7 Steps for Finding the Best Financial Advisor
7 Steps for Finding the Best Financial Advisor
Financial advisors aren’t only for the very wealthy. People in all sorts of financial situations can benefit from some guidance with their financial planning.
Whether you need to come up with a saving plan for retirement, manage your debt, diversify your portfolio or make your paycheck last longer, a financial advisor can help you set clear financial goals and much more.
With so many options now available, it’s key that you first learn how to find a financial advisor that’s right for you.
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Some financial advisors offer financial planning services but not investment management services. Others manage investments but provide little financial planning. Some have expertise in retirement income planning focused on those near or in retirement. Others focus on wealth accumulation for folks who won’t be retiring for another 10 or 20 years.
To find the best financial advisor for your situation, you need to know what type of financial advice you need and what services a potential advisor provides.
Here’s a brief summary of three main types of service offerings:
Financial planning focuses on all aspects of your financial life such as how much to save and what type of insurance you need. It is not just about your investments.
Investment advisory services are focused on such investment management decisions as what investments to own in which accounts. The best investments are chosen only as part of an ongoing financial planning process.
Retirement income planning is focused on how you coordinate all the pieces such as Social Security, taxes, investments, pensions, retirement date, and more, so they all align toward the goal of delivering a retirement paycheck for life.
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All credentials are not alike. Some organizations create easy-to-obtain credentials for a fee so that salespeople can acquire a credential and appear to be an expert.
To find advisors or financial planners with reputable credentials, look for someone who has their CFP (Certified Financial Planner) or PFS (Personal Financial Specialist) designation, or an investment advisor who has their CFA (Chartered Financial Analyst) certificate. Importantly, CFP professionals are bound by the fiduciary standard of care, meaning that they are required to always place their clients’ interests above their own.
Credentials are obtained by passing an examination that demonstrates proficiency in the subject matter. To maintain the designation, an advisor must adhere to an ethics policy and meet continuing education requirements.
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There are numerous ways financial advisors charge for their services, but the most objective and unbiased financial advisors are fee-only. To hire the best financial advisor you’ll need to know all the ways a potential financial advisor may be compensated, such as charging an asset-based fee, an hourly fee, or participating in commissions.
Understand the difference between a fee-only advisor and a non-fee-only advisor. A non-fee-only advisor may be able to receive other types of kickbacks or incentives from their company based on meeting sales goals or objectives.
There are no right or wrong ways for an advisor to be compensated. What works best for you will depend on your financial needs.
For example, if you are buying an investment that you plan on holding on to for a long time—and for which you will not need ongoing advice—paying a commission may be the most cost-effective option. However, if you want someone readily available to update your financial plan and address ongoing questions, a commission-based fee structure is not the optimal choice.
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Online searches are a great way to narrow down the advisors in your ZIP code who have the right credentials and appropriate billing structure to meet your needs. You can use financial advisor search engines to input specific criteria about the type of advisor you are looking for.
Many firms work with clients remotely. That allows you to pick an advisor based on expertise rather than location if you don’t need to meet face-to-face. Not everyone is comfortable working remotely, so you have to decide how important it is to meet someone in person rather than virtually.
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The right questions can help you weed out financial advisors with whom you don’t communicate well. How long have they been practicing? How are they compensated? Can they walk you through different retirement projections?
Using specific interview questions can help you determine how the financial advisor communicates, as well as their area of expertise and their ideal client. The key is in making sure you understand the answers—and if you don’t, feeling comfortable enough to ask follow-up questions.
It’s always advisable to ask someone for references. However, due to privacy regulations, many advisors cannot hand out the names of other clients. Regulations prohibit financial advisors from using testimonials unless certain provisions have been met, including disclosing whether the person giving the testimonial or endorsement is a client and whether the endorser is compensated.
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To be sure that someone is legitimate and has a good service record before you hire them, verify an advisor’s credentials and complaint history by checking their records with the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), the CFP Board, or other membership organizations with which the advisor is associated.
Form ADV Part 2, a brochure that advisors are required to submit to the SEC, lists conflicts of interest the advisor might have. You may also want to check out ADV Part 1, which spells out an advisory firm’s ownership structure, and Form CRS, which discloses information about a firm or advisor’s business operations and compensation. You can find the first two on the Investment Adviser Public Disclosure website and ask an advisor for Form CRS.
If the advisor you’re researching is regulated by FINRA, you can use the BrokerCheck feature on FINRA’s website to see whether there are any complaints on file. If the SEC regulates the advisor, then you can use the SEC Investment Advisor search feature on the SEC’s website to check out both the advisor and the firm they work for.
Just because an advisor has a complaint, it doesn’t mean you should automatically rule them out. Formal customer complaints stay on a financial advisor’s record for a long time. The longer someone has been in business, the more likely it is that they will have at least one complaint on their record. However, if someone has multiple complaints, you may want to look for another advisor.
When hiring a financial professional, make sure you do some research before hiring anyone to manage your money. The industry makes it a bit easier for consumers by making financial advisors’ professional backgrounds available to search.
You can look up advisors via BrokerCheck. The site shows you how long they’ve been in the industry, which firms they’ve worked for and whether they’ve had any consumer complaints or regulatory issues, referred to as a “disclosure event.”
Those who are registered as investment advisors will also have a record with the SEC, so make sure you check out that information as well. You can access the SEC records through BrokerCheck or do a separate search through the SEC’s investor information website.
If the professional does have a disclosure, it may not be a deal breaker. Sometimes financial advisors and planners have consumer complaints, but they have been resolved or the event pertains to a personal bankruptcy. If there is anything listed, make sure to investigate it fully before making a decision.
In addition to running their name through BrokerCheck, if the financial planner is a CFP, the organization offers a search tool in which you can verify their status, as well as see if they have any disciplinary history and bankruptcies.
Do a quick Google search on any of the professionals you are considering as well, and pay attention to local news and information released by state securities agencies. Many times if a financial advisor or planner is going through a civil or criminal case, their records may not reflect it until the case is wrapped up.
Conclusion
Once you’ve narrowed down your choices using these four factors, all that you have to do next is assess the financial advisor’s credentials. The best way to do that is to check the qualifications of the advisor and to look up for reviews online. This can give you a better idea of how the financial advisor works and whether he would be in a position to help you out. Alternatively, you can also come up with a set of questions on your own to analyze and determine the capability of the advisor before opting for one. Always remember, the best investment advisors are the ones who have your best interests at heart.