How to Find and Choose a Financial Advisor
There is a vast amount of information online on how to find a financial advisor. It can be difficult knowing what information to follow and what to disregard. In this quick guide, we gather together all of the essential information on how to find a good financial advisor.
We will tell you where to start, where to look, what credentials to look for, what compensation model to look for, and how to choose a financial planner with your best interests in mind.
We also reveal the top 10 questions for you to ask so that you know exactly how to choose a financial advisor.
How to Find a Financial Advisor: Where to Start
You want a financial advisor who is a Certified Financial Planner (CFP). This is not the only consideration, but it is one of the most important things to consider from the beginning. You want to find a financial advisor that is regulated and licensed.
How to Find A Financial Advisor
The Wall Street Journal is clear on the importance of finding a CFP. They stress that CFP “is the most significant credential. A CFP has passed a rigorous test administered by the Certified Financial Planner Board of Standards about the specifics of personal finance. CFPs must also commit to continuing education on financial matters.”
Once you have found someone who is a certified financial planner, the mission to find a financial advisor does not end there. Even CFPs might lack certain requisite skills. When you want to find a financial advisor, you must keep in mind that you are trusting this person with your money. You must leave no stone unturned.
See Also: Do You Need A Financial Advisor?
Where to Find a Financial Advisor
The best place to start your quest to find a financial advisor is by asking friends, family members, and acquaintances you trust. Word of mouth recommendation from people in your immediate circle can often carry more weight than anonymous recommendations on the internet.
Ask those who are in the same financial demographic as you for their recommendations. You can gain a comprehensive view of how a financial advisor will treat you and your finances by observing how they have handled a friend’s finances over the years.
If you can’t find a financial advisor through a friend’s recommendation, The Wall Street Journal recommends the following two websites for leads to fee-only financial advisors:
- The National Association of Personal Financial Advisors (NAPFA) and
- The Garrett Planning Network
How to Pick A Financial Advisor With A Good Compensation Model
Understanding compensation models is key in your search to find a wealth manager with your best interests in mind. How your financial advisor receives compensation may affect how they give you advice.
The three most prevalent models of compensation are as follows:
1. Fee-Only Compensation: This is the compensation model you will find employed at the NAPFA. Compensation is based purely on the advice or time that your financial advisor gives to you. No other institution gives them any monetary reward. A fee-only financial advisor receives no commission based on the specific advice they give. This makes this model one that minimizes conflict of interest.
2. Commissions: NAPFA’s stance on a commission-based model is that a financial advisor “who is compensated through commissions is primarily a salesperson.” If you are a client of such a financial advisor, you must continuously ask yourself whether their advice is in your best interest or if it’s simply the most profitable advice for the financial advisor.
3. Commission and Fee: This is a combination of both models. You pay for the financial advisor’s time and expertise, but they might also receive monetary incentives for their advice outside of your fees. This model keeps the client’s best interests as a priority, but advice might still be based on other factors from time to time.
If you want to find a financial advisor who has your best interests in mind, you should look for a CFP who works within a fee-only compensation model.
Forbes warns that there may be one situation in which you should find a financial advisor with a commission-based compensation model rather than a fee-only model: “that’s if you want him or her to also help you with annuities, life insurance or disability insurance–basically, other investment vehicles besides stocks, bonds, mutual funds, etc.”
But the question remains. How to find a good financial advisor who will treat me honestly?
When interviewing prospective financial advisors, ask to see their Form ADV. Registered Investment Advisors (RIA) have this document prepared by the Securities and Exchange Commission (SEC) in order to show clients the following things:
- Their business
- Their compensation model
- Their experience
- The services they offer
- Any disciplinary history
The Form ADV is available on a financial advisor’s website. If you cannot find it there, request a copy during the evaluation stage.
NAPFA cautions that if the financial advisor is not an RIA, they are likely a broker’s registered representative. This requires you to check the FINRA BrokerCheck website for their disciplinary history.
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Fiduciary vs. Suitability Standards: How to Select a Financial Advisor With Your Best Interests In Mind
RIAs are held to a fiduciary standard by law. This means that they must only act in the client’s best interest at all times. They must divulge all conflicts of interest and disclose their compensation model.
