Given the uncertainty in the financial world today, now is a great time to think about hiring a financial advisor to help you navigate the markets and reach your financial goals. No matter what experience you have with personal finance or investing, we believe that everyone can benefit from professional help with their assets. However, searching for the right financial advisor can be challenging and many people are not sure what questions they should ask. Here are some guidelines to help you evaluate financial advisors as you do your research.
1. Are you a fiduciary?
A fiduciary is someone who is required to make decisions based on their clients' best interests. Fiduciaries must act in good faith and provide all relevant facts to clients. They must avoid conflicts of interest and disclose any potential conflicts of interests to clients should they arise. Fiduciaries are also required to do their best to ensure the advice they provide is thorough and accurate.
2. How are you compensated?
There are many different compensation models available today. Does the advisor charge a commission for the investment they sell you? Do they charge a flat fee? A percentage of assets under management? A good advisor will be able to answer this question quickly and transparently. Financial advisors deserve to be compensated for their value, but you should make sure that there are no red flags when it comes to disclosing how they get paid.
3. Are you independent or connected to a broker-dealer or wirehouse?
This will help you understand how your advisor might recommend products and services. Many brokerage firms and wirehouses are limited in regards to what products they can use. This does not automatically mean the advisor is the wrong fit, but it is important to understand the factors involved in making their recommendations. An independent or RIA advisor typically has the freedom to provide a much wider range of products and services.
4. How will the client-advisor relationship work?
Make sure you have an understanding of what kind of service you can expect and how you will communicate with your advisor. How many meetings will you typically have per year? What is the best way to communicate between those meetings? Can you call and email at any time with questions or concerns? Will you work exclusively with one advisor or will other team members be involved as well? There is no right answer to these questions, but you want to make sure you will have a relationship you feel comfortable with.
5. What are your qualifications?
It may be surprising, but almost anyone can call themselves a financial advisor. There is no formal certification process to use the title. It is important to understand what kind of experience your advisor has. Beyond number of years in the industry, there are a few professional designations to look out for.
A CFP® (Certified Financial PlannerTM) must meet minimum experience requirements related to delivering financial planning services to clients. They must pass the comprehensive CFP® Certification Exam that covers ethical standards, financial planning, education planning, risk management, investing, tax planning, retirement planning, and estate planning. To maintain the certification, advisors must adhere to a strict ethical standard and complete ongoing continuing education. Only about 20% of advisors have this certification.
A CFA® (Chartered Financial Analyst®) designation is one of the highest distinctions in the investment management profession. In order to receive a CFA charter, advisors must complete three separate rigorous exams covering investment tools, valuing assets, portfolio management, and wealth planning. The average pass rate for these exams is only 45% and fewer than 1 in 5 candidates who begin the program successfully earn the CFA charter.
There are many great financial advisors who do not have these professional designations, but the CFP® and CFA® can be useful guidelines in your search because they show a commitment to learning and providing a high standard of service to clients.
6. What is your investment philosophy?
An investment philosophy is a set of principles that guide an advisor's decision making process. There are many ways to approach investing, and there is no one correct strategy. You want to have an understanding of what to expect in your investment accounts and make sure you are comfortable with how they are managed. Most advisors will use some combination of mutual funds, ETFs, stocks, bonds, and SMAs. They may exclusively focus on longer-term strategic allocations or may also make shorter-term tactical trades. It is important that they can speak intelligently about their strategies and that you have confidence they have a well thought out framework.
Hiring a financial advisor can help you maximize your wealth and reach your financial goals. Use these questions when hiring an advisor to assist you in finding an advisor who is committed to your success and will be a great long-term partner.