The number of Americans that have sought help from a financial advisor has increased tremendously over recent years. The primary reason most people seek professional assistance is their finances have become too complex to handle on their own. Some want to avoid repeating a financial mistake again or realize that they don’t pay attention to their finances enough. Or it may be that our lives have become busier and the financial landscape has become too complex and time-consuming to manage on our own. We want to help simplify the process for you by providing a guide to find the best financial advisor for you.
The primary steps in evaluating the right advisor for you are to:
1. Determine Your Needs
2. Understand How Advisors are Compensated
3. Evaluate Credentials and Experience
4. Conduct a Firm Evaluation
This 5-minute article should help you save hours in your search for the best financial advisor and help you avoid making any costly mistakes.
Determine Your Needs
As with a good financial plan, your search for a financial advisor should be centered around your specific needs. While most traditional financial advisors from the 1980’s and 1990’s focused on investments and stock-picking, many financial advisors today provide comprehensive financial planning services to their clients to help them make better financial decisions.
We are inundated with information these days, which is what makes self-managing one’s finances so difficult. Having a professional that truly understands your goals in life is crucial in helping you plot the shortest and most efficient path from point A to B.
What percentage of your income do you need to save to retire at a certain age? If you saved X amount more, how many years earlier could you retire? Does keeping your target retirement age the same, but spent 15% less change things?
These questions are an example of the types of questions you should be asking yourself and your financial advisor candidates. You want to gain a thorough understanding of their knowledge, education and scope of services offered. Will they review your tax return? Ask them about their typical client – does that sound like you?
Part of a sound financial plan is to have an investment philosophy that reflects your goals and it’s important that you and your advisor share a similar philosophy. If you are seeking an active investment philosophy (trying to outperform market indexes), then a financial advisor might help you construct an allocation and find suitable active managers to attempt to outperform the market. You should keep in mind that this approach is expensive and can be tax-inefficient. Also, many studies show that this investment strategy can underperform a portfolio comprised of index funds.
If you are only seeking investment management and don’t want to pay the higher fees associated with active management, then a passive strategy can be pursued through index funds exchange-traded funds (ETF’s) or through a number of different robo-advisors. A passive investment strategy is predicated on the belief that markets are efficient and that buying indexes that track the market is more effective than the higher costs and low odds associated with beating the market. A passive investment strategy will typically be lower in cost and more tax-efficient than an active strategy and has more support from the academic community.
Understand How Advisors are Compensated
The most crucial element that must be understood about the person giving you financial advice is how they are compensated. A Fee-Only financial advisory firm receives all of its revenue from its clients as opposed to any third parties. Simply, the firm or advisor charges their client’s a fee for the advice that is being provided.
There aren’t any other commissions or alternative sources of revenue from sales of products that could influence the advisor’s objectivity. Because after all, you are hiring someone to provide advice that’s in YOUR best interest, not theirs. Fee-Only advisors are also held to a fiduciary standard in working with clients, so by law, they must always act in a prudent manner for their clients. Working with a Fee-Only advisor is the best way to ensure you are getting objective advice free from conflicts of interest.
In addition to Fee-Only financial advisors, there are a number of other financial professionals that are commission-based and earn the majority if not all of their income by selling a certain number of products or opening a certain number of accounts. Products come in the form of insurance products such as annuities, mutual funds, or even private investments.
This is not to say that all commission-based financial professionals are acting in bad faith. However, under current law, the only protection the consumer has is that these professionals recommend products that pass a “suitability test,” but not a fiduciary test. Under the suitability test, they can sell any products that are suitable, but they do not have any legal duty to their clients.
Evaluate Credentials and Background
No assessment of hiring any professional is complete without a thorough analysis of that individual’s resume. Finding an advisor with the CFP® designation should be at the top of your list when evaluating credentials. The CFP® certification is the most recognized and rigorous credential for financial advisors and requires proficiency in all areas of financial planning.
The list of designations is nearly endless and while some may imply additional knowledge and expertise, none require the same experience, testing, educational, and ethics requirements presented by the CFP Board. While the CPA and CFA credential programs are well recognized and accepted, they are focused on taxes and investments, not the broader financial picture.
