Financial planning tools are now ubiquitous across the Web. There are very few things an individual can’t do in calculating their needs and searching for solutions when they know how to access these tools online. Still, most people should seek the guidance of a financial professional, if for no other reason to validate their own findings and ensure that their solutions are best suited for their financial situation. If a person wants to truly address all of their financial needs, it may involve different disciplines, such as retirement planning, tax planning, insurance planning, and investment planning, that are beyond the scope of most people’s knowledge. A qualified, and trust financial advisor can ensure that your decisions are on the right track to meet your objectives.
What to Look for in a Financial Advisor
Financial advisors come in all shapes and sizes. What may pass as an “advisor” in some instances may be a product salesperson, such as a stockbroker or a life insurance agent. A true advisor should be a well-educated, credentialed, experienced, financial professional who works on behalf of his or her clients as opposed to serving the interests of a financial institution. Generally, a financial advisor is an independent practitioner who operates in a fiduciary capacity in which a client’s interests come first. Only registered investment advisors (RIA), who are governed by the Investment Advisers Act of 1940 are held to a true fiduciary standard. You can find some agents and brokers who try to practice in this capacity, however, their compensation structure is such that they are bound by the contracts of their companies.
How are they paid?
Many advisors actually work for a financial institution, such as a brokerage firm or a life insurance company, and they are compensated based on the sale of products offered or manufactured by these companies. With this type of compensation, there are inherent conflicts of interest as products could be recommended that aren’t necessarily in the best interest of the client. Some financial reps are affiliated with an independent broker-dealer that provides the advisor with a product platform from which the rep can choose for his clients. While they may have more flexibility in the way they can work with their clients, they are still paid commission for the sale of these products. Some of these independent reps are RIAs who also charge fees for offering objective advice, but they also sell products for commissions. These are referred to as “hybrid” RIAs.
If you are looking for truly objective, conflict-free advice, it’s best to work with an independent, fee-only RIA. Some RIAs charge fees based on assets under management. For instance, if a client has $500,000 of asset placed in the trust of an RIA, the RIA would charge a flat percent of around 1% annually. In this case, the RIA would earn $5,000 a year for advising the client without regard to the type of investments purchased. Under this fee structure, most RIAs won’t work with anyone with less than $250,000 to $500,000 of assets to manage. Other fee-only advisors charge an hourly rate, which may make sense for people with fewer assets who only need advice periodically. In either case, fee-only RIAs will analyze your situation without any product bias and recommend investment and insurance products for which they are not compensated.
If all you need is some sound advice on how to allocate your retirement assets, or which life insurance strategy is best, it may be less expensive to work with a commission-based financial rep. But you should still look for one who is has the qualification, the knowledge and a client-centric approach in their practice.
Dedicated to Client Interests?
Regardless of whether they are independent, captive to a company, fee-only or commission-based, it is important that your advisor demonstrate a commitment to his excellence and your interest. Advisors who commit themselves to rigorous and continuing education are best positioned to advise you and they clearly demonstrate their desire to provide superior service. At a minimum, your advisor should be credentialed with designations from one or more of the financial professional schools, such as the College for Financial Planning (CFP), the American College (CLU, ChFC), a financial planning masters program (MFS), or any number of accredited professional colleges.
Background and Experience
There are more than 500,000 financial professionals in the U.S., so you can certainly afford to sift through those in your area that have the requisite background and experience. Look to those advisors with at least five years of experience in working with clients similar to your own profile. Also, you can check for any disciplinary actions by checking with the regulatory or governing agencies, such as FINRA, the state insurance commissioner, or the CFP Board of Standards.
Can they pass your interview?
That’s right – you need to interview them. You should meet with at least three candidates and ask them a series of questions regarding their practice – how they assess your situation; how they are compensated; how they make recommendations; their client profile, etc. You’ll know if you are talking with a “client-centric” advisor when they skillfully turn the conversation to you and start asking you meaningful questions about your goals, dreams and concerns. If all you get from an interviewee is a sales pitch and brochure, you may want to move on to the next one. Don’t be afraid to ask for references. A good indication of how well the advisor understands your situation is if they refer you to clients who have profiles similar to your own.
Where to look for the ideal financial advisor
Your best sources for finding a financial advisor are your trusted friends, relatives or colleagues. Additionally, you can search the directories of the professional organizations in your area. Look for advisors in your area with professional designations. You can then Google their names to learn more about their background, community involvement, and their stature in their industry.