Financial advisors aren’t just for the mega-rich. People in all sorts of financial situations can benefit from guidance when it comes to financial planning. (One could even argue that the people who don’t have a ton of money could benefit the most.) But before you can reap all the benefits, it’s essential to know how to pick the right financial advisor for your situation.
Identify What Kind of Assistance You Need
Before you can begin looking for a financial advisor, you need a clear idea of the services you will require. Are you looking for assistance with retirement, debt repayment, insurance products, taxes, estate planning, or maybe a little bit of everything? Not all financial advisors offer the same menu of services, so you can narrow your search using the parameters of your particular needs.
Check for Fiduciary Duty
Because federal law doesn’t regulate who can use the title, people with all kinds of credentials can offer financial advice. So, to determine whether a potential financial advisor will have your best interest at heart, you need to find out if they are bound by fiduciary duty. Fiduciary duty is the requirement that certain professionals — such as lawyers or financial advisors — work in the best interest of their clients. Only fiduciary financial advisors have to place your best interest over theirs. In other words, their recommendations must consider your overall financial situation carefully, and then offer the most economical solutions with the best performance.
Most advisors who are fiduciaries will explicitly say so, but do not make assumptions. Those who aren’t fiduciaries are held to a lesser legal standard of care called the suitability standard. These advisors must offer investment advice and product recommendations that are suitable for you. The products will generally fit your needs, but may have higher fees or offer the advisor a bigger commission.
Find Out How They Make Their Money
Another method for determining whether a financial advisor will keep your interests a top priority is to find out how they get paid. Financial advisors are typically paid on commission, through fees, or a combination of the two.
Commission-Only Financial Advisors only make money when they sell investments or a particular financial product. Often, commission-only financial advisors are employed by broker-dealers, and are only held to a suitability standard. This isn’t always a bad thing. Life insurance, for example, is predominantly sold under a commission model, so in that instance it wouldn’t imply a lack of good faith on the advisor’s part. If you choose to use a commission-based advisor, be sure they are a fiduciary, or that you at least fully understand the products (and associated fees) before you do business.
Fee-Only Financial Advisors earn their living from client fees. These can be a flat rate, hourly rate, or a percentage of the assets they manage for you. Because they don’t earn commissions on investments or buying/trading securities, they generally have fewer conflicts of interest. Fee-only financial advisors are almost always fiduciaries, but can take off the “fiduciary hat” when discussing certain topics.
Fee-Based Financial Advisors make up the middle ground between the previous two types. They usually have some fees but also earn money from commissions or referral fees. If you choose to use a fee-based advisor, make sure they are always acting as a fiduciary.
Selecting Potential Advisors
A good place to start searching for specific financial advisors is asking friends or family if they like their financial advisors. Free databases online can also be helpful:
- NAPFA (The National Association of Personal Financial Advisors)
- Garrett Planning Network
- XY Planning Network
- ACP (Alliance of Comprehensive Planners)
When reviewing potential financial advisors, look at their credentials, their background, and fee structures. You can view disciplinary actions and complaints filed against financial advisors using the Financial Industry Regulatory Authority’s BrokerCheck. It’s also a good idea to look at the business’s credentials on the SEC website. (FINRA is an independent, non-governmental regulator for all securities firms doing business with the public in the United States. They are authorized by Congress to protect investors.)
Once you’ve narrowed your options down to a reasonable number, meeting with your prospective financial advisors is a good next step. You are entering into an ongoing, intimate relationship with this person, so you need to feel comfortable with them. Be sure you agree with their investing philosophy and that they understand your goals and risk tolerance. Remember: just because you’re meeting with them doesn’t mean you have to hire them. This is a big commitment, so it’s a good idea to “date around,” if you will.
Questions to Ask
Come to that first meeting with prepared questions so that everything is clear and in the open. Forbes Advisor created this helpful list to help you get started:
- Are you a fiduciary?
- Are you always acting as a fiduciary? (Remember: Some fee-based advisors may not always act as fiduciaries when selling commission-based products.)
- How do you make your money?
- What is your approach to financial planning?
- What kind of clients do you normally work with?
- Do you have any account minimums?
- Do you have any conflicts of interest in managing my money?
- What information do you need from me?
- How many times and how often will we need to meet?
- Will you collaborate with my other advisors, like CPAs or attorneys?
