How to Choose A Financial Advisor
There are some decisions in life that can be monumental to your future happiness. Choosing a spouse is one of them, and picking a financial advisor is another. Good financial advisors are much more than stock pickers. They offer invaluable insight into achieving your financial goals. So how do you go about finding “The One?”
If you wear flip-flops to the beach and sneakers to play tennis, you know how important it is to choose the right shoe for the job. Picking a financial advisor is no different. The Financial Industry Regulatory Authority lists almost 200 professional designations on its website. Luckily, you don’t need to know them all.
The most widely recognized designation is the certified financial planner. Regulated by the Certified Financial Planner Board of Standards, CFPs must pass a difficult exam as well as meet strict standards of education and work experience. If you are shopping for an advisory firm, be sure to ask if there is a CFP on staff, as it is one of the highest standards for a financial planner. You can also verify if your advisor has the designation they claim by searching the individual on the CFP Board’s online database. A chartered financial consultant, or ChFC, is a designation that follows the same curriculum with additional electives, but is less stringent because it does not require an exam.
After CFP, the most important acronym to know is the RIA. Registered Investment advisors are licensed by the SEC (or similar state office) to give investment advice. Both CFPs and RIAs are fiduciaries, which means they are legally required to put your interests above their own. Many purported financial advisors are actually broker-dealers, who are essentially salesmen. Brokers follow a much less rigorous standard of suitability, which does not prohibit them from making trades they wouldn’t make with their own portfolios.
There are also financial advisors who specialize in specific situations. If your purpose is saving for retirement, consider a Chartered Retirement Planning Counselor who will be more familiar with products such an annuities and other solutions. If the main quality you require is investment advice, the CFA is the premier designation for investment management professionals, involving three rigorous six-hour exams that cannot be taken in less than 18 months.
For high-net-worth individuals, wealth managers offer comprehensive bundled services including tax services, retirement planning, and investment management. On the other side of comprehensive care are robo-advisors. These programs provide computer-generated financial planning and investment services at low cost and with little or no human intervention. You typically fill out a questionnaire based on your investment preferences and the software populates your portfolio with the appropriate investments.
It’s equally important when picking a financial advisor to evaluate their employer. When considering a financial advisory firm, ask for their Form ADV, or get a free copy from the U.S. Securities and Exchange Commission. All financial advisors, including the robot ones, must file this from with the S.E.C. listing their services, fees, and detailed background. For advisors who also handle investment transactions, the FINRA offers a free BrokerCheck tool on their website to give you similar background information for broker-dealers.
Your goal when reading an ADV should be understanding the firm’s business model to help you identify potential conflicts of interest. For example, does the company sell proprietary products [will link to our article on proprietary products] or services? Are they owned by or partnered with a company that does? They may be incentivized to push certain products because of their affiliation.
Financial advisors may charge based on a flat fee, hourly, or a percentage of assets managed. Regardless of how they charge, it’s important to understand what you are paying for. Compare their fees and compensation structure with other firms you are considering.
You should also note whether the firm is registered as an Independent RIA, brokerage, bank, or credit union. Only RIAs have a fiduciary duty to put your interests first. Pay special attention to who the firm employs as custodian for client assets. Ideally, assets should be maintained by a well-known, independent third-party with a transparent relationship that does not including revenue-sharing or additional compensation that could present a conflict of interest.
One rule of thumb that should not be underestimated is your level of comfort with your advisor. Many firms and advisors offer free initial consultations. Take advantage of this opportunity to shop around. Try to meet with several advisors before making a commitment. While it’s possible to build a rapport in an hour-long initial meeting, choosing a firm is an important choice that can have far-reaching implications for your financial future. It’s important to weigh your options carefully before making a decision.
Whether you are looking primarily for investment advice or help planning for retirement, choosing the right financial advisor requires a holistic approach. It should encompass not only their track record, but how you feel about working with them. After all, when you find the one, you should want that relationship to last a lifetime.