Whether you need investment advice, help managing an estate, or preparing for tax season, there’s a financial advisor out there for you. But with such a broad definition, how do you pick a good match? From wealth managers to stockbrokers to financial planners and even bankers, there are several professionals who might be able to help you. Let’s talk about picking the perfect person for your situation.
Before you start Googling your nearest advisors, ask yourself some questions to understand your own needs. What kind of help are you looking for? How much are you willing to pay? How often do you want to meet? Additionally, consider aspects of your lifestyle. Do I want to start a family someday? At what age would I like to retire? Will my parents need long-term care? Getting clear on your goals will help you find the right professional suited for your needs.
Types of Advisors
There are two types of financial advisors: online and traditional. Robo-advisors provide investment management at a low cost with very minimal human interaction. You answer a series of questions relating to your tolerance for risk and your time horizon, and an algorithm makes appropriate investment choices on your behalf. Robo-advisors are a good option for beginning investors given they typically have low account minimums.
Online financial advisors also choose your investments with help of an algorithm, but you have access to a dedicated team member when you have questions. It blends the automation of a robo-advisor and the human advice from a traditional advisor.
Traditional professionals include brokers, registered investment advisors, wealth managers and financial consultants. They often have multiple titles that overlap, but whatever their expertise, it should be clearly communicated. Consider a traditional advisor if you desire a one-on-one, in-person experience.
Now, let’s turn to the four key considerations you should keep in mind when choosing a specific financial advisor.
By definition, a fiduciary is an individual or organization that acts in the best interest of someone else. In terms of investing, a financial advisor who is a fiduciary must avoid conflicts of interest and utilize investment products that best serve their clients. A non-fiduciary may recommend investment products that are only “suitable” for you, which leaves you open for exploitation. They may suggest strategies that benefit them and their bottom line through unnecessary fees and commissions. If they aren’t a fiduciary, it’s probably best you walk away.
There are many acronyms to keep track of in investing—ETF, CFP, IRA—the list goes on and on. When choosing an advisor be on the lookout for these acronyms that will help illustrate their level of education and areas of expertise.
- Certified Financial Planner (CFP) – Requires a set of courses and a long test, but the individual will be well versed in financial rhetoric and investment strategies. These highly trained specialists must act as fiduciaries according to their code of ethics.
- Chartered Financial Analyst (CFA) – Certification requires three very rigorous exams in 10 investment topics. A CFA often works in corporate investment analysis whereas a CFP works to build individual financial plans.
- Certified Public Accountant (CPA) – For tax professionals who pass a four-part test within 18 months. It is an added benefit if your financial advisor is also a CPA to help with tax related issues, but you should be getting your investment advice from someone with the first two designations.
Before a financial advisor earns any of these coveted designations, they will need a bachelor’s degree in a relevant field like finance or economics. Then they pass a combination of these tests to further their finance education before becoming a CFP or a CFA.
- Series 7: General Securities Representative Exam – Provides basic investment knowledge as well as federal and state rules and regulation information.
- Series 63: Uniform Securities Agent State Law Exam – Allows advisors to conduct business across multiple states.
- Series 65: Uniform Investment Advisor Law Exam – Gives advisors the authority to charge fees.
For a comprehensive list of the various exams advisors can take to advance their knowledge visit: https://www.finra.org/registration-exams-ce/qualification-exams.
3. Transparent Fee Schedule
A trustworthy advisor will willingly explain how they make money and will plainly list their fee structure online. Here are the most common structures.
- Fee-Only – Can be an annual, hourly, or flat fee. Often based on AUM, or assets under management, to provide tiered management fees based on a percentage of your assets. For example, account balances less than $1 million might be charged 1% whereas assets between $1 million and $5 million might be charged .75%, and so on. When you make money, they make money.
- Commission Based – They make money by selling you certain products, so the relationship feels more transactional in nature. Commissions are a one-time fee paid when you purchase or sell a fund.
- Fee-Based – Offers a mixture of commissions as well as fees.
In addition to a firm’s fee structure, there are extra costs to be aware of such as trading and transaction fees. Ask about front-end and back-end loads which are built-in commissions akin to mutual funds. Remember, higher fees don’t necessarily equate to higher returns.
You can verify an advisor’s investment experience by checking out their background on FINRA’s website here: https://brokercheck.finra.org. BrokerCheck is a free online tool that lists advisors’ employment history and licenses as well as any complaints, arbitration, or past state and federal disciplinary action.
You don’t need experience to start your investment journey, but the advisor you decide to work with should. In addition, your advisor should be good at communicating and listening to your needs. If you don’t feel like you’re matching with a potential advisor, there is no reason to force a relationship.
If your goal is to find a trustworthy, competent, and cordial financial advisor remember to focus on fiduciary status and fee schedule plus qualifications and experience. Hiring a financial advisor is a big step in anyone’s financial life and you deserve to find the best match.