How to Choose the Right Wealth Advisor

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Your choice of a wealth advisor is one of the most important decisions you will make in your life, at least from a financial standpoint. Given this, it’s surprising how little time and research some people put into the process of choosing the right advisor.

For example, some people will choose a wealth advisor based simply on the recommendation of their golf buddy or tennis partner. While a recommendation from a trusted friend is one factor to consider, it should just be the starting point in your research to find the right wealth advisor for you and your family.

Following are three important questions you should ask potential wealth advisors before deciding which one to hire:

1. Are you a fiduciary? A fiduciary has a legal obligation to make investment decisions that are in your best interest. While this might sound like a no-brainer, not all wealth advisors are required by law to do this.

There is another standard wealth advisors can be held to when offering financial and investment advice that’s referred to as a suitability standard. This means that the advisor’s advice must be “suitable” for your needs at that particular time. The suitability standard is less stringent than the fiduciary standard in terms of the advisor’s obligation to make recommendations that are in your best interest.

One easy way to find out whether an advisor is held to a fiduciary or a suitability standard is to ask whether he or she is Registered Investment Advisor (RIA) or a broker-dealer. RIAs are held to a fiduciary standard, but broker-dealers are only held to a suitability standard.

Working with an RIA will ensure that the recommendations you receive from your wealth advisor are unbiased and in your best interest. Therefore, it usually makes sense to choose an RIA as your wealth advisor instead of a broker-dealer.

2. What are your credentials? This is an important question because an advisor’s professional designations will tell you a lot about his or her financial education and areas of expertise. Some of the most common credentials for wealth advisors are:

  • Certified Financial PlannerTM (CFP®) — A CFP has completed university-level financial planning coursework and passed a 10-hour exam covering a wide range of financial, insurance and investment topics.
  • Chartered Financial Consultant® (ChFC®) — An alternative to the CFP designation, this credential has the same core curriculum as the CFP plus a few additional elective courses that focus on various areas of personal financial planning.
  • Chartered Financial Analyst® (CFA®) — A CFA must pass three different exams, each of which requires a minimum of 250 hours of study.

3. How are you compensated? There are several different compensation models for wealth advisors. The three most common models are:

  • Fee only: Typically, the fee will be based on assets under management (or AUM) or charged on an hourly or flat basis. This compensation model rewards your wealth advisor for growing your portfolio and removes any potential conflict of interest in the advisor’s recommendations. RIAs are paid on a fee-only basis.
  • Fee plus commission: This type of hybrid wealth advisor receives a portion of the commissions you pay when you buy or sell financial products they recommend (like mutual funds or annuities) in addition to their advisory or planning fee.
  • Commission only: This type of wealth advisor receives compensation only from sales commissions on the investments and financial products he or she recommends for you. The commission-only compensation model may give the advisor an incentive to recommend investments and products that increase his or her commission. Broker-dealers are paid on a commission-only basis.

As you interview potential wealth advisors, be sure to ask them these three critical questions. This is one of the best ways to narrow down your list of potential advisors and eventually select the best one for you and your family.

If you have more questions about how to choose the right wealth advisor, please give us a call. We’d be glad to discuss these and other questions with you to help you make the right choice.

 


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's ("Frontier") investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

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