How to Choose a Financial Advisor
Finding a financial advisor is tough with so many options on the table. This article will help you get started and narrow your search.
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Financial advisors can help you take care of your portfolio. And, more than ever, there are so many options to choose from. Data from the Bureau of Labor Statistics (BLS) shows that the market is on track to grow 15% from 2021 to 2031.
Unless you already know someone with a great one, how do you find a reputable and capable expert? This article will explain, in-depth, how to find and select a financial advisor. Specifically, it will cover the criteria you should use to vet one, questions to ask, and red flags to watch out for. We’ll also break down some simple steps you can take to simplify your search.
What to Look for in a Financial Advisor
Finding someone to help manage your assets and, often, guide your future isn’t something to take lightly. You’ll want to work with an advisor who takes the time to make you feel comfortable and lays out how you can reach your goals.
As a starting point, consider advisors who have these essential qualities:
Abides by Fiduciary Duty
Fiduciaries practice the highest level of trust and ethics. They must place your needs before their own and avoid questions about conflicts of interest. Professionals who follow this standard don’t take commissions as compensation.
Look for finance experts registered with government agencies like the U.S. Securities and Exchange Commission (SEC) or state securities regulators, or reputable organizations such as the Certified Financial Planners (CFP) Board. Advisors who register with these must agree to strictly uphold a fiduciary duty.
Excellent advisors should be upfront with you. If you have questions, you should expect clear and honest answers. They should also give you a clear picture of their compensation, fee structures, or their expertise as specifically as possible when asked.
If you meet or do research on an advisor and something doesn’t feel right, it’s best to rely on your instincts. Go with someone who makes you feel comfortable, and you know you can trust.
Plenty of Experience and Credentials
Getting an advisor who’s been around the block a few times can help you cut down on mistakes and pick shrewd investments. Be on the lookout for professionals with valid credentials and education. These will have spent ample time studying the field, taking exams, and racking up hours of on-the-job experience.
Below are some credentials to look for:
- Certified Financial Planner (CFP). Must register with the CFP Board and go through extensive training and education, including several thousand hours of work experience.
- Registered Investment Advisor (RIA). Must register with the SEC or a state authority and be a fiduciary. May be an individual or a larger firm.
- Investment Advisor Representative (IAR). An individual registered with a state securities agency or the SEC who follows a fiduciary duty.
- Chartered Financial Analyst (CFA). A title granted by the CFA Institute after completion of a curriculum that includes topics such as economics, investment management, and ethics. They must also acquire 4,000 hours of experience in the area.
- Chartered Financial Consultant (ChFC). This is a title awarded by The American College of Financial Services. These experts specialize in advanced financial planning and must have years of business experience before they receive their designation.
- Certified Public Accountant (CPA). A title that includes years of coursework in accounting and work experience. To become a CPA, candidates must pass the Uniform CPA Exam.
It’s a good sign if an advisor has put together a good number of years in the field. Another plus is if they have customer testimonials or references from colleagues.
Aligns With Your Desires
Pick a financial advisor who can take you where you want to go. Some are better for certain goals than others, like managing investments, planning for retirement, or helping you save for your kids’ education.
Robo-advisors, for example, are good if you want a more automated, hands-off approach. On the other hand, a planner or investment manager may be better if you want to sit down and plan several areas of your finances.
Austin Scott, a CFP with Pinnacle Ascent Wealth Management in Washington state, also recommends that you interview an advisor and ask them about “their hobbies or activities they do in their spare time, as well as their experience, resources, and philosophies.” It’s important to find someone you’ll enjoy working with and who aligns with your core values.
Bad signs for advisors can be both subtle and as bright as a flashing sign you’d see on the side of the highway. On the surface, a red flag may simply be anybody who doesn’t align with what you want to do. Or one with expensive or unreasonable fees.
However, there are some negatives you may have to read between the lines to notice. Here are some ones to keep in mind:
Not a Fiduciary
Non-fiduciary advisors aren’t bound by the law to carry out the highest level of trust. In this way, you’ll never truly know if they care about what you want.
Earns Money from Commissions
Commission-based professionals could recommend products solely to make money. Like the last red flag, you’re in the dark about their true intentions, even if they seem like an expert.
A Little Too Enthusiastic
There’s nothing wrong with an advisor enjoying what they do. But be conscious of the ones who seem all in on the strategies or investments they recommend.
Scott cautions you to watch out for “guarantees on investment performance” or someone who’s overly confident. He also says you should beware of “zero-risk investments.” While it’s possible to have reasonable expectations for how plans unfold, a good strategist will understand that some don’t work out as expected.
It takes a lot of care to help clients manage their finances. Stay away from advisors who don’t seem to focus on the details or put you first, even if they are a fiduciary. Scott, a licensed CFP, points out that details, such as “privacy and professionalism” are paramount and shouldn’t be overlooked. Some signs are frequently being late to meetings or taking a long time to respond to emails or phone calls.
Finding a Financial Advisor: Key Steps to Take
There are a wide range of factors to consider when trying to find an advisor, including experience, payment, and whether they’re a fiduciary. Below are four steps you can take to put yourself on the right path:
1. Consider Your Goals
The first step in finding a financial advisor is knowing what you want to accomplish. Your specific needs will depend largely on both your finances and life situation. Common reasons people consult one of these experts include:
- Receiving a windfall or inheritance
- Owning a business
- Having children
- Getting married or divorced
- Wanting to plan for retirement
- Feeling unsure about taxes
In each of the above cases, advisors can provide valuable advice. As mentioned above, seek out an expert whose expertise matches your goals. Here’s a list of the different types:
- Financial planners are skilled in planning estates, taxes, retirement, education, and more.
