Before you hand anyone your savings: the questions to ask a financial advisor

Seven questions cover most of what you need to know

Before you hire a financial advisor, ask what licenses and registrations they hold and with which firm, whether they have any disciplinary history, how they are paid, what every product will cost you, how they choose what to recommend, what they can and cannot help with, and what happens after the first meeting. Then check the answers yourself on FINRA's BrokerCheck. A professional who answers all of that plainly is worth a second meeting; one who avoids it is not.

I have been on the advisor's side of these meetings since 2002, and the families who end up with the best plans are rarely the ones who know the most about investing. They are the ones who asked clear questions at the start and kept asking until the answers made sense.

Who are you licensed with, and in what capacity?

FINRA suggests opening with exactly this question. The title on a business card is not a license, and the words financial advisor can describe very different roles. Some people can sell insurance only. Some are registered representatives of a broker-dealer, which lets them offer securities such as mutual funds. Some are investment adviser representatives, which lets them provide advisory services. FINRA notes that investment professionals must be registered or licensed with FINRA, the SEC or a state regulator before selling to you, and that if someone says they are not, you should walk away.

Ask what the person can and cannot discuss under their licenses, and in which states. I am a registered representative of PFS Investments Inc., an investment adviser representative with Primerica Advisors and a licensed life insurance representative. That combination lets me plan protection and savings together, but the point applies to anyone you interview: the licenses should match the advice.

Check the record before the second meeting

Anyone registered to sell securities can be looked up on FINRA's BrokerCheck, which shows the person's registrations and employment history along with any disclosures they are required to report. It takes a few minutes and costs nothing. FINRA also warns that some bad actors falsely claim to be registered, so verify what you are told against your own search rather than a document the person hands you.

For insurance, the Texas Department of Insurance offers a lookup to confirm that an agent and the company are licensed to sell insurance in the state. If you are meeting someone in Dallas about both investments and life insurance, check both. A clean record does not prove someone is the right fit, but a record with problems tells you to slow down and ask about it directly.

• Search the person's name and firm on FINRA BrokerCheck
• Confirm insurance licensing through the Texas Department of Insurance lookup
• Read any disclosures and ask the advisor to explain them
• Note how long they have been registered and with which firms

Ask how they are paid and what you will pay

Every advisor is paid somehow, and you deserve to know how. Some earn commissions on products they sell, some charge a fee based on the assets they manage, some charge flat or hourly fees, and some combine these. None of these is automatically good or bad, but each creates different incentives, and you should understand which ones apply to the recommendation in front of you.

Then ask about the costs inside the products. FINRA explains that all mutual funds have fees and expenses, that a front-end sales load is a commission paid when you buy shares and can range between 2 percent and 5 percent, and that funds publish an expense ratio showing the share of assets used for recurring fees each year. FINRA also notes that larger investments can qualify for lower front-end charges at breakpoints, and that your firm must tell you what those are. Ask to see the prospectus, and read the fee table before you sign anything.

FINRA also describes 12b-1 fees, which are capped at 1 percent of your assets in the fund and taken out of the fund's assets, and notes that one fund can offer several share classes, each with its own fee structure. Ask which share class is being recommended and why it suits the amount you plan to invest and how long you expect to hold it. The right answer depends on your situation; the wrong answer is an advisor who does not know.

Ask how they choose what to recommend

The answer should start with you, not with a product. A sound recommendation comes from your goals, time horizon, existing accounts, debts and the protection your family already has. If someone recommends a specific investment before asking about your emergency fund or your life insurance, the order is wrong. I build every plan in the same sequence: protect the income, build an emergency fund, deal with expensive debt, then invest for long-term goals, as I describe in the order I walk working families through.

A useful test: count how many questions the advisor asks you before suggesting anything. These are the ones I expect to hear in a good first meeting, from me or from anyone else.

Ask which companies' products they can offer. Some advisors work with a short list of asset managers; others have a wider menu. Ask why a particular fund or account type fits your goal better than the alternatives, and what would make them change the recommendation later. If the explanation does not make sense to you, it is not your job to nod along.

• Who depends on your income, and what coverage protects it today
• How much you could reach in an emergency without borrowing
• What you owe and at what interest rates
• What accounts you already have, including old workplace plans
• When you will need the money and how you would feel if the balance dropped

Ask what they can do for the rest of your financial picture

Most households need more than one account opened. They need someone who can see how the pieces fit: a retirement account from a previous job, a spouse's workplace plan, a college fund, life insurance, a small business. Ask whether the advisor helps with each of those or refers them out, and who they work alongside, such as estate planning attorneys and tax professionals.

For example, if you have an old 401(k) sitting with a former employer, ask how they would evaluate whether to leave it, move it to a new plan or roll it to an IRA; I explain that decision in what an old 401(k) rollover involves. If you own a business, ask whether they set up plans for employers; the options are compared in choosing a retirement plan for a small business.

Red flags that should end the conversation

Some answers should make you stand up and leave politely. The most serious is any promise of a specific return. Investments carry risk, including the possible loss of principal, and no honest professional guarantees what markets will do. I never promise a rate or a return, and neither should anyone else you interview.

Be just as cautious with anyone who discourages you from checking their record or from talking it over with your spouse, your tax preparer or an attorney before deciding. A sound plan survives a second opinion. Urgency is usually there to benefit the person selling, not the family buying.

• A guaranteed or unusually high return on an investment
• Pressure to decide in the first meeting or before you have read the documents
• Reluctance to put fees in writing or show you a prospectus
• No registration you can verify, or an excuse for why BrokerCheck shows nothing
• A recommendation to move all your money at once without a clear reason
• Advice that sounds the same no matter what you tell them about your family

Questions people forget to ask until later

How often will we review the plan, and who starts that conversation? What happens if my income drops or I lose my job? Who do I call when I need to change a beneficiary or update an address? How do I take money out if I need it? These sound like administrative details, but they decide whether a plan stays current or drifts for years.

Ask, too, how the advisor will communicate. Will you receive statements directly from the investment company, and where can you see your accounts online? Knowing that your money sits in your name at an established company, with statements coming straight to you, is part of what lets you sleep at night.

It is also worth asking what the advisor would want you to do on your own. If you are comfortable opening a simple account yourself, a good professional will tell you so. I lay out when that works in opening a Roth IRA on your own, and where people usually get stuck.

How I handle a first meeting

I expect to be interviewed, and I welcome it. In a first meeting I explain my licenses and the companies I work with, walk through the household picture with you, and show you where the gaps are before any product comes up. You can look me up on BrokerCheck before or after we talk. Products are offered only in the states where I am licensed, and everything is explained in plain language so you can repeat the reasoning to a skeptical relative.

There is no obligation to buy anything. Some families leave the first meeting with a list of priorities and come back months later; some want to act right away. Either way, you should leave knowing what each recommendation is for, what it costs and why it is in the plan. That is the standard I would hold any advisor to, in Dallas or anywhere else.

Questions people ask me