If you’re preparing to retire, the quality of the relationship you have with your advising team could determine how successful your retirement journey is.
Fact Checked by: Matthew Schwartz, CFP®
If you’re preparing to retire, the quality of the relationship you have with your advising team could determine how successful your retirement journey is. They will be navigating the next 30 years of life’s changes with you, ensuring you retire the way you’ve envisioned. But finding quality advice can be difficult because we are inundated with opinions, ideas, and financial advice from every corner. So how do you know you’ve made the right choice with your advisor?
Ask them good questions. We’re going to equip you with some of the most important questions our clients have asked us before they have retired. We’d recommend that you ask these questions too, as they can help you determine if you are working with the right advisor.
Question #1: Are you regulated under the Fiduciary or Suitability standard?
There are two governing standards called Fiduciary and Suitability that regulate those who give financial advice. They may seem similar, although the difference is quite stark. Fiduciaries are strictly regulated by the SEC and have a legal and moral obligation to provide recommendations to you in your best interest. You’ll find titles such as “Registered Investment Advisor” (RIA for short) regulated as a Fiduciary. Those that are governed by the Suitability standard are simply required to provide a suitable recommendation for your situation.
Consider this example: say you are looking to buy a new truck. You go to a Ford dealership, and after a consultation, the salesman recommends you purchase an F-150. This may be a suitable recommendation for you from Ford’s lineup, however, the truck that is in your best interest is actually a Toyota Tundra. The Ford salesman cannot provide you with the truck that is in your best interest, even if he is well-intentioned.
Many financial advisors are working to give their clients good advice. However, because of the strict regulations, greater requirements for ongoing education, and obligation to put your needs above their own, Fiduciaries may be better equipped to provide you with sound advice.
Questions #2: What is your investment philosophy?
The approach and investment strategy you have used over the years to help accumulate your assets will likely not work in retirement. Income and preservation, not growth, become the main focus. Find an advising team that understands this monumental transition to retirement, and will clearly communicate their philosophy without hesitation.
As they are communicating their philosophy, listen for phrases like holistic financial plan. They should discuss things with you like maximizing your social security benefits, creating income streams from your assets, reducing your income taxes in retirement, and much more. If your advisor only talks about the latest stock pick or simply good diversification, that could be a red flag. You’re looking for a retirement financial advisor who understands your goals, thinks long term and oversees all aspects of your financial portfolio.
Question #3: How do you and your firm receive compensation?
There are many ways an advisor gets paid, and each advisor has specific reasons for doing so. Some charge a flat fee for their advice and others receive commissions on product sales such as investments or insurance. There are benefits and downsides to all types of compensation structures, however its vital that you clearly understand how your advisor gets paid. If your advisor is reluctant to share their compensation structure, this might be a warning sign.
Each compensation structure provides different incentives, and good advisors structure their compensation to serve their clients best. For retirees, paying an advisor a flat fee, or a fee wrapped into their account, could be the best option. It’s cost effective because there may be price breaks for larger account sizes. And it also reduces the advisor’s incentive to over-sell high priced investments.
Bonus Question: Who is on your team?
Financial advisors are humans, and often can find something they’ve never seen before. When this happens, advisors who work with a team of experts are equipped to serve your needs better because they can tap the resources of those around them. Find out who is on their team and how they rely on the strengths of others.
Additionally, If your advisor is near retirement age, the strength of their team is even more important for you. When your advisor chooses to retire you will be relying on their team to carry you through your retirement. When you are asking your questions, find out how they plan to transition their relationship with you to someone else.
What other questions do you have?
Choosing the right advisor relationship is critical. Your dream retirement is in your hands, and you’ll be entrusting your vision to someone. Don’t rush your decision. Take some time and think critically about what you need to discover about your advisor before you enter into a relationship. If you want more thoughts on how to evaluate a financial advisor, check out our evaluation guide.