- Wealth managers, like planners, can aid you with many areas of your portfolio. They’re a good choice if you have a high net worth.
- Investment managers assist with planning, picking, and selling investments, including everything from stocks to real estate. They develop plans that align with your goals for retirement, your estate, and more.
- Robo-advisors are an online option that automatically allocates assets and rebalances your portfolio over time. They use the information you provide to create a plan and stick to it.
As an example, in the event of a windfall, it’s usually overwhelming to handle taxes or decide what to do with such a large sum of cash. In this case, it makes sense to see a financial planner or an investment manager. Both are adept with taxes, cash flow, and ways to invest sensibly.
2. Check Credentials and Experience
After you’ve nailed down your goals, you’re ready to begin your search. You’ll want to look for advisors with official certifications. These will be the ones who follow a fiduciary standard and put your best interest at the forefront.
Jobs often perform background checks on new hires, so why not do one on the person with whom you’re trusting your financial future? You can verify the credentials of advisors you’re considering with the following tools:
- FINRA Broker Check. This tells you if an advisor is registered with the SEC, a state agency, or another organization.
- CFP verification. This can tell you whether someone is registered with the CFP Board.
- Investment Adviser Public Disclosure (IAPD). Using this can help you check if an individual or a firm is an RIA with the SEC.
- SEC Action Lookup. This discloses all SEC actions taken against individuals. This can give you an idea of how reputable an advisor is.
- CPA Verify. With this, you can verify a CPA’s credentials and background.
You’ll also want ones who bring significant experience to the table. Check out customer reviews or try to find references you can check. If they have a website, read their “about page” and do some research on their background.
3. Be Sure the Price Is Right
How much you pay for a financial advisor can vary. Depending on your needs, you could see one of a couple types of payment structures. For instance, some may charge a percentage (usually 1%) based on the assets under management (AUM) they’re working with. Others, though, may simply charge a flat or hourly rate.
Some financial advisors require a minimum amount of money or asset value before you can work with them. This is often the case with wealth managers. Fidelity, for example, requires at least $2 million under management.
You may consider working with a robo-advisor if you don’t have a large net worth. They can be cheaper and don’t typically have high account minimums. If you need one service, a flat rate may be better.
4. Prioritize Fee-Only Advisors
You also should prefer fee-only experts to fee-based (or commission-based) ones. They don’t earn commissions or make money from sources. These are normally the ones who uphold a fiduciary duty.
Be wary of financial professionals who say they’ll work for free. These are usually commission-based.
When in doubt, look up an advisor’s Form ADV. This shows information about how they make money. You’ll find details about compensations that could bring about conflicts of interest.
Questions to Ask
It’s not always easy to know what to ask or consider when it comes time to select a financial advisor. To help you zero in on one who fits the bill, we put together a list of questions you can ask:
- Are they a fiduciary?
- Do they have any certifications or are they registered with a government authority?
- How many years of experience do they have?
- How do they make money (fee-only vs. fee-based)?
- What does their payment structure look like (AUM percentage, flat rate, hourly fees, etc.)?
- What’s their typical client (high net worth, individuals, families, etc.)?
- Do they have any references or testimonials from colleagues or clients?
- How will you end up working together? Virtually? In-person? How many times will you meet?
- Do they have account minimums?
- What strategies (investment, asset allocation, risk management, etc.) do they believe in?
After asking the above questions, you’ll get a clearer view of the advisors you’re weighing. They’ll help you learn about their credentials, experience, philosophies, and how your relationship would look.
Frequently Asked Questions
When do I need to hire a financial professional?
The best time to hire one is when your financial situation has become too much to manage. Often, this is when you’ve had something happen, like marriage, an inheritance, or having kids. It may also make sense to see one after you’ve had a lifetime of growing wealth, or you have a vision of turning your earnings into a larger, more complex portfolio.
How can I check how my financial advisor makes money?
If you’re working with a registered investment advisor, you can use the SEC’s IAPD tool to examine their Form ADV. This discloses compensation information, among other facts.
Another way to find out how your advisor makes money is simply by asking. And, if you feel that they’re not being forthright, you can always bow out and take your business elsewhere.
How much do expert financial services cost?
Depending on several factors, costs for advisory services can vary. Some could charge a fee based on the number of assets you have, while others may have an hourly or flat cost.
The payment structures you see will often also be different for certain types of experts. For example, you’re more likely to pay an hourly or flat fee if you’re looking for a one-off service, like tax planning. Conversely, your advisor may use the AUM structure if you’re looking for a long-term relationship, such as wealth or investment management.
What are some qualifications financial advisors should have?
Reputable advisors should have years of experience and hold credentials from authoritative organizations. Some examples of credible qualifications are:
- Registered Investment Advisor (RIA)
- Investment Advisor Representative (IAR)
- Certified Financial Planner (CFP)
- Chartered Financial Analyst (CFA)
- Chartered Financial Consultant (ChFC)
- Certified Public Accountant (CPA)
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