How to Find a Financial Advisor You Can Trust
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Finding the right person to entrust with your hard-earned cash can be stressful. And the economic turmoil of the past few years has only dampened consumers’ trust of financial experts further.
The best way to minimize those jitters: do a lot of research before you choose.
When searching for a financial advisor, one of the first things to consider is how they make their money: by selling investment products or by giving financial advice (i.e. charging a flat fee)? If what you are looking for is orientation on how to handle your money, stay away from advisors who work on commission, as they may focus on selling you the investments that line their pockets — not necessarily yours.
To begin your search, look into self-regulatory organizations and government agencies. The Certified Financial Planners Board of Standards is a nationally recognized organization that grants the CFP designation to advisors who have undergone rigorous learning and testing in various financial planning fields, including insurance and risk management, employee benefits, investment planning, income tax- planning and retirement and estate planning. You also search for a CFP and any information on complaints or disciplinary actions within their website.
Check out the Better Business Bureau, too: here you can find information about an advisor’s history, specifically whether any complaints have been filed against them.
Another place to search is the National Association of Insurance Commissioners (NAIC), an organization of insurance regulators. Here you can check for qualified advisors who sell insurance products.
Investment advisors, meanwhile, must be registered with the Securities and Exchange Commission (SEC) and other state regulators. The SEC regulates investment advisors and all securities dealers. In addition, the Financial Industry Regulatory Authority (FINRA), the largest independent regulator for securities firms in the United States, has a tool called Broker Check that enables you to check the background of your investment professional.
Fees
Financial advisors work with different fee structures depending on the type of service they provide. For example, a financial planner could earns commissions from selling investment or insurance products.
A fee-based financial planner, on the other hand, charges an upfront fee for providing financial advice, but also charges a commission on security trades or insurance purchases.
A fee-offset financial planner charges an annual or hourly fee, but if the client purchases a financial product from the advisor, the annual or hourly fee is reduced.
A fee-only planner earns no commission; they charge a specific fee, which could either be an hourly or a percentage of the client’s assets under management (typically 1%). Since they do not work on commission, these types of financial advisors are not incentivised to recommend financial products only because of their high commissions.
Important as they are, fees should not be the only consideration in your search for a financial advisor. Here’s what else you should look for:
Personality
Will you get along with this person in a business setting? If the advisor seems aloof and not in tune with your needs, you might want to reconsider. You need to make sure the person you select will listen to you and understand your needs.
Availability
Are they available to answer your questions? Does this person have hundreds of clients? Do they seem overwhelmed? How much time will they be able to dedicate to reviewing your portfolio and answering your questions or concerns? How many times a year will they meet with you to go over changes or modifications in your portfolio?
Who will be handling your portfolio?
Will an associate be evaluating your plan or will the person you are interviewing be doing this job? It’s better to talk directly to the person who will be handling your account.
Credentials and Experience
How much work and client interaction experience do they have? Ask what type of formal training and education they have and how many years of experience they’ve accrued. Do they have investment or life insurance broker licenses? Are you allowed to see examples or representations of financial plans? This way you have a better idea of how detailed the plan is and how effective it can be.
When looking for a planner, you can also look at some of these professional organizations:
The Chartered Financial Consultant (ChFC)
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7 Comments so far
leave a commentFinding a great financial advisor is like finding the love of your life. There are so many people out their claiming to be financial advisor with little, no, or outdated information. Do you financial homeworker before talking to an advisor and ask the advisor to show you there stats and types of plans they have set up for people in the past.
Understanding the risks of the investments & track record of your financial planner are so crucial. It is easy to point the finger when an investment didn’t end up how you expected & sometimes it’s not the financial planners fault at all. On the flipside, if the financial planner gave you poor advice from a logic standpoint then it is cause for concern. Here’s an example – if a financial planner advocates a guaranteed income annuity but doesn’t explain all of the risks such as no step-up income provision during a falling market, then there is cause concern. If there is no step-up provision then there is NO GUARANTEED INCOME level.
Good job of laying out some of the considerations and the differences in compensation methods. If your readers are looking for a fee-only advisor, they should check out the Find An Advisor section of the NAPFA website http://findanadvisor.napfa.org/Home.aspx. NAPFA is the country’s larget professional organization for fee-only financial advisors. Full disclosure, I am a proud NAPFA member.
RE: How an advisor gets paid.
If the advisor is an honest person, whether they get paid by fee or by commission will not change the advice they get. If they are not honest, a fee based advisor may not recommend the best products but recommend the ones most likely to keep a client whereas a commissioned agent would go for the higher commissioned products.
I’ve known fee based advisors that were top of their game as well as many commissioned based ones. Unfortunately, I’ve met many more that, regardless of how they got paid, screwed their clients royal.
A key point that is NOT brought up on most articles like this is whether the agent will spend the time to not only recommend a product but ALSO EDUCATE their clients on HOW the products work. They are not as complicated as many advisors make them out to be.
This subject is more confusing than probably anything in the finance area. First off people don’t distinguish between a financial planner and an investment advisor/manager. There is a difference. Typically they are paid different. In my opinion most people need a good planner. In my opinion most people should pay for a plan. “Free” plans offered by investment managers are usually not very good. They are used to get you in the door for asset management. Plans can be expensive (maybe $3,000 – $4,000) but often go a long way towards paying for themselves because they look at taxes, estate planning, investment management process, college funding etc.
To find an investment manager start with one question: are you a fee-only registered investment advisor? If so they are a fiduciary. Next, ask to see their ADV. Read the ADV and look for experience. Make sure they have no legal actions against them. Read their investment process. Next, have them explain their investment process. If it’s a lot of buzz words and gobbledly gook grab your wallet and run. Finally, pin them down on access. You want someone you can get talk to if you have questions are feeling a bit queasy in a market downturn etc.
What about SEC security terms.
Even when employing the services of others possibly more qualified to handle an individual’s financial and investment strategies, it is still important to have some understanding of what the products are. This is beneficial because people will then maintain at least some knowledge of the ins and outs of what the programs or products are that their money is actually being applied to. This typically helps in the communication between the parties involved.