Unless you’re a market guru, having a financial advisor can easily pay for itself. Financial advisors work day in and day out counseling clients on how to best plan for their financial future. As such, they have insights into the fluctuations of the market that laymen don’t. While you might enjoy the thrill of picking your own investments, it’s worth considering having a financial advisor take on the bulk of your portfolio, setting aside a smaller amount for you to play the market with.
So, what should you consider before selecting your financial advisor?
How to find a good financial advisor you can trust
Here is a step-by-step guide to finding the right financial advisor for you.
1. Ask for recommendations
Ask your friends, family, coworkers, etc. if they have a financial advisor that they know and recommend. Post on social media to ask your network for recommendations. Perform online searches to find reputable people or use a trusted site that curates peer-reviewed lists, such as SuperMoney. Then, make a list of potential advisors and get ready to do some research.
2. Vet your list of advisors
Next, it’s time to vet your list of advisors. To do so, you need to know what makes a good financial advisor. Advisors don’t have to be certified, but a certification does speak to their level of professionalism and legitimacy. Here’s a quick look at the common types of certifications and what they mean.
Types of certifications
There are three main types of certifications in the finance realm. We’ll explain each below and then will elaborate on how they differ and why they are important.
Chartered Financial Analyst CFA
Arguably the most respected certifications in finance, this designation is awarded by the CFA Institute after an individual completes three levels of exams on a wide range of topics from accounting and economics to security analysis and money management.
CERTIFIED FINANCIAL PLANNER™ CFP®
Awarded by the Certified Financial Planner Board of Standards Inc. (CFP Board), this certification is for those who voluntarily commit to ethical and competent behavior by following the CFP process. It involves annual education programs, extensive exams, experience, and meeting ethical requirements.
Certified Trust and Financial Advisor CTFA
The CTFA certification is awarded when an individual has worked in their field and completed extensive training in the areas of ethics, investment management, tax law and planning, financial planning, and fiduciary and trust activities.
All of these certifications show that an advisor is dedicated to their profession. They each also increase the likelihood that the advisor is skilled and operates with integrity. However, note that a CFP® designation prepares an individual for financial planning but does not indicate they can manage your money. So they can determine a recommended asset allocation by analyzing your investment objectives and risk tolerance but would need another qualified person to pick the individual securities (adding a fee).
On the other hand, a CFA would be able to fulfill the money management as well as the planning which can be advantageous. The CFTA is a credential to look for when hiring a professional to focus on the provision of guardianships, estates, trusts, and individual asset management accounts.
Perform due diligence
So look up the advisors online, whether it’s on their website, social media profiles, review pages, or elsewhere, and find out how long they’ve been in business, what others say about them, if they are certified, what services they offer, and what investment philosophies they follow. If they jive with you, add them to your shortlist.
3. Interview your shortlist
Now that you’ve done some basic vetting, it’s time to learn more about the advisors on your shortlist. In this stage, you’ll be contacting them to set up a time for a “consultation” which will also be an interview. They’ll learn about your needs and you’ll learn about them and how they can meet them.
What are good questions to ask in a financial advisor interview?
In your search for a financial advisor, be prepared to ask a lot of questions. After all, this is nothing less than your future financial stability. But what should you be asking? Here are the bases you should cover:
What are your qualifications?
Obvious, right? Ask about any certifications that they hold, what continuing education they pursue, and how they keep abreast of the changing market.
How does the payment work?
Understand up front whether you’ll pay for services based on a set fee, a percentage of transactions, or assets under management. Which is best for you depends on how much you’re going to invest and how often you plan to trade.
What’s your investment philosophy?
Some financial advisors are going to help you work on one area of your portfolio. Others look at your portfolio as a whole. You should also get a sense of whether or not the advisor is more aggressive or passive. There’s no right answer here. The point is to find an advisor who matches your comfort level and needs.
Who can you provide for references?
The best thing to do is get two references from current clients, as well as a third reference from a professional who does not work for the same firm. This shows you that his clients are happy and that he is professionally respected.
What will I find if I research your regulatory record?
You’ll have to do the legwork here to find out how honest the potential advisor is. However, he should be upfront about any regulatory violations, especially since some are nothing for a customer to worry about, such as settled customer complaints or failing to get his marketing materials pre-approved. You can use a search tool like BrokerCheck to search the background and experience of potential advisors.
The key traits of a good financial advisor to look for include someone knowledgeable, whose investment philosophy makes you comfortable, who is attentive to your needs, who looks at the big picture as well as the small details, who has strong communication skills, who can teach you (in laymen’s terms) about your financial plan, and who you can trust.
Note, there are red flags that are a clear sign to make a beeline for the door (or hang-up button) such as if the advisor recommends any of the following:
- Replacing your whole life policies with term life policies and investing the difference.
- Taking equity out of your home to invest it.
- Buying a variable annuity for the tax benefits without first maxing out your tax-deferred retirement plan.
- Charging you 1% of your assets for portfolio management without offering services beyond investments and without explaining how or why you’re invested.
- Deciding where to invest your money based on their commission structure.
- None of these put your best interests first, which is now required of Registered Investment Advisors, as per the fiduciary standard.
These red flags have you doing things such as putting money that is already doing something useful—giving your home value and protecting your family in the event of the unthinkable—into risky, get-rich-quick schemes. Any financial planner worth his salt will never advise you to do them.
4. Make a decision
Once you’ve interviewed the shortlist of advisors, reflect on the interviews. Which one do you think is the overall best fit? You should consider your gut feelings, did any of them make you feel confident and positive about your future? Did any of them give you a suspicious feeling or did you feel you could trust any of them? How about their level of experience, reputation, certification, and investment philosophy? Choose the one who provides the best overall value of the bunch. If you don’t feel great about any of them, start over from step one.
How to choose a good financial advisor: The bottom line
The most important question you need to ask when you’re looking for a financial advisor is: Do I like and trust this person? You’re going to be in close communication with them. If you constantly feel like you have to second guess their advice, or you think that they are a painful person to interact with, it’s going to be hard to have a fruitful working relationship.
Do your due diligence, but also trust your gut and you’ll be sure to have a financial advisor that works for you and your family’s financial future and security. And remember, it’s not a one-and-done decision. Keep checking in with yourself to see if you are still happy with the person as time goes on. Ask yourself if they are keeping your best interests in mind, staying true to what they promised, and delivering the results you need.
For help finding leading financial advisors without hours of research or networking, browse our list below– complete with reviews and ratings from the firm’s past clients.