Managing personal finances can be challenging even for financially sophisticated individuals and families. A financial advisor can offer valuable assistance by helping create a comprehensive financial plan that includes saving for various goals, such as buying a home, sending kids to college, and achieving a financially comfortable retirement.
A financial advisor can also help devise an investing plan that dovetails with these goals and maximizes after-tax returns. In addition, a financial advisor can assist with estate planning by helping create a last will and testament, living trust, and other important estate planning trusts and documents.
Where to Start Your Search for a Financial Advisor
There are lots of people today hanging out a shingle that says “financial advisor,” so how should you go about choosing the right advisor for you and your family? Here are a few suggestions for getting started:
• Get recommendations and referrals.
If your friends and family members have worked with a financial advisor, ask them about their experiences and if they would recommend their advisor to you. You can also ask other financial professionals for referrals, such as your CPA, banker, or attorney. Keep in mind, however, that some advisors have different kinds of specialties. So just because a friend or family member recommends an advisor doesn’t mean that person will be the best choice for you.
• Consult the National Association of Personal Financial Advisors (NAPFA).
This association of fee-only advisors has a Find an Advisor feature 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. The Garrett Planning Network and XY Planning Network are similar resources.
• Perform independent research.
Do an internet search for financial advisors in your area. Carefully review their websites to get a feel for them and their services, paying especially close attention to their background and experience, areas of specialty, and any client recommendations.
• Visit the SEC and FINRA websites.
The U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) both provide detailed information online about any financial advisor you may be considering working with. This includes any disciplinary action that may have been taken against the advisor, how many years of experience the advisor has, and whether the advisor has passed professional exams for licensing.
Types of Financial Advisors and Fee Structures
Different financial advisors offer different sets of services. Some advisors specialize in certain areas, such as investment management, wealth management, financial planning, and retirement planning.
Advisors may use terms like investment manager, wealth manager, or financial planner to label themselves, but these descriptions are fluid. There currently aren’t any rigid definitions in the industry that advisors must adhere to.
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:
- Commission-based advisors — These advisors earn a commission when they sell financial products and investments or execute transactions for clients.
- 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.
- 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, ETFs, and annuities.
Another important distinction among financial advisors is 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.
Advisory Certifications and What They Mean
Individuals must complete rigorous training in order to practice as a financial advisor. There are several different professional certifications advisors can earn based on the training they receive and the types of planning they want to focus on, including the following:
- Certified Financial PlannerTM (CFP®) — A CFP has completed college-level financial planning coursework and passed a comprehensive board exam covering a wide range of financial, insurance, and investment topics. In addition, a CFP must have at least three years of industry experience and meet continuing education requirements.
- Chartered Financial Consultant® (ChFC®) — Similar to the CFP designation, this designation includes the same core curriculum along with some additional personal financial planning courses. However, it doesn’t require a board exam or that advisors abide by a code of ethics.
- Chartered Financial Analyst® (CFA®) — A CFA possesses a wide range of expertise when it comes to investing, portfolio management, securities, and financial analysis. To earn this designation, a financial advisor must pass three different exams, each of which requires a minimum of 250 hours of study.
Questions to Ask Before Hiring an Advisor
Once you have created a list of potential financial advisors to work with, conduct in-person interviews with each candidate before you make a final selection. Here are a few questions you can ask potential advisors during the interviews:
- Do you specialize in any particular aspect of financial planning or are you more of a generalist? If you specialize, what are your areas of specialty?
- Which compensation model do you use?
- Are you a fiduciary?
- What is the average account size of your clients? (You probably don’t want to be the biggest or the smallest client an advisor is working with.)
- How (and how often) do you communicate with your clients? For example, by telephone, Zoom, email, or in-person meetings?
- Will you work directly with the advisor or with someone else in the practice who works for the advisor?
- Do you work with other financial professionals who can provide additional assistance, if necessary, such as a CPA, banker, or insurance professional?
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Personal Capital compensates Don Sadler (“Author”) for providing the content contained in this blog post.