How To Pick A Financial Advisor
Brokers, on the other hand, are not held to a fiduciary standard. They are held to a suitability standard, which is quite different from the fiduciary standard. Brokers are legally required to act in the best interest of their employer, not their client.
The Securities and Exchange Commission (SEC) requires brokers and other non-fiduciaries to include the following disclosure to their client agreements:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”
Ask yourself if this is the sort of professional relationship you want.
How to Choose a Financial Advisor: 10 Questions You Need To Ask
1. What licenses and credentials do you have? RIAs are the best bet for managing your money. Certified Public Accounts (CPA) are best for those with high incomes or small businesses because they can offer you tax planning. The CFP designation is preferable to the Chartered Financial Consultant (ChFC) because it is more difficult to obtain and indicative of better education. Also, find a financial advisor who demonstrates dedication to ongoing education and advanced education in investments, taxes, and insurance.
2. How do you charge for your services/how are you compensated? You are likely to be most interested in a financial advisor who has a fee-only compensation model.
3. What services do you provide? The answer to this question will reveal how much assistance your financial advisor will give you. One may only offer a narrow line of help, while others might have a more comprehensive approach to advice.
4. Will you provide me references from other professionals? The financial advisor should be able and willing to supply you with the contact information of other clients. Speaking with other clients will give you a good view of how the financial advisor will approach your situation.
5. Did you ever receive a disciplinary citation by a regulatory board? If the financial advisor has received disciplinary attention, it was likely due to abuse regarding their financial advice. A positive answer to this question should raise a red flag, but you should allow them to explain themselves.
6. How much contact do you have with your clients? Some financial advisors offer one annual meeting, while others offer a quarterly service, and/or a more ad hoc approach. How involved you want the financial advisor to be is a personal and financial decision. Forbes notes that “the J.D. Power & Associates survey found that investors contacted 12 or more times a year had the highest rates of satisfaction with their advisors.”
7. Do you have clients like me? Find a financial advisor who has clients in a similar demographic as you. If the clients are roughly the same age, have the same reasons for needing a financial advisor, and have a similar income, you are likely to deal with someone who has a comprehensive understanding of what advice would work best for you.
8. Can I see a sample financial plan? Forbes makes an excellent point on how varied financial plans can be: “Some people might give you 50 pages of stuff you don’t understand like charts and graphs, and another planner might provide a five-page snapshot of your financial situation. With a sample, you can say, ‘I really want that in-depth analysis,’ or ‘I don’t understand that.’”
9. What makes your advice unique? Find an advisor that brings what you want to the table. Their answer should give you an idea about their strengths and weaknesses.
10. Will I be working with just you or with a team? Examine the answer to this question in tandem with the question of how much contact they provide their clients. If your financial advisor will only offer a short annual meeting, you might feel the presence of a team is a great benefit.
Related: How to Become a Financial Advisor
How to Pick a Financial Advisor by Looking For Core Competencies
When you ask the financial advisor questions, and when you ask other clients about their financial advisor, you are looking for them to possess traits that are integral to a great financial advisor. Here are three traits to be on the lookout for:
- Integrity: You need to be able to trust your financial advisor. Find a financial advisor who takes their duties seriously and is accredited as a CFP. Having a CFP means that they likely hold to the CFP board’s strict Standards of Professional Conduct.
- Transparency: Your financial advisor should be open with you at all times on their reasoning behind their advice. They shouldn’t hide anything from you and should be dedicated to being open on all accounts.
- Privacy: You need to divulge personal information to your financial advisor in order to receive the best results. As such, your financial advisor must be committed to client confidentiality.
How to Find a Financial Advisor: Executive Review
In summation, if you want to find a wealth manager who will treat you and your finances correctly, you should follow these five steps:
- Ask friends, relatives, and associates like you for their recommendations.
- Use websites like NAPFA and the Garrett Planning Network to find a financial advisor who is professionally accredited.
- Find a financial advisor with a compensation model that suits you. The best model is often a fee-only one.
- Ensure that you find a financial advisor who is held up to fiduciary standards.
- Ask them the top 10 questions and search for the core competency traits.
If you follow this guide, you are highly likely to find a financial advisor you can trust and who will keep your best interests in mind.
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