The most important question to ask a financial planner before working with them, according to a CFP who knows

• Before you sign up to work with a financial planner, you're allowed to ask questions - and you should.
• The first, most important question you can ask is: "Are you a fiduciary?"
• A fiduciary is someone who is legally and ethically bound to put your interests ahead of all others, including their own, and not all financial advisers are held to this standard.
• If a financial planner tells you they are a fiduciary, ask for that statement in writing. It's very standard to ask, and if a planner won't do it, that's a red flag.
• Find a financial planner to help achieve your goals with SmartAsset's free tool »

Before you sign on to work with a financial planner, you need to do your due diligence and plenty of research.

That means understanding who that adviser specializes in working with, what their experience is like, how their process works, and how they're compensated for the service they provide.Advertisement

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There are a lot of questions to ask - but there's one big question that is probably the most important to get an answer to before working with any planner or adviser. Here's what you must know to choose a financial professional who will work in your best interest.

'Are you a fiduciary?'

"Are you a fiduciary" is the most important question to ask a financial planner before working with them - because not all financial professionals are. A fiduciary is someone who is legally and ethically bound to put your interests ahead of all others, including their own.

Based on that, you might think that being a fiduciary would be like table stakes for a group of professionals you're supposed to trust with your money… but unfortunately, this isn't the case.

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In fact, there are two "standards of care" financial advisers can operate under:

1. The fiduciary standard, which requires the adviser to put their clients' interest first. That actions, advice, and recommendations all must be aligned with what is best for you, given the specifics of your situation.
2. The suitability standard, which only requires the adviser to provide advice that is suitable for you, but not necessarily best for you. That means an adviser can suggest you buy a product that is suitable, for example - but it might be more expensive than another option that would have been a better fit.

This might not sound like a big deal at first. After all, ending up with something that's suitable for you doesn't seem like a bad outcome.You need to know if your advisers is a fiduciary, and while you're asking questions, understanding how they get paid is important to know, too.Advertisement

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Find a financial planner to help achieve your goals with SmartAsset's free tool »

Know how your adviser gets paid

Typically, advisers working under the suitability standard earn commissions or kickbacks when their clients buy certain products or invest their money in certain funds.

"If you're working with someone who gets paid a commission, there are inevitably conflicts of interest at hand," says Sara Gelsheimer, CFP®, AIF® and wealth manager at Plancorp, LLC.Advertisement

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Gelsheimer provides this example to illustrate what those conflicts can look like:

Say an adviser gets paid $2,500 to sell you XYZ product (that has lower fees and is thus more likely to experience higher performance). But that same adviser could instead make $7,000 to sell you ABC product (with higher fees).

What do you think that adviser will do? Advertisement

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"As much as I'd love to believe every adviser will naturally do what's in the best interest for their clients, I think it's hard for people not to sell ABC product," she says. "It's much easier for an adviser to rationalize that ABC product is still reasonable for the client, so what's the harm?"

There are plenty of people in the world with strong moral compasses, and there are probably financial advisers out there who would recommend what was best for you even if it meant losing out on a bigger commission for themselves.

But as Gelsheimer points out, why even take the risk of putting yourself in that situation and hoping your adviser will choose time and time again to put your interests first at their own cost?Advertisement

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Instead, she suggests, work with an adviser who only gets paid by you and will work as your fiduciary 100% of the time. "That allows you to rest assured knowing they are doing what's best for you because their income isn't dependent upon what they sell you," she says.

A good follow-up question to the "are you a fiduciary" query, then, might be, "how are you compensated?" There are three main ways advisers receive payment for what they do for clients:

1. Commissions, where advisers earn money when they sell specific products, services, or investments to clients.
2. A combination of fees and commissions, where they can accept kickbacks from companies for which the adviser sells products - but they may also collect flat fees from clients directly. This fee model is called "fee-based." This is not the same as fee-only.
3. Client payments only. This is the fee-only financial adviser, and the only kind of compensation they receive is fees paid directly by clients. They cannot accept marketing dollars, commissions, kickbacks, or any other kinds of incentives from third parties to push certain kinds of advice, products, or recommendations. Fee-only advisers are usually fiduciaries 100% of the time.

If your adviser gets paid by someone other than you, it might be time to re-evaluate the relationship and ask yourself if you feel comfortable trusting a professional who does not have to put your interests ahead of all others at all times.Advertisement

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How to make sure a financial planner is a fiduciary (and will act as yours 100% of the time)

The fiduciary question can get even more complicated for two primary reasons:

1. Some advisers only work as fiduciaries some of the time. They can put on their fiduciary "hat" when advising you in one area, but take it back off if talking about a different issue (like when it's time to sell you a product).
2. Sometimes, people just lie. It's unfortunate, but it does happen.

So how do you avoid these potential pitfalls even after you've asked your adviser if they're a fiduciary and their first response is, "Of course I am?"

Get it in writing. Don't just take someone's word for it; before you work with a financial planner, ask them to sign a fiduciary oath on your behalf. Advertisement

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If they refuse? That's a red flag. Consider walking away and continuing your search for a financial planner elsewhere.

Associations that support the fiduciary standard, like XY Planning Network, display signed fiduciary oaths for each one of their members online.

Any planner who genuinely works as your fiduciary will be happy to put their commitment to you in writing in a similar way.Advertisement

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Find a financial planner to help achieve your goals with SmartAsset's free tool »

Eric Roberge, CFP, is the founder of Beyond Your Hammock. He helps professionals in their 30s do more with their money.

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