A 5-question guide on how to choose a financial advisor
Do you know your parents’ financial advisor? Is he a friend of the family? Has he served your parents for decades?
Wouldn’t you like to have one of those? You have money that needs minding and could use a steady, knowledgeable hand. After all, you do want to retire someday.
It is likely that you know someone who has the perfect financial advisor. But such relationships don’t just happen. They occur through research, and a full understanding of your financial advice needs.
These 5 Questions Will Help You find a Financial Match
In order to find an advisor who would best fit your situation, you must know why you want help in the first place. Then, you can ask the financial advisor a few questions as well. These are not necessarily the literal questions you will ask but you need to know the answers whether you get them from the financial professional or by searching the internet or talking to another client.
Question 1: “Why Do You Want a Financial Advisor?”
Whether it is an increase in income, or an inheritance, or you are reaching the age where retirement income needs to be a consideration, you have a reason or reasons for wanting to use a financial advisor. Ask yourself why.
Make a list. You will only find the correct financial advisor if you know what it is you want that advisor to do for you. Whether it is retirement planning, budgeting for your child’s education, or you have developed a new interest in investing, your relationship with a new financial advisor is only going to work if it works for you.
Figure out what services you want from an advisor first before you begin researching possible candidates. Your personal needs will narrow your list of candidates and will also point you in the correct direction as you do your search for candidates.
There is something else you should consider besides your current financial advisory needs. Are you hoping this financial advisor you find will be with you for years to come? If so, you should consider the age of the person you are working with, and eventually ask them their professional intentions toward their own retirement. You don’t want to be left in the lurch down the road, going through this process again.
Question 2: “Are You a Financial Advisor?”
Hah! That’s a trick question! There is no such thing as a “financial advisor.”
At least, not as far as the Securities and Exchange Commission is concerned. Absolutely anyone can call themselves a “financial advisor’ because there is no regulated definition of that term.
However, there are a lot of other terms that are indeed regulated, that require a lot of study (sometimes years) and come with all of those cool initials that you see following the names of the financial professionals you find.
While anyone can call themselves a financial advisor and get away with it, what you want to find is a Certified Financial Planner. A CFP undergoes 1,000 hours of education and must pass an exam offered by the Certified Financial Planner Board of Standards.
Keep in mind, a CFP has worked hard to be able to offer his services, and you will pay more in fees (most likely) to receive those services.
Besides their education and dedication to the job, CFPs also must comply with the Fitness Standard, which says they will always put the interests of their client first. Not all financial professionals adhere to that standard.
You could also look for a CFA, a Chartered Financial Analyst, who has already worked as an investment professional for four years before he can even apply to earn his CFA certification. Again, you should decide if you need this level of investment advice.
What you may need is a Personal Financial Specialist (PFS), who is a Certified Public Accountant who also has experience in wealth management and personal finance, including insurance, budgeting and investing. This may be more your speed.
Question 3: “Are There Complaints Against You?”
The reason many people never hire a financial professional to help with their personal finances is because they are afraid of being taken advantage of, or having their life savings stolen outright. But, when you are ready to consider candidates for your personal financial advisor, you can find out if your candidate has any client complaints against him already.
The website brokercheck.finra.org allows you to type the name of a financial advisor or provider into a search engine and find out if there are any complaints against that person or company with the Securities and Exchange Commission.
It is a government-authorized not-for-profit organization, and it is linked to other websites to provide consumers information to protect them from the rats who give financial advisors a bad name.
Question 4: “How Do you Make Money?”
Not too long ago, this question boiled down to “fees vs. commissions,” meaning the difference between paying an advisor for every action they take in your name vs. paying a commission on the investment products they sell you.
Today, most financial advisors work on a fee-based system, but you must determine what services you are willing to pay a fee for. Do you need budgeting, retirement planning, investment planning, education funding planning? Each of those services will come with a price, and you should ask your advisor candidate precisely how much each service will cost you.
Even better, there may be a published fee schedule on their website.
Question 5: “Are You Listening to Me?”
Surprisingly, this is a legitimate question, and the most important one.
Successful financial advisors work with dozens, maybe even hundreds of clients, and they may believe they know what is best for their clients. However, what is right for one client is not necessarily what is best for another client. You have already decided what you want your financial advisor to do for you, for example help you prepare for retirement or save for the baby’s college education. Is he or she willing to do what you ask of them?
If you want to limit your financial advisor to playing a specific role in your financial plan, does he accept that decision, or does he try to sell you or push you into other services you already decided you don’t want or need right now?
If your financial planner is going to be looking for investments for you, does he or she understand your risk tolerance level? Does your financial advisor candidate take “no’’ for an answer?
There may be more questions
After you conduct an interview or two with financial advisor candidates, you may come up with more questions that need answered. That’s good! That means you know more now about the process than you did before, and you can make a wiser decision in the future.
Kent McDill is a veteran journalist who has specialized in personal finance topics since 2013. He is a contributor to Codetic.