What questions should I ask a financial advisor on our first meeting?

Question

I am a 28 year old school teacher and am meeting with a financial advisor to discuss my options for the best way to manage my meager earnings.

Answer 1

1. Can you explain your practice of asset location?
This question will elicit a blank stare from many advisors. Perhaps they'll ask, "Do you mean asset allocation?" To which you'll reply, "No, I mean asset location" -- which investments should go in tax-advantaged accounts like IRAs, and which should stay in taxable accounts.

This is a crucial decision, one that can add 15% to your after-tax wealth (according to research done by economists Robert Dammon, Chester Spatt, and Harold Zhang). Some investments have built-in tax advantages, which are nullified if those investments are placed in tax-deferred accounts. For example, qualified dividends are taxed at no higher a rate than 15%. However, if those dividends are withdrawn from a traditional IRA, they'll be taxed as ordinary income -- as high as 35%. Make sure your advisor knows all the tax consequences of placing different investments in different accounts.

2. What percentage of assets can I withdraw from my portfolio in retirement?
If you plan to retire in your 60s and your advisor responds with a recommended withdrawal rate higher than 5%, strongly consider heading for the door. Numerous studies have shown that the withdrawal rate that would have survived any 30-year period over the past 130 or so years is just around 4%. It's a very safe withdrawal rate, so some will argue that 5% is manageable if you can alter your lifestyle based on market conditions. But anything higher is taking on a big risk that you'll outlive your money.

3. When should I begin receiving Social Security benefits?
There's no one right answer to this question -- you just want to make sure your advisor knows the rules. You have a "full retirement age" (FRA), the age at which you'll receive your full Social Security benefit. For example, the FRA for people born in 1941 is 65 and eight months. The FRA gradually moves up to age 67 for people born in 1960 or later. You can begin receiving Social Security before then -- as early as age 62 -- but then your benefit will be reduced permanently. And if you take the benefit early, but continue working, you'll have to give back one dollar in benefits for every two dollars earned from work above an exempted amount ($12,480 in 2006).

This should be a pretty easy one for an advisor to answer. If your advisor can't give you a convincing explanation, you know you haven't found the advisor for you.

4. To whom should I leave my IRA -- my spouse, my kids, or my estate?
Here's a crucial aspect of estate planning that you (and your advisor) must remember: The beneficiary form you fill out for your investment accounts and insurance policies trumps your will. Did you name your ex-spouse as the beneficiary on your life insurance policy, but state in your will that your current spouse gets that money? Guess who will get it when you join that Great Golf Resort in the Sky? That's right -- the ex-spouse.

This is an even more important point when it comes to IRAs. If you don't leave it to anyone -- or just leave it to your estate -- it may have to be liquidated soon. However, if you do right by the beneficiary form, your heirs can keep that tax-advantaged growth going for years and years. The exact solution varies by individual, but generally, you should make your spouse the primary beneficiary, with your kids as contingent beneficiaries. If your advisor has a different recommendation, make sure there's a good reason for it.

A couple of bonus IRA questions for your advisor:

"I'm not yet 59 1/2, yet I might need to take money out of my Roth IRA. Can I do that without paying taxes and penalties?" The answer: Yes, as long as you take out the contributions. The earnings may be subject to taxes and penalties.

"What should I do if I inherit an IRA?" The answer: Do not try to put it in your own name. Rather, keep it in the decedent's name, but for your benefit -- something like "Charles Dickens, deceased, IRA for the benefit of Charles Dickens, Jr. as beneficiary."

5. Are you going to ask me about my debt?
Any good financial plan begins with a discussion of how much someone owes. Any financial advisor who doesn't bring up debt at some point isn't looking at the whole picture. Of course, if the advisor gets paid via commission, he or she has no incentive to ask about this -- more money stands to be made if you invest your extra cash with him or her, rather than pay off debt.

Now, some debt is OK -- for example, many good advisors recommend that people never pay off their mortgage. There are solid reasons for that (as well as reasons to pay it off). But high-interest credit card debt should always be paid down first -- and any advisor who doesn't ask about debt isn't doing a thorough job.

Keep your advisor accountable
The best defense against exploitation is knowledge -- even if you work with an advisor, you have to know enough to know whether the advisor knows what he or she is doing.

Answer 2

Unless your consumer debt is very little, your financial plan should simply be paying off your debt......and contributing to your employer matched retirement fund ...

If your consumer debt is zero, NEVER make out a check to the financial planner - if he asks you to......he's scamming you....

If you know nothing about longterm/shortterm investments/goals, etc.......go to the library and get some kind of Idiots Guide to Finances; otherwise, he could just talk over your head and you'd have no idea if he's full of it or not.

Answer 3

I'm going to agree with part of what kyk... said. More important than all of those questions is, What do you recommend for me and why. They should ask you alot of questions then. If they can't explain themselves so you understand it fully, walk away. They should teach you about finance, not try to impress you with what they want you to think they know. If they through a bunch or terms at you, they are just following their training and don't really understand why.

Answer 4

What is your clientele?
What are your clients' average net worth?
Do you manage funds? How much?
Have you ever filed for bankruptcy?
How can I save more money? Are there tax-shields/cuts I can take advantage of? Which securities should I invest in that have low risks?
How much does someone my age have saved away?
When can I expect to retire?

Answer 5

Ask for some proof of his qualifications in this field and check it out.

Answer 6

ask him if he has ever been to jail..??? you should learn to manage your own money...do you really want to trust someone else with your money...it seems to me even the most honest looking people steal...im sure a financial adviser is in it for the money...even if its at your expense...

Answer 7

What car do you drive? (If the car is American then walk away)