Choosing a financial advisor can be a daunting task, but it is an important decision that can have a significant impact on your financial life. A qualified and trustworthy financial advisor can add tremendous value through comprehensive planning that meets your unique needs.
There is a lot to consider when making a selection, such as what services are provided, credentials, fees, size of the team, communication style, and more.
In This Insight
Types of Financial Advisors
Traditional Financial Advisors
Traditional financial advisors are the most common type of financial advisor, and they typically work for large financial institutions or brokerage firms. They offer a wide range of services, including investment advice, retirement planning, estate planning, tax planning, and more.
Fee-Only Financial Advisors
Fee-only financial advisors charge a flat fee or hourly rate for their services. They do not earn commissions on the products they sell or recommend. This compensation structure ensures that their advice is unbiased and in the best interest of their clients. The majority of financial advisors today are Fee-Only advisors and act as fiduciaries on behalf of their clients.
Commission-Based Financial Advisors
Commission-based financial advisors, or brokers, earn commissions on the products they sell or recommend to clients. This compensation structure can create conflicts of interest because advisors may be incentivized to recommend certain products over others based on commission rates rather than what is best for their clients.
It's important to note that not all commission-based advisors are bad actors; many operate ethically and put their clients' interests first. However, it's essential to understand how an advisor is compensated before deciding to work with them.
Robo-Advisors
Robo-advisors are a newer type of financial advisor that use algorithms to provide automated investment advice and management. They offer a low-cost alternative to traditional financial advisors and are becoming increasingly popular among younger investors. One downside to working with a robo-advisor is a lack of comprehensive planning; they generally only cover investments.
Questions to Ask When Choosing a Financial Advisor
Prepare a List of Questions
Knowing the right questions to ask can be helpful in weeding out advisors that sound good, but lack the capabilities or team to deliver a comprehensive suite of services. Before starting your search, prepare a list of questions that you want to ask potential advisors.
This will help you ensure that you find an advisor who is the right fit for your financial needs. We even recommend reviewing our Retirement Planning Checklist to get an idea of the planning opportunities an advisor should be identifying and incorporating into your plan.
At a minimum, we recommend asking the following questions:
What credentials and licenses do you hold? Can you explain their significance?
Do you have a fiduciary duty to your clients? In other words, are you legally required to act in my best interest?
Describe your investment philosophy and how you make decisions about asset allocation?
How are you compensated for your services? Is it a flat fee, commission-based, or a combination of both?
What is the typical profile of your clients? Do you specialize in working with specific types of clients or financial situations?
How often will we meet to review my financial situation and investments? How do you communicate with clients between meetings?
How do you measure and report investment performance? Will it be compared to certain benchmarks?
How do you assess and manage risk in a portfolio? What is your approach when markets become volatile?
Apart from investment advice, do you offer other financial planning services, such as retirement planning, tax planning, or estate planning?
Do you work in a team, and if so, describe the team members?
Qualifications and Experience
One of the first things you should ask about is their qualifications and experience. You want to work with someone who has the necessary credentials and expertise to handle your finances properly. There are three "gold standard" qualifications that are generally regarded as the best in the industry:
CERTIFIED FINANCIAL PLANNER®, CFP®
Charter Financial Analyst, CFA
Certified Public Account, CPA
In a perfect scenario, you'd work with a firm that offers all three in a team based approach.
Investment Philosophy
It's also important to inquire about their investment philosophy and approach to risk management. Every advisor has their own unique style so make sure theirs aligns with your goals and values. Ask them how they choose investments, what their strategy is for managing risk, and how they adjust portfolios over time.
References or Testimonials
Don't be afraid to ask for references or testimonials from previous clients. This can give you insight into their track record, customer service skills, and overall reputation in the industry. Look for an advisor who has worked with clients in similar situations as yours.
Transparency and Honesty
Pay attention to how they answer your questions - a good financial advisor should be transparent, honest, and able to explain complex financial concepts in a way that is easy to understand. If they are evasive or use jargon that you don't understand, it may be a red flag.
Communication Style
Another important factor is their communication style - do they prefer phone calls or emails? How often do they communicate with clients? Make sure that their communication style matches your preferences so that you can stay informed about your finances without feeling overwhelmed or neglected.
Fees
Ask about fees upfront - this includes not only advisory fees but also any other costs associated with managing your investments (such as trading fees or mutual fund expenses). Make sure you understand how they are compensated and what services are included in their fee structure.
Beware of Financial Advisors Who Earn Commissions
Many financial advisors earn commissions from the products they sell, which can create a conflict of interest between their own financial gain and the best interests of their clients. This is a common issue in the financial industry, and it has led to investment fraud and other unethical practices. As an investor, it's important to be aware of this potential conflict of interest and take steps to protect your retirement savings.
Investment advisers and registered investment advisors are held to a fiduciary standard, meaning they are legally obligated to act in their clients' best interests and avoid any conflicts of interest. Only advisors who are fiduciaries can guarantee that they will prioritize their clients' needs over their own financial gain.
Unfortunately, not all financial advisors are fiduciaries. Some brokers and other professionals may be more concerned with earning commissions than providing sound advice. These individuals may recommend investments that aren't suitable for your long-term goals or charge high account fees that eat away at your returns.
Robo-advisors and online brokers may offer lower fees, but they may not provide the same level of personalized advice and guidance as a human advisor who is held to a fiduciary standard. While technology has made investing more accessible than ever before, it's still important to work with an advisor who understands your unique needs and can help you develop a comprehensive retirement plan.
Commission-based investments, such as annuities or mutual funds, may not be the best option for individual investors. These products often come with high account fees that can eat away at your returns over time. Additionally, commission-based investments may not align with your long-term goals or risk tolerance.
