Ten Tough Questions You Should Ask Any Financial Advisor
by Ron A. Rhoades, JD, CFP® and Chris Brown, Ph.D., CFP®
Introduction from Ron
A shocking revelation from a 2008 SEC report found that 30% of consumers believed they paid no fees to their financial advisors! The truth? Wall Street firms and insurance companies excel at concealing their fees. When I review investment portfolios, I often find that individuals, committee members, and plan sponsors are stunned to learn about the hidden fees they’ve been paying all along – sometimes adding up to 3%, 4% or greater each year. The academic research is very strong in demonstrating that high fees and costs lead, on average, to lower investment returns.
Introduction from Chris
I have noticed that even a single question cannot guarantee consumers are protected from conflicting advice. While many financial advisors today claim to be “fiduciaries,” that’s not enough. To truly be a trusted advisor, they need to go above and beyond by avoiding the conflicts of interest that plague many firms. And a financial advisor needs to acquire and maintain an incredible level of expertise.
Ron and I put together this list of ten tough questions you should ask before hiring a financial advisor. We’ve included our own firm’s answers to show you what good answers should look like. And we’ve included some made-up client scenarios based on our experiences to show you how tricky it can be to figure out who is actually a trustworthy
and expert advisor.
1. Will you and your firm always be a fiduciary during our professional relationship? And will you provide me with a copy of your Form ADV, Parts 2A and 2B, and your own public disclosure document?
Yes. Being a “fiduciary” is critical. However, the reality is that the “fiduciary standard” has not been interpreted by the regulators correctly, and this has led many “fiduciary” financial advisors to operate with significant, and avoidable, conflicts of interest that impair the quality of the advice they provide.
Every investment adviser should readily provide you with their Form ADV, Part 2A (the firm brochure), Form ADV, Part 2B (information about individual advisors), and Form U-4 (employment history and disciplinary records).
2. Are both you and your firm a “fee-only” advisor?
Yes. This distinction matters because under current regulations, a “fiduciary” can still sell investment and insurance products, creating an inherent conflict — attempting to serve both the client and product manufacturers simultaneously.
In contrast, fee-only advisors don’t sell products, significantly reducing many of the conflicts of interest which could exist in financial services. You can find fee-only advisors through organizations like the National Association of Personal Financial Advisors, XY Planning Network, Garrett Planning Network, and the Alliance of Comprehensive Planners.
Ron and Chris are members of The National Association of Personal Financial Advisors and the XY Planning Network.
3. Will you provide advice and/or management of my investment portfolio under the tough standard of the “prudent investor rule”?
Yes. This is a much tougher standard of due care than the requirement financial advisors typically possess, in which they must only possess a “reasonable basis” when recommending an investment strategy or an investment product.
The prudent investor rule has two key requirements. First, the investment portfolio must avoid or minimize idiosyncratic risk through broad diversification. This means potentially holding hundreds or even thousands of different securities (stocks, bonds) to reduce the impact of any single security’s poor performance on the portfolio.
Second, avoid “wasting” client assets by controlling fees and costs, minimizing tax drag, and preventing permanent losses from inadequate diversification.
4. Are you a Certified Financial Planner™ (CFP®), Chartered Financial Analyst (CFA®), or a CPA/Personal Financial Specialist (CPA/PFS®)?
Yes. We are both Certified Financial Planners™ (CFP®), as well as university professors. We have decades of combined teaching experience in finance, investments, and financial planning courses. At the AACSB-accredited Gordon Ford College of Business at Western Kentucky University, we currently teach courses in Retirement Planning, Applied Investments, Principles of Finance, Markets & Institutions, Estate Planning, Legal and Regulatory Aspects of Personal Financial Planning, and Financial Plan Development.
The three broad-based designations set forth in the question above each require hundreds or thousands of hours of study, ensuring a solid foundation in investments and financial planning concepts. Beware of the hundreds of lesser designations in financial services that may require minimal study or expertise.
5. Will you commit to NEVER recommend any proprietary product, nor any investment or insurance product for which you, your firm, or any affiliated firms receive material compensation?
Yes. We make that solemn commitment.
