Hiring a financial advisor can be one of the best investments you make. It can also be a colossal waste of time. Financial advisors can help you make smart investment choices, but without trust, the best financial planning is useless. How do you a financial advisor you can trust? This guide will help you do your due diligence and find a financial advisor that’s right for you.
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. Search for investment advisers, not brokers
The Securities and Exchange Commission regulates both investment brokers and advisers, but they are held to different standards when it comes to providing advice. The key term when searching for financial advisers is the “fiduciary standard of care.”
The fiduciary standard of care requires financial advisers to act solely in the client’s best interest when offering personalized financial advice. Brokers are not required to follow the fiduciary standard.
If you are doing your own financial planning and investment decisions, a broker may be just what you need. But if you’re looking for someone who is required to have your best interests at heart at the risk of getting fined or losing their license, go with a certified financial adviser.
SuperMoney provides free tools to compare the cost, features, and customer reviews of leading investment advisors.
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 an excellent 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
The CFA Institute awards this designation 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®
Arguably the most recognized certification in finance, the CFP accreditation is awarded by the Certified Financial Planner Board of Standards Inc. (CFP Board). CFP professionals are required to meet rigorous education and experience standards in investment, insurance, income tax, estate, and retirement planning.
Certified Trust and Financial Advisor CTFA
The ABA Institute of Certified Bankers awards the CTFA certification to individuals who have worked in their field and completed extensive training in the areas of ethics, investment management, tax law, and financial planning.
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 that 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 your 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. Check 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 questions should you 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?
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?
Ask 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 ask for 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. Ask your friends and family who they use and whether they can recommend their services.
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 the SEC’s Action Lookup to check whether there are any legal or administrative proceeding filed against them.
You need someone you can trust, knowledgeable, and who has an investment philosophy you are comfortable with. Find an advisor who looks at the big picture as well as the small details and who has strong communication skills.
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:
- Is not required to abide by the fiduciary standard of care.
- Tells you to take equity out of your home to invest it.
- Recommend you buy a variable annuity for the tax benefits without first maxing out your tax-deferred retirement plan.
- Charge you 1% of your assets for portfolio management without offering services beyond investments.
- Determine where to invest your money based on their commission structure.
None of these behaviors put your best interests first, which is a requirement for Registered Investment Advisors, as per the fiduciary standard. 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 best fit? You should consider your gut feelings, did any of them make you feel confident and positive about your future? 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
An important thing to remember when selecting a financial advisor is that financial planning and advice is not a single transaction. There isn’t a magic formula. Financial advice is a process, a relationship. Good financial advisors will take the time to listen to your goals and specific needs, not theirs.
Financial advice needs to be an ongoing process that measures progress and adapts to changing goals and life circumstances. Also, 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.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.