If you're working with a financial advisor who earns commissions on the products they sell, it's important to ask questions about how these investments align with your overall retirement strategy. A good advisor will be transparent about any potential conflicts of interest and work with you to find investments that meet your needs.
Ultimately, the best way to protect your retirement savings is to work with an advisor who is held to a fiduciary standard. These professionals are legally obligated to act in your best interests and avoid any conflicts of interest. By working with a fiduciary advisor, you can be confident that your investments are aligned with your long-term goals and risk tolerance.
Learn about their Investment Philosophy and Strategy
Understand the Advisor's Investment Philosophy
When considering hiring an advisor, it is essential to understand their investment philosophy. An investment philosophy refers to a set of principles that guide an advisor's approach towards investing. It is crucial to know if the advisor follows a conservative or aggressive approach towards investments as this will help you determine if their investment philosophy aligns with your interests.
Conservative advisors tend to focus on preserving capital and minimizing risk. They may recommend investing in low-risk assets such as bonds and fixed-income securities. On the other hand, aggressive advisors may take on more significant risks in pursuit of higher returns. They may recommend investing in high-growth stocks or emerging markets.
Evaluate the Advisor's Investment Strategy
It is also important to ask the advisor about their investment strategy and how they plan to manage your investment portfolio. This will help you understand their approach towards investing and how they plan to achieve your investment goals.
Some advisors follow a passive management strategy where they invest in index funds or ETFs that track market performance. Others may opt for active management, where they try to beat market performance by actively buying and selling securities.
Consider Diversification
Diversification is a important aspect of investing that involves spreading your investments across different asset classes to minimize risk and maximize returns. A well-diversified portfolio may include stocks, bonds, and ETFs.
Ask the advisor about their approach towards diversification and if they recommend investing in a mix of assets. They should be able to explain how they plan to manage your portfolio and ensure that it aligns with your investment goals.
Know the Cost of a Financial Advisor: How Much Should You Expect to Pay?
Financial advisors can be a valuable resource for anyone looking to manage their money more effectively. However, it's important to understand the costs associated with hiring a financial advisor before making any decisions.
Annual Fees
One of the most common ways that financial advisors charge for their services is through an annual fee. This fee is usually calculated as a percentage of your net worth and can range from 0.5% to 2%. For example, if you have a net worth of $500,000 and your financial advisor charges a 1% annual fee, you would pay $5,000 per year for their services.
For an outstanding team of advisors that includes a CPA, CFA, and CFP, the annual fee is well worth it. You should expect to receive advice on financial planning, investment management, tax strategies, estate planning, insurance, and charitable donations.
Beware of Hidden Fees
When choosing a financial advisor, it's essential to not only understand the costs associated with their services, but also any funds they purchase on your behalf. Fund fees can range from 0.03% up to 2.0% and can substantially diminish investment returns if not monitored closely. We recommend choosing advisors that utilize funds with the lowest cost expense rations to maximize your investment returns.
The Importance of Communication
Effective communication is key in building a strong relationship between clients and their financial advisors. A good financial advisor should be easily accessible to their clients through various channels, such as phone, email, or video conferencing, to address any concerns or questions promptly. Open communication allows for transparency and trust between the client and the advisor.
Financial advisors should always act in the best interests of their clients, taking into account their goals, assets, and account balance. This means that they must provide unbiased advice that aligns with their clients' long-term goals.
According to a survey conducted by J.D Power in 2020 on investor satisfaction with full-service investment firms in the United States, 27 percent of investors who were highly satisfied with their advisor had weekly contact with them compared to only 8 percent of those who were less satisfied. This highlights how important regular communication is when it comes to building a strong relationship between an advisor and client.
In addition to regular communication, accessibility plays a vital role in maintaining a healthy relationship between an advisor and client. Clients want quick access to information about their accounts whenever they need it. Advisors who are accessible through multiple channels such as phone, email, or video conferencing can provide the necessary support to their clients in a timely manner.
Trust Your Gut: Walk Away If It Doesn't Feel Right
There are many factors to consider. You want someone who is knowledgeable, experienced, and trustworthy. But perhaps the most important factor of all is your gut instinct. If something doesn't feel right, it's probably not a good fit.
Trust your instincts when choosing a financial advisor.
If you meet with an advisor and something just doesn't feel right, don't ignore that feeling. Take the time to explore why you're feeling uneasy. Is it because the advisor seems more interested in making a sale than helping you achieve your goals? Or maybe they're pushing investments that seem too risky for your comfort level?
Whatever the reason, if your gut is telling you to walk away, listen to it.
Take the time to find someone who understands your unique financial situation and goals. Finding the right financial advisor takes time and effort. Don't settle for the first person who comes along or choose someone simply because they have impressive credentials.
Instead, take the time to find someone who truly understands your unique financial situation and goals. A good advisor will take the time to get to know you as a person and understand what matters most to you. They'll work with you to develop a customized plan that meets your needs and helps you achieve your goals.
Don't settle for a one-size-fits-all approach.
Schedule a Free Consultation with Selective
Maximizing the value of your wealth is a complex task that requires expertise across a variety of disciplines. Schedule a free consultation with an advisor that provides comprehensive wealth management, which includes financial planning, investment management, tax strategies, estate planning, and insurance services. Schedule a free consultation today.
Final Thoughts
Choosing the right financial advisor is a critical decision that requires careful consideration. By following these key takeaways, you will be able to find an advisor who can help you achieve your financial goals and provide you with the best money advice. Remember that wealth management is a long-term process, so choose wisely based on your needs and preferences. Use our scoring formula to evaluate each potential advisor against your requirements before making any decisions.