Recently, I saw this advertisement (from last year) about finding a financial advisor you can trust:
I think it’s quite clever and delivers home the point that a reliable and trustworthy financial advisor needs to do more than just “look the part”. If you’re going to follow someone’s advice on your finances, you need to be sure that advice will be worth it and keep your best interest in mind. But how do you determine if you’ve found the right advisor for you?
Many people take advantage of the “advisors” at their local bank or through their existing investment companies. I used to do that for a living: after working as a bank branch manager, I took my series 6 exam and became a financial specialist (i.e. a salesperson). While I had taken an oath to only recommend products suitable for the client, that didn’t stop my employer (the bank that signed my paycheck, not the clients) from pressuring me to sell whatever was profitable for them. I soon realized that if I was going to keep my integrity intact, I would need to leave, and a number of clients who trusted my advice decided to follow me into private financial consulting. But how many clients end up with a financial specialist who doesn’t truly have their interests at heart? This is why it is important to do your due diligence when finding someone who can have a tremendous impact on your financial future.
Here are my recommendations on how to find a financial advisor you can trust.
Finding a Financial Advisor
First, you need to locate a financial advisor. One of the best ways to find one is by getting referrals from family, friends, or colleagues. Prioritize recommendations from those who are in a similar financial situation to yours.
There are also many websites you can use to search for advisors in your area. Try Let’s Make a Plan to find Certified Financial Planners near you, NAPFA’s Find an Advisor for fee-only advisors, or the Financial Planning Association. If you find a planner on your own using such a resource, feel free to ask them to provide a couple of references from longtime clients.
Next, it’s important to learn what makes them qualified to give financial advice. Certified Financial Planners (CFP) are licensed and regulated, and have been educated (and must continue their education) in financial planning matters. However there are other licenses that are out there and those professionals may meet your needs as well. Designations include RIA (Registered Investment Advisor), IAR (Investment Advisor Representative), CRPC (Chartered Retirement Planning Counselor), and AIF (Accredited Investment Fiduciary). When in doubt, look up the requirements for a particular credential, but beware that some of those calling themselves financial advisors have no credentials at all.
It’s also fair to ask potential advisors about their years of experience and areas in which they specialize (investment gurus are not always tax experts for example).
Types of Advisors
There are two types of standards to which advisors adhere. Fiduciary responsibility advisors are legally bound to act in your best interest, whereas suitability advisors are only required to suggest products that are suitable, but not necessarily the best for you. Finding an advisor with fiduciary-level responsibility is best. All of the credentials listed above under Qualifications carry a fiduciary-level responsibility.
Financial advisors generally make their money one of three ways: fee-only, fee-based, or commission-based. Fee-only advisors get paid a fee directly by the client, which may be an hourly rate, a flat rate, or an annual retainer. Commission-based advisors make money off the products they sell to you. Fee-based advisors receive a combination of the two types. Fee-only advisors offer two advantages: the products they sell you won’t be influenced by their commissions and you will know exactly how much you are paying for your financial advice.
Also think about what kind of advice you need. Some financial advisors will include planning advice in the fees they charge to manage your investments, while others will consider that a separate service.
Good financial planners will start by getting to know you, your financial situation, and your risk tolerance. They should look at not only where you are in life right now, but where you’ll be down the road (such as kids in college, elderly parents needing care, etc.). If an advisor dives right into giving you advice, without learning what your circumstances are, beware.
Finally, if your advisor is suggesting something that sounds too good to be true, goes against all the other financial advice you’ve ever heard, guarantees a return (except on a fixed-rate investment) or asks you to make a check out to them personally (for an investment, not for fees), do not ignore the alarm bells in your head and be sure to use your judgment. At the very least, get a second opinion before moving forward.
Your financial advisor will have a significant influence on your financial future. Be sure the person you select is trustworthy and qualified, or you may end up singing the blues with a well-dressed DJ! What do you look for in a financial advisor?
Image courtesy of stockimages on freedigitalphotos.net (with changes)