You’ve finally decided to see a financial advisor. You know this is an important decision, but you have no idea where to start. The amount of financial information out there is infinite, and getting started can be overwhelming and intimidating. But the process can be simplified if you break it down into steps, know what you are looking for and how to look!
1. Choose a type of advisor:
Almost anyone can call themselves a financial advisor. Let’s start by narrowing down the financial field. There are three basic types of advisors based on how they are paid: commission-based, fee-based and fee-only.
Commission-based: Commission-based advisors (brokers, insurance agents, registered representatives) sell financial products such as mutual funds, annuities and insurance and receive commissions on those products. They are often employed by large financial institutions and have their Series 6 or Series 7. Because part (or in some cases all) of what they are paid is based on what they sell, there is a major conflict of interest. It's important to be aware that the temptation of commission is there and it can influence their recommendations for you.
Fee-based: These advisors are relatively new to the financial world. Fee-based advisors are typically affiliated with a broker/agent and like the commission-based advisors, generally hold a license to sell investments or insurance for a commission. Fee-based advising is confusing because like the fee-only advisor, the fee-based advisor provides financial planning for a fee. However, the important difference is they also sell products and get paid commissions. So there is still that major conflict of interest, because their fee-based recommendations could (and often do) include purchasing products they receive commissions on.
Fee-only: This is the only type of advisor I recommend for comprehensive financial planning and/or asset management. Fee-only advisors have a fiduciary duty to act in the best interest of their clients. They only make money through flat fees, hourly rates or a % of the assets they manage. They don’t receive commissions or fees based on product sales, and usually provide more comprehensive advice including estate, retirement, investing, taxes, education funding and insurance planning.
2. Determine how much help you need:
Hourly consultation: You have questions around a specific financial situation such as buying a house, going back to school or selling a business. The best option for you is an advisor who provides hourly consultation. They charge an hourly fee, and should be able to give you a total cost estimate upfront based on the scope of work needed.
Comprehensive financial planning: You need a professional to create a one-time roadmap to reach your financial goals. You want to them to look at everything: insurance, education, investments, retirement, etc. Advisors charge either an hourly rate or a flat fee for a comprehensive financial plan based on the scope of the project.
Asset management: You want a long-term financial partner. An asset manager will invest and manage your money, and provide continuous comprehensive financial planning throughout life’s stages and changes. They charge a % of the assets they manage for you.
3. What to look for in an advisor:
Credentials: There are several licenses and certifications an advisor can have: CFP, CFA, CPA, and ChFC. The CFP (Certified Financial Planner) is generally considered the gold standard in the industry. Advisors must have several years of experience, take an extensive course and pass a six-hour exam to become a CFP. Once certified they must complete continuing education and are held to strict ethical standards.
Ethics: You can easily see if an advisor has ethical or legal marks against them such as certain criminal charges, investigations, bankruptcies or unpaid liens on BrokerCheck. Also, advisors are required to disclose any disciplinary actions and conflicts of interest on part 2 of their ADV. You can ask the advisor for their ADV or download it from the SEC’s Investment Adviser Search website.
Experience: How long have they been in practice? What was their previous experience? Education is important, but advisors need to also have the experience in dealing with real life financial situations.
FIT: This may be the most important. You need to like and trust your advisor. It’s an intimate relationship and much like a therapist, your financial advisor will know your most personal details . Most advisors will provide a free initial consultation to tell you about their practice. Advisors have different styles and philosophies, so shop around. I always tell potential clients to meet with at least one other advisor before choosing one.
