We’re concluding Financial Literacy Month with a look at one of the most important financial decisions many individuals and families must make: Who should you choose as a financial advisor?
Financial advisors can serve many different roles, depending on the specific needs of the client. Typically, advisors help clients create a comprehensive financial plan that includes meeting goals like buying a home, saving for college and enjoying a financially secure retirement.
In addition, a financial advisor can help you create an investing plan that aligns with these goals and maximizes your after-tax returns. An advisor can also assist with estate planning by helping you create a last will and testament, living trust and other important estate planning trusts and documents.
Starting Your Search for an Advisor
Lots of people today call themselves a financial advisor, so how can you choose the right advisor for you? Start by getting recommendations from family members and friends. Ask them about their experiences in working with their advisor and if they would recommend him or her to you. Similarly, you can also ask your CPA, banker or attorney for a recommendation or referral.
Of course, you can also perform your own research. Search online for financial advisors in your area and carefully review their websites to get a feel for them and their services. Pay especially close attention to their background and experience, areas of specialty and any customer recommendations.
The National Association of Personal Financial Advisors (NAPFA) can also be a useful resource. Their website has a tab that can help you locate member advisors in your area. All NAPFA members sign and renew a Fiduciary Oath annually and subscribe to a Code of Ethics.
Once you have narrowed down a list of potential advisors, visit the SEC and FINRA websites to investigate them further. Their websites provide detailed information about advisors including any disciplinary action that may have been taken against them, how many years of experience they have and which professional licensing exams they have passed.
Financial Advisor Compensation
Financial advisors offer different types of services and specialize in different areas — for example, investment management, wealth management, financial planning and retirement planning. One of the most important differentiators between types of financial advisors is how they charge for their services. There are three main commission models used by most advisors:
1. Commission-based advisors: These advisors earn a commission when they sell financial products and investments or execute transactions for clients.
2. Fee-only advisors: These advisors charge fees for services provided, usually calculated as a percentage of assets under management. They may also charge an hourly consultation fee or a fee for specific services provided, like developing a financial plan.
3. Fee-based advisors: These advisors use a hybrid compensation structure that’s a combination of commission-based and fee-only. It usually includes a base advisory or planning fee in addition to commissions on the sale of financial products like mutual funds, EFTs and annuities.
You should also ask potential financial advisors about their fiduciary status. A fiduciary has a legal obligation to make investment decisions that are in the best interest of the client, not the advisor. This might seem obvious, but all financial advisors are not held to this fiduciary standard. Some advisors are held to a less-stringent suitability standard in which the advisor’s advice must only be suitable for the client at that particular time.
Most commission-based advisors and broker-dealers are held to the suitability standard, not the fiduciary standard. Registered Investment Advisors (RIAs), on the other hand, are always held to the higher fiduciary standard.
Questions to Ask Potential Advisors
Once you’ve narrowed down a list of potential financial advisors, meet with each of them in person before making a decision. Here are a few questions you can ask them:
- How are you compensated for your services?
- Are you a fiduciary?
- What is the average size of your clients’ accounts?
- Do you have an area of specialty or are you more of a generalist? What is your area of specialty if you have one?
- How often do you communicate with your clients and by what methods (e.g., telephone, email, in-person or online meetings)?
- Are there other financial professionals like a banker, CPA or insurance professional you can bring in for additional assistance if needed?