transparency

Understanding all your costs is critical, as even a 1% difference in fees can cost you hundreds of thousands, if not millions, of dollars over a lifetime.

1. "How are you compensated?"

   • Listen for: A clear explanation of their business model.

   • Main Models:

     • Fee-Only: Most prevalent in the form of Assets Under Management (AUM), but also flat-fee or hourly-only.

     • Fee-Based: Can earn both fees and commissions.

     • Commission-Based: Solely earns commissions from selling products.

   • Top Tip: Ask what percentage of their revenue comes from fees clients pay versus commissions.

2. "What are all the fees I'll pay, direct and indirect?"

   • Listen for: A clear breakdown of all costs, including advisory fees, fund expense ratios, transaction costs, and custody fees. A red flag is an advisor who just says, "My fee is 1%" and doesn't mention anything else.

3. "Do you receive any third-party compensation?"

   • Listen for: Full disclosure of any payments from fund companies, insurance providers, or other financial firms. If they say you don't pay anything directly to them, it's a clear sign they are receiving a third-party fee.

4. "Can you provide me a clear fee breakdown in writing?"

   • Listen for: An easy "Yes." This should be readily available on their Form ADV.

Section 4: Service & Communication

You want to make sure you can get your questions answered in a timely manner.

1. "How often will we meet and communicate?"

   • Listen for: A structured communication plan that matches your needs, with a clear response time. Ask how you can reach them between scheduled meetings.

2. "Who else on your team will be working on my account?"

   • Listen for: A clear explanation of their team's roles and qualifications, and whether you'll have direct access to them if needed.

3. "What technology platforms do you use?"

   • Listen for: Modern, safe, reliable, and secure technology platforms.

4. "How do you handle client emergencies?"

   • Listen for: A clear definition of what constitutes an emergency, how you'll get in touch after hours, and the plan for remedying the situation.

Section 5: Business Structure & Safeguards

These questions help you understand the stability and security of the advisor's business.

1. "Where is my money actually held?"

   • Listen for: Custody at a large, well-known institution like Charles Schwab or Fidelity. A big red flag is if your money is held somewhere you've never heard of, or if the advisor has custody of your assets themselves.

2. "What happens if something happens to your firm?"

   • Listen for: A clear succession plan that shows they've thought about the continuity of service if they can no longer work.

3. "How do you handle conflicts of interest?"

   • Listen for: An honest acknowledgment that conflicts exist in any business. If an advisor says, "We have no conflicts," that's a huge red flag and a sign they don't want to have a meaningful discussion about it.

4. "What's your compliance and oversight structure?"

   • Listen for: Robust compliance procedures and a plan for dealing with regulators.

5. "Do you have professional liability insurance?"

   • Listen for: A "Yes." It's peace of mind to know they have a policy in place in case something goes wrong.

The Final Vetting Steps & Making Your Decision

Final Red Flags

• Guarantee of Returns: No legitimate advisor guarantees investment returns.

• Pressure to Invest Immediately: A legitimate advisor knows this is a long-term relationship and won't pressure you to sign up right away.

• No References: Advisors should be ready to provide references you can talk to about their service.

Vetting the Advisor

• FINRA BrokerCheck: A free online tool to verify employment history, licenses, and disciplinary actions.

• SEC Website: Provides much of the same information, including access to their Form ADV.

• Web Search: Look for reviews on the Better Business Bureau or any news stories that involve the advisor.

Making Your Decision

Once you've gathered all this information, create a simple rubric to score each advisor on a scale of 1 to 10 on factors like qualifications, transparency, philosophy, and service. Finally, trust your instincts. You have a gut feeling for a reason, and if something feels off, it probably is.

The bottom line: Choosing an advisor is too important to be left to chance. By asking these questions and verifying the answers, you can dramatically increase your odds of finding a great partner and avoiding the costly process of doing this all over again.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you with comprehensive financial planning and see if we're a good fit.