You may be feeling uncertain about your finances and beginning to think you could use some help from a financial advisor, or you may be currently working with a financial advisor but you are feeling ignored or unhappy with the services you receive. But where do you begin to find an advisor who is a good fit for you, and who do you trust with your hard-earned money? It will be helpful to shed some light on how to find and select a financial planner or financial advisor who is the best fit for you.
Areas of Financial Planning
Financial planning is a multi-step process which identifies where a person is currently with their finances, what their goals are over the short term and the longer term, and the steps needed to reach those goals. It is a highly individualized process which looks at all aspects of the person’s financial life, including risk management, cash flow and budgeting, estate planning, taxes, and investments.
However, the degree to which the financial advisor will go into any one of the areas of financial planning varies considerably between advisors. Some advisors will focus on specific topics within financial planning, such as investments, and not touch on the other areas at all. A comprehensive review of all the topics in financial planning is beneficial so that the client is aware of any gaps in their current situation which may cause unexpected problems. It will also help the advisor and the client become aware of opportunities the client can take advantage of to increase their overall financial well-being.
Types of Financial Advisors to Select
The term financial advisor has been used and misused in so many ways over the years that there is understandably a great deal of confusion over what the term means. It makes it even more difficult to select a financial advisor who is best for you and your needs. If someone says they are a financial advisor it is similar to someone saying they are a doctor in that the label doesn’t really tell you what the person does for work. A doctor could mean anything from someone has a PhD in Economics to someone who is an Orthopedic Surgeon. Similarly, financial advisors can have very different education, training and areas of expertise but they all can still use the title financial advisor.
Most financial advisors who work with individuals to help them with their personal finances fall into two main categories. They are either investment managers or financial planners. Investment managers typically focus on managing their client’s investments, will charge fees based on a percentage of the assets they manage for the client, and in addition they may receive commissions for products sold. A financial planner will typically take a more comprehensive look at the client’s total financial picture and make recommendations to help the client improve their financial outlook in any of the areas within financial planning mentioned above.
Financial planners will use various fee structures depending on how their business is set up. They may use a percentage of assets managed to cover all the costs associated with developing and implementing a financial plan, they may receive commisions for products sold, they may charge a set fee for their services, or they may have a combination of these fee structures. It is important to understand what services are most important to you and if that matches up with the advisor’s area of expertise when you select a financial advisor.
How Financial Advisors Get Paid
There are three labels given to financial advisors based on how they receive their income. They are commission, fee-based and fee-only. Commissions are earned based on products the advisors sell to the clients. Fee-only advisors do not receive any commissions at all and are only compensated directly by the client. Fee-based advisors are a combination of both. At times a fee-based advisor will earn commissions for selling products and other times they will be paid directly by the client for services. For a fee-based advisor, both commissions and getting paid directly by the client can both happen when working with the same client.
It is important to understand how your advisor is compensated so that you are aware of any conflicts of interest the advisor may have in making a recommendation. Fiduciary advisors are required to disclose any conflicts of interest, but it is an area which can be subject to some interpretation. When hiring a financial advisor, it is very important to ask and understand how your advisor is compensated and when they are required to act as a fiduciary and when they are not.
Where to Find and Select a Financial Advisor
Many people rely on a recommendation from friends or family members to find a financial advisor. While it’s a good start to know that someone you know and trust found the advisor’s services valuable, it doesn’t mean they are the right advisor for you. Most people don’t know what they don’t know. Most people don’t understand what fees they are paying, how they are paying them or even what services they should be receiving or could be receiving.
A better way to find an advisor who is the best fit for you is to first understand what is most important to you. Is it managing an investment portfolio with certain goals in mind, is it taking a holistic look at your financial life, is it planning for all the aspects of retirement, is it cash flow management, or is it something else. Then decide what type of fee structure is most comfortable for you. Once you decide what area you want the advisor to specialize in and how you want the fees to be structured, you can now go on-line and find advisors to interview. And don’t feel limited to your immediate geographical area. Because of the technology available, most advisors are able to work remotely with clients with no problems.
When you are narrowing down the selection of financial advisors it is important to know the advisor’s history, including any potential infractions. You can look up an advisor’s record on Broker where you can find a great deal of information about the firm and the advisor, including a breakdown of the firm’s services and fees. Check to see if the broker has had any problems in the past. You can also look up the advisor’s company’s information at Securities and Exchange.
If you would like to hire a fee-only advisor, NAPFA is a member organization for fee-only adviors which has a search tool. If you’d like to hire a financial planner with a tax-focus to their practice, Alliance of Comprehensive Planners is a member organization which also has a search tool. Many financial planners who charge a service fee instead of charging a percentage of assets under management are members of XY Planning Network. This is an especially good option for clients who do not have significant investable assets but still need the services of a financial planner. If you do a general Google search to find a financial advisor near you or receive a recommendation from someone, it’s best to review their firm on the Securities and Exchange website to get an understanding of the types of services they provide and if it matches up with what you need.
Additional Information and Explanations from Morningstar
For another source of information and explanations of the various financial advisory terms and how to find an advisor who is a good fit for you, an article by Morningstar is here.
The CERTIFIED FINANCIAL PLANNER™ credential is the gold standard for financial planners. In order to become a CFP® professional, an advisor must have several years of experience related to financial planning, pass the rigorous CFP® exam, keep current through continuing education, and adhere to a strict ethical standard as set by the CERTIFIED FINANCIAL PLANNER™ board. CFP® professionals are held to a fiduciary standard, meaning that they are obligated to act in the best interest of the client. Most financial advisors are held to a lower standard of suitability, meaning the recommendation must be suitable for the client but it doesn’t have to be the best option available to the client.
To find a CFP® professional, the CFP® board has a search function. Other professional organizations such as NAPFA, XY Planning Network, and Alliance of Comprehensive Planners also require the advisors who are listed on their search functions to have the CFP® certification.
Disclaimer: This article is provided for general information and illustrations purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult with a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Tricia Rosen, and all rights are reserved. Read the full disclaimer.