In today’s market with thousands of investment options, there’s no need for advisors to recommend proprietary products or those that generate commissions or revenue sharing.
True independence means surveying the entire universe of investment and insurance products to find what best serves the client’s needs—not what pays the advisor or the advisor’s firm (or affiliated companies) more.
6. Will you utilize an independent custodian and avoid taking custody over my assets to ensure they’re protected?
Yes. Having an independent custodian (in our case, primarily Schwab Institutional) who directly provides you with monthly or quarterly account statements, along with online access to view your accounts, is a crucial safety measure. This significantly reduces the risk of theft or Ponzi schemes.
Always review your monthly or quarterly statements from the independent custodian. If you notice unusual activity, query your advisor. If suspicions remain, seek a second opinion quickly.
7. Will you provide a summary of the academic evidence supporting your recommended investment strategies?
Yes. Scholar Financial utilizes “evidence-based investing” as its core philosophy. This approach relies on academic research rather than gut feelings, market timing, or speculation. Regarded by many as a conservative investment philosophy, more detail on our evidence-based approach is available upon request.
8. Will you provide an “Investment Policy Statement” describing the recommended investment strategy and establishing a strategic asset allocation?
Yes. While not legally required, an Investment Policy Statement serves as a roadmap for your investments. It helps both you and your advisor maintain discipline when markets become volatile. The document typically addresses strategic asset allocation and sets forth a disciplined process for rebalancing. It ensures that your investment portfolio is managed under a defined set of criteria with mutual understanding.
9. Will you provide a written estimate of the total fees and costs I’ll incur with my investments?
Yes. Our own fees are clearly set forth in our client services agreement. We seek out lowcost investment vehicles for our clients, and we can provide a written estimate of the total fees and costs, considering the specific investments recommended for a client, upon that client’s request.
Many “hidden” fees exist in investment vehicles, including transaction costs and opportunity costs. By combining all fees and costs associated with your portfolio management and products, you get a “total fees and costs” estimate.
10. Will you design and manage my investment portfolio with a view toward long-term tax efficiency?
Yes. Tax-efficient portfolio design and management is essential for nearly every client.
Strategies include tax-loss harvesting, asset location optimization, and tax-efficient fund selection. Various studies show these approaches can add between 0.5% and 1.5% annually to after-tax returns (Vanguard/Rowling). Remember: it’s not what you make, but what you keep after fees and taxes that matters most.
BONUS QUESTION: Will you put your answers to these questions in writing?
Absolutely. If an advisor won’t answer affirmatively to all these questions or refuses to put their answers in writing, consider that a significant warning sign.
Of course, there are good advisors that might not be able to answer the questions in the same way that we can answer them, many through no fault of their own but because of the requirements of the firms where they work. And like all investment situations, results can vary for each person and situation. Even the best possible advisor may not be able to achieve the exact results that you desire. Despite there being no guarantees in investment advice, we think that these questions serve as a great starting point in choosing a financial advisor with awareness, prudence, and confidence.
About the Authors
Ron A. Rhoades, JD, CFP®
Ron Rhoades is an Associate Professor of Finance at the Gordon Ford College of Business, Western Kentucky University. He also serves as a financial advisor at Scholar Financial, a practice within XY Investment Solutions LLC. With a background as both an attorney and a CERTIFIED FINANCIAL PLANNER™ professional, Ron is a nationally recognized authority on the fiduciary duties of financial advisors.
Chris Brown, Ph.D., CFP®
Chris Brown is a faculty member in the Department of Finance at the Gordon Ford College of Business, Western Kentucky University, and a financial advisor at Scholar Financial, a practice within XY Investment Solutions, LLC. He holds the CERTIFIED FINANCIAL PLANNER™ designation and a Ph.D. in Personal Financial Planning. His research and teaching focus is on behavioral finance, retirement planning, and evidence-based investment strategies.
Sources
“Investor and Industry Perspectives on Investment Advisers and Broker-Dealers,” RAND
Corporation, TR-556-SEC, 2008, https://www.rand.org/pubs/technical_reports/TR556.html
“Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®,” Vanguard (July 2022);
Sheryl Rowling, “Why Advisors Should Bother With Tax Alpha,” Morningstar (Dec. 5, 2022).
