Choosing a financial advisor or broker is one of the most important decisions you can make – after all, you are placing your financial security, as well as your family's, in their hands. Here are six areas to consider when searching for a financial guide.
- Which Standard Do Candidates Meet? – There are two primary standards for financial professionals. The fiduciary standard requires an advisor to act in your best interests and to disclose any potential conflicts of interest. The suitability standard requires recommendations that are suitable to your needs, and does not require disclosing conflicts of interest. Either one may work for you, but be sure you know which standard your advisor follows.
- What are Their Certifications? – Of the many financial planning certifications, two of the most respected are CFP (Certified Financial Planner) and CFA (Chartered Financial Advisor). Both require extensive exams and usually follow the fiduciary standard. CFP's tend to have a broader approach to financial planning, whereas CFA's have a greater focus on investment strategies.
Whatever certification your financial planner or broker has, make sure you understand what it means and how rigorous the training and testing is to achieve that certification. They should have no concern explaining their credentials to you.
- Do their Services Match Your Needs? – To answer this question, you have to assess and understand your needs first. Do you need simple investment advice, full-fledged financial planning, or an emphasis on retirement? Do you have a plan you need someone to help you execute, or do you need help formulating a plan?
Taking some time to understand your needs will help you understand the best questions to ask as you search for an advisor.
- How Are Candidates Paid? – Are they paid through commissions on products they sell, and are they affiliated with a specific provider of financial products? If so, and they follow the suitability standard, they may steer you toward products that work for you but earn larger commissions for them. That may or may not be the best choice for you.
Are they a fee-only provider? In other words, there are no commissions; you directly pay their salary through flat fees, hourly rates, periodic retainers, or annual fees as a percentage of your account. You are more likely to get a fiduciary standard and unbiased advice in this case.
Are they a fee-based provider? Many people confuse fee-only and fee-based, but fee-based planners may be compensated through fees or commissions, and may or may not follow the fiduciary standard.
None of these approaches is inherently right or wrong for any investor. But make certain you understand – and are comfortable with – how your advisor or broker is paid.
- How do Candidates Respond to Questions? – You should expect the service you pay for. It's important that you find an advisor who will meet with you, explain concepts and options to you in language that you can understand, and is available to answer questions in a reasonable time.
Look for red flags when you first meet with them. Anybody who immediately pitches products without discussing your needs first, or claims to be able to beat the market in any circumstance should be avoided. They should be able to answer direct questions about their compensation, standards, client base and asset management. For example, you may find your account size is small enough compared to their typical client that you are concerned about the level of service you would receive.
- Do Candidates Provide a Formal Investment Plan? – A good financial advisor will be willing to create a written Investment Plan that lists your investment objectives, time horizons and risk tolerances. It also includes asset allocation modeling designed to achieve those objectives, along with suggested timing for periodic portfolio rebalancing. Each year, the advisor should be happy to meet with you to review how the plan is working, to hear your comments, current goals and concerns, and to make whatever adjustments to the plan the two of you deem appropriate going forward.
As with the search for any product or service, check reviews and credentials, and if something doesn't feel right, don't proceed. Keep searching until you find the best fit for your needs. Your financial health is too important to take shortcuts.