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Things to Think about when Choosing a Financial Advisor

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I often speak to consumers on all sorts of financial planning issues – budgeting, debt management, saving and investing for retirement, financing education, and estate planning.  But no matter the topic, there is one question always asked:  “How do I find a good financial advisor?”

Frequent as the question is, it’s not asked nearly enough. Many individuals who might benefit from financial advice do not seek out an advisor, believing it will be too expensive or they can do it themselves. Those wanting to work with an advisor often do little more than ask their friends for a name. Choosing a financial advisor may be one of the most important decisions you make for yourself and your family, but most consumers spend less time looking for an advisor than they do deciding where to go on vacation!

It’s important for consumers to understand they’re in the driver’s seat when choosing an advisor.  They need to determine what’s most important to them – do they want a long-term relationship, or do they simply have a few immediate questions? Are they willing to pay commissions, an asset management fee, or an hourly fee?   Individuals often think they are not the “right” clients for financial advisors, perhaps because their net worth is low, or they’re not looking for investment advice.  But that’s the wrong approach.  It is not whether they are the right clients, but who is the right advisor?

When looking for that right advisor, remember this phrase — I COME FIRST!  This is an acronym for the ten most important things to be thinking about.

I = INTERVIEW  

Be sure to interview at least 2, preferably 3 advisors, even if your first contact with an advisor has you convinced that he or she is “The One.” By talking to several advisors, you will learn how various advisors work, and will appreciate the differences between them.  It is customary for these interviews to be complimentary.  Make certain you ask, however, if there is any fee associated with this meeting.

C = CREDENTIALS

Find out what the prospective advisor “brings to the table” in terms of training and experience.  There are many advisory designations and certifications.  Some are primarily for marketing purposes.  Others, such as the Certified Financial Planner certification, carry some real heft, in terms of the requirements to earn the credential.  You may want to know, for example, if the advisor had to go through an extended course of study and/or take an examination.  Ask, too, if the advisor is required to abide by a code of professional ethics and standards.

O = ORGANIZATIONS

Ask potential advisors what organization regulates them.  For example, brokers are supervised by FINRA (Financial Industry Regulatory Authority) whereas investment advisors are under the eye of the SEC or their state securities commission, depending on their size. Those licensed to sell insurance are regulated by their state insurance commission. Some advisors are dually registered and are supervised by more than one authority.  Certified Financial Planner professionals are regulated by CFP Board – the non-profit organization responsible for their certification that imposes public disciplinary sanctions, including suspension and revocation, to those CFP professionals who are found to have violated its code of professional conduct. Contact these organizations to ascertain whether the advisor is in good standing.   

M = MINIMUMS

If you are looking for an investment advice, be aware that some advisors take clients based on the size of the client’s investment portfolio. Ask about this up front.  If you don’t meet an advisor’s minimum, don’t assume there is no one who will take you.  Keep looking for those advisors offering advice on a different basis.

E = ENGAGEMENT

What would an engagement with the advisor entail?  Find out not only what services would be provided – such as tax prep, retirement planning, investment management – but also how you would work with the advisor.  Will you be working with one advisor, or are there other team members you may be interacting with?  How often will you meet?  Can you call the advisor whenever you have questions without creating a new and separate engagement?  Will the advisor be calling you when there are changes in the economic or tax environment?

F = FIDUCIARY

A financial fiduciary puts a client’s interests ahead of his own when providing advice, and makes full disclosure of any potential or existing conflicts of interest that could influence the basis of his advice. For example, Registered Investment Advisors (RIAs) are legally required to be fiduciaries; CFP professionals providing financial planning are also required to act as fiduciaries as a condition of their certification.  But there are many financial practitioners who are not held to this standard.  The simplest, most direct way to find out if your advisor will be acting as a fiduciary in his engagement with you is to ask:  “Are you a fiduciary?”  You can also ask to see this in writing.

I = INCOME

All financial advisors earn income, one way or another, but it is important that you understand how the various compensation arrangements work.  Generally speaking, advisors are distinguished as either being “fee” or “commission,” or some combination of the two.  Commissions are earned on product sales or transactions.  These commissions are sometimes paid by the client, sometimes by the product provider.  Fees can mean an hourly fee for advice; a set fee for a given project; such as preparing a financial plan; a retainer fee; and asset management fees, wherein an advisor is paid to build and manage a client’s portfolio as a percentage of the client’s portfolio.

R = REFERENCES

When interviewing an advisor, by all means ask if you might speak to some of the advisor’s clients.  Be aware, however, that few, if any, advisors will give you the names of dissatisfied clients.  Further, maintaining the confidentiality of clients is an important practice, so the advisor may be unwilling to ask his clients for permission for you to contact them.

S = SPECIALTY

Financial expertise covers a wide array of topic areas: cash flow and debt management; risk management; tax, education, investment, retirement, and estate planning, to name some of the most common.  Discuss with a potential advisor which areas he or she may specialize in, and whether referrals are given to outside professionals for advice in areas where the advisor is not expert.

T = TYPES OF CLIENTS

Some advisors focus on particular types of client:  divorced clients, retirees, professional women, doctors and attorneys.  Sometimes the focus is defined by levels of wealth, such as middle income, affluent, or mega-affluent.  Find an advisor for whom you are the “norm” — right in his or her sweet spot of practice.  You do not want to be the advisor’s biggest, nor smallest, client, nor do you want to have a life situation or profession that the advisor is unfamiliar with.

Yes, there is a lot to think about when choosing an advisor, and there are many, many different styles of practice and business models.  Nevertheless keep the focus on yourself, remembering that you and your financial needs COME FIRST.   

Visit www.LetsMakeaPlan.org to find a Certified Financial Planner professional who fits your needs and for additional consumer resources on financial planning.