Let’s face it, experience matters. You are going to want to know how many years the advisor has been working with clients. If you are working with a younger advisor, it doesn’t hurt to ask if there will be another senior advisor involved in the relationship. Working with a more experienced advisor who has advised clients in similar situations goes a long way in getting reliable financial recommendations.
If working with a broker, you can perform a background check by searching for their form U-4. This form will provide you with all sorts of information about the advisor like have they ever committed a felony or misdemeanor, filed bankruptcy or been involved in any lawsuits or violations of securities laws.
One of the most overlooked criteria in searching for a financial advisor is determining what type of client they work with. As more financial advisors have made an effort to provide financial planning services, many advisors have become subject matter experts in one niche.
There are financial planners that specialize in employee stock options, business owners, millennials and retirees. From college planning to retirement planning and everything in between – there’s an expert for that. Aside from ensuring that you are working with a Fee-Only CFP®, working with an advisor that is a specialist in your area of need may be the most critical factor to evaluate.
If you are approaching retirement you need to know how much you can spend, how to replace your income, when to take Social Security, etc. Ideally, you want to work with a firm that helps retirees since they will have the expertise, resources and experience to provide you with the best solutions to your problems.
Firm Type and Size
One thing that has changed over the last 20 years are the number of independent and smaller Registered Investment Advisors (RIA). Advancements in financial technology platforms and dedicated platforms from the largest custodians (Fidelity, Charles Schwab & TD Ameritrade) have allowed smaller firms to offer a more boutique-style personalized approach than larger firms. In some instances, you may even be directly working with the founders of the firm, who are typically more seasoned advisors and also business owners. RIA’s have been the fastest-growing segment in the financial advisory realm in recent years.
Outside of RIA’s, the most populous platform to work with a financial advisor is through a brokerage such as Merrill Lynch, UBS, Raymond James or Edward Jones just to name a few. Even your local bank has a licensed securities branch representative who can sell you financial products.
Again, broker-dealers are not held to a fiduciary standard, and the products they sell all pay them different types of commissions, so make sure to understand the costs associated with the investment and how the broker is being compensated. Some representatives are under salary & bonus structures, but bonuses are typically tied to selling a certain type or number of products. At the end of the day, it’s your right to understand any conflicts of interest the advisor has, so you shouldn’t feel that these questions are inappropriate.
As a potential new client to a firm, you should be paying close attention to the initial onboarding process. Most firms have an initial meeting with some type of free evaluation of your situation. You want to ensure that the advisor is being transparent in all facets of the relationship, especially how they are compensated and the types of clients they serve.
Most importantly, how much time are they spending upfront to gain a thorough understanding of your life goals. This will be paramount to a successful relationship because a good financial plan is a result of how much the advisor understands your core values and goals. They should be helping you make financial decisions that are in alignment with what’s most important to you.
If you are working with a comprehensive financial planner, they will most likely request a number of documents, but tax returns, insurance policies and investment statements are some of the most common documents for the planner to begin their analysis. Depending on how thorough the initial process is, they may also need to spend more time with you to clarify goals more clearly prior to making recommendations.
If you aren’t working with a financial planner, then your onboarding process with a broker or agent will most likely be to review a final proposal or illustration and sign the paperwork depending on the type of financial product you are purchasing.
Once you have made your decision and completed your client onboarding process and have implemented all recommendations, you should feel good about unifying your goals with all of your financial decisions. At this point, you should know how many times a year you will be meeting with your advisor, how to access online portals and what type of reporting you will receive.
While it may take some time effort before you find the right fit, you don’t want to cut any corners in finding the best financial advisor for you. However, if you know that you are looking for a Fee-Only financial planner, then you can really start your search by looking for a firm that specializes in your needs. From there you can continue your evaluation of the firm and the advisor you will be working with. There are also a few websites such as NAPFA and the Fee-Only Network that offer databases of Fee-Only planners to help make your search easier. Aside from your doctor, you will probably interact with your financial advisor more than any other service provider in your life, so make sure to hire the best one for YOU.
Danny G. Michael is the founder and CEO of Satori Wealth Management, Inc. He has 20 years of experience in retirement planning working with individuals, families, and business owners.