How to Choose a Financial Advisor

Many seemingly simple decisions in life can radically impact your future happiness. Selecting a financial advisor is one such decision. So, how should you go about finding “the one”? This article is a great place to start.

Know the different types of financial advisors

All financial advisors help you manage your money and reach your financial goals in various ways. Knowing how these professionals differ is instrumental in your search.

Brokers: if you’re only looking to buy and sell securities such as stocks and bonds, you’ll need a broker. These are essentially intermediaries between investors and a securities exchange. You can choose between full-service brokers—such as Morgan Stanley, Stifel, and Merrill Lynch—and discount brokers including E-Trade and TD Ameritrade. While the latter charge lower fees and commissions, they compel you to make investment decisions on your own whereas full-service brokers provide personalized investment advice.

Robo-advisors: also known as automated investment advisors, these online platforms provide investors with computer-generated financial planning and investment services. Betterment and Wealthfront are two of the most popular examples. Robo-advisors are best suited for novice investors who don’t have a lot to lose, those with basic investment management needs, or investors looking to pay as little as possible (robo-advisors are relatively inexpensive). Some of these platforms also provide access to a human financial advisor.

Investment advisors: simply put, these advisors provide clients with investment advice while managing their investment portfolios for a fee. While this option is more expensive than a robo-advisor, you’ll enjoy much more personalized service and access to additional types of investments.

Financial planners: this financial advisor segment offers a much broader service offering than investments alone, integrating all components of your life—including savings, insurance, and taxes—to fulfill both short-term and long-term aspirations.

Wealth managers: representing a hybrid of investment advisors and financial planners, these professionals primarily serve high-net-worth and ultra-high-net-worth clients.

While some very clear distinctions exist between each type, know that overlap often occurs between roles. For example, many financial planners also offer investment advice and management services.

Now that you know the different types of financial advisors and their unique services offered, you should have a clearer picture of what to look for.

How to identify a financial advisor

For starters, you should consider an advisor’s credentials as various designations are not the same—and they do in fact matter. If you’re seeking a financial advisor with a CFP® designation, you’re on the right path. That’s because it’s the most widely recognized designation for a financial advisor.

Regulated by the Certified Financial Planner Board of Standards, CFPs® must pass a difficult exam and meet strict standards with respect to education and work experience. Better yet, CFPs® are held to a fiduciary standard: meaning they’ll always put your best interests above their own (we’ll discuss this more later on).

You can use Google to search for a CFP® near you and/or search the CFP® Board’s online database to verify an advisor’s designation.

You may stumble across a few other distinguished designations during your research. Get to know them and learn how each one differs from a CFP® professional (click here to explore professional designations).

A chartered financial consultant (or ChFC) is a designation that follows the same curriculum as a CFP® but with additional electives. It is less stringent, however, because it does not require an exam. Moreover, ChFCs aren’t held to a fiduciary standard.

Meanwhile, a chartered retirement planning counselor (CRPC) specializes in retirement planning whereas a CFP® provides financial guidance across all aspects of an individual’s life: including retirement planning. CRPCs also aren’t held to a fiduciary standard.

Beyond your advisor’s credentials, you’ll need to dig a little deeper to ensure he or she didn’t leave a previous firm for disciplinary reasons and/or is not facing any pending disciplinary action. If this is the case, you might want to dig deeper or even reconsider your relationship altogether.

BrokerCheck—a tool provided by FINRA, a regulatory agency for advisors who manage investment transactions—and the U.S. Securities and Exchange Commission (SEC) website allow you to search financial advisors and identify any potential disciplinary actions against them.

How to evaluate a firm

With a list of financial advisors you’re considering in hand, you’ll need to do a little homework on their respective firms to avoid the sting of buyer’s remorse.

Getting advice vs. being sold to

In addition to “CFP®,” one of the most important acronyms to know is “RIA.” A registered investment advisor is a firm or person who offers investment advice and is licensed by the SEC (or a similar state office). More importantly, RIAs are fiduciaries: meaning they are legally required to put your interests above their own at all times during the relationship.

All other purported “financial advisors” are actually salesmen who operate within the broker-dealer category. Brokers follow a less rigorous “best interest” (BI) standard of care, falling short of the full fiduciary standards RIAs are held to because they only need to act in your best interest at the time a recommendation is made. Regulation BI also allows for commission-based compensation from employers or third parties, and RIAs are not paid on commission.

If you want to feel confident you’re paying for the advice and services you want and need—rather than being sold products that score high commissions for your financial advisor—choosing an RIA firm is your best bet. It’s therefore important to learn the precise standards your firm(s) of choice is held to.

Disclosures

You should then research firm disclosures, which detail operational details and other information that may help you narrow your search.

With respect to RIAs, you can obtain a free copy of their Form ADV from the Securities and Exchange Commission. All firms must file this form with the SEC or applicable state jurisdiction, listing their services, fees, and detailed background information. FINRA’s BrokerCheck tool will provide you with similar background information for broker-dealer firms.

Be sure to keep a few goals in mind when reading firm disclosures, including understanding the firm’s business model to help you identify potential conflicts of interest. For example, does the company sell proprietary products or services?

Regardless of fee structure (fee-based, commission-based, subscription, etc.), it’s important to fully understand what you are paying for while also checking for any disciplinary action against the firm (if so, you may want to move on).

Finally, pay attention to which custodian the firm employs to manage client assets; ideally, a well-known, independent third party will maintain assets as part of a transparent relationship.

Team

You should also check to make sure other CFPs® work at the firm so that should your financial advisor leave, you can feel confident you’ll remain in good hands.

Building a rapport with a financial advisor

One rule of thumb to never underestimate is your level of comfort with an advisor. Many firms and advisors offer free initial consultations for this very reason, so take advantage of this opportunity to shop around after narrowing your list to two or three options.

Ask questions regarding how often your advisor will communicate with you and how he or she defines success in a client relationship. Even more critical? Assess how well the advisor will listen and work to understand your financial situation and specific financial goals.

While it’s possible to build a rapport in an hour-long initial meeting, selecting a firm can have far-reaching implications for your financial future. It’s therefore important to weigh your options carefully before making a final decision.

In sum: how to choose a financial advisor

Whether you are primarily seeking investment advice or help with retirement planning, choosing the right financial advisor requires a holistic approach that not only considers his or her track record but also how you feel about working with this person. After all, when you find “the one,” you want that relationship to last a lifetime and summon a fruitful experience.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.