While some people choose to manage their finances alone, many prefer to work with a seasoned
financial professional.
But, finding a financial advisor that is both reliable and capable can be a challenge.
First, you must narrow your search to a list of potential candidates, consider costs and
fee structures, and finally, you have to meet.
While the task may seem daunting, selecting the right financial advisor can potentially
pay life-long dividends.
When creating your list of candidates, it's important to do some critical research and
evaluation.
Start by asking your friends and family for recommendations.
Once you have a list of names, research them online: Review their websites, social media,
and marketing materials.
Critique a potential financial advisor as carefully as you would a doctor or lawyer.
After narrowing your list to a few names, search sites like the Financial Planning Association
and the National Association of Personal Financial Advisors for in-depth information like education,
certifications, and peer ratings.
You can also perform background checks on advisors using BrokerCheck, a site run by
securities regulator FINRA.
The site can help you verify licenses or disciplinary history of an advisor you're considering.
In addition to performing background and history checks, one of the most important considerations
when choosing an advisor is cost.
You must understand how your financial advisor is paid, including any sales incentives and
if those incentives align with your goals and desired outcomes.
Ask questions like Is there an initial planning fee?
What is the overall fee structure?
Will you be charged based on a percentage of assets, by the hour, or for specific products
they might be selling?
Costs and advisor compensation structures vary across the industry.
There are three main types: commission-based, fee-based, and fee-only.
Let's discuss the differences, starting with commission-based.
Commission-based advisors sell financial products such as mutual funds, annuities, and insurance
and receive commissions on those products.
Because part, or in some cases all, of what they're paid is based on commission, there
is a potential for conflict of interest.
Fee-based advisors provide financial planning for a fee and receive compensation directly
from clients.
However, fee-based advisors, similar to commission-based advisors, also sell products and get paid
commissions.
So there's still potential for a conflict of interest, because their fee-based recommendations
could include purchasing products they receive commissions on.
Fee-only advisors tend to provide comprehensive financial planning and/or asset management.
They have a fiduciary duty to act in the best interest of their clients.
These advisors only make money through flat fees, hourly rates, or a percentage of the
assets they manage.
They don't receive commissions or fees based on product sales, and usually provide more
comprehensive advice to their clients.
You can find important disclosure information about an advisor's services and fees by
reviewing their Form ADV and other applicable disclosure documents.
Once you understand how your candidates are compensated, schedule meetings.
This may be the most important step of the process.
Just as in a job interview, you must ask the tough questions: Why should I choose you,
what makes you better than other advisors, and how are you going to help me pursue my
financial goals?
This will help you gauge whether the advisor understands, perhaps even empathizes, with
your situation to better help you define and pursue your goals.
After choosing a particular advisor, look for signs of a healthy relationship.
You don't have to be best friends, but you should have a good rapport.
Continually evaluate whether the advisor's investment strategy aligns with your goals.
Over time, your financial plan will evolve and so should your advisor.
Be on the lookout for warning signs that your financial advisor may be leading you astray.
Red flags include ambiguous investment advice, confusion, and unexpected changes in your
financial plan.
If your advisor doesn't communicate well, be prepared to end your relationship and move
your business elsewhere.
Ultimately, your relationship with your financial advisor is a personal one.
The relationship should foster a feeling of trust, security, and mutual success.
Taking the time to find the right advisor is important and potentially a life-changing
decision that could set you on course to reach your financial goals.