As a financial planner, I often get asked by friends for advice on choosing a financial advisor. I thought I’d share a few resources with others who might be on the hunt for a financial advisor.
The financial advice industry is a very fragmented industry, with many different types of firms and advisors offering different types of services. There are also several different ways to get compensated as an advisor. I’ll attempt to provide some clarity to these muddy waters.
There are many criteria to evaluate in choosing a financial advisor, but the most important are services offered, education, relevant experience and compensation model.
Type of Firm – Understand The Differing Standards
Financial advisors can work for large brokerage or financial firms, such as Wells Fargo, BofA, Morgan Stanley, Goldman Sachs or Charles Schwab. On the other hand, many advisors work for independent Registered Investment Advisor (RIA) firms, either as a sole practitioner or at a smaller firm. Advisors who work for independent RIAs are held to a higher “fiduciary” standard than advisors employed by large brokerage or financial firms, where they are only held to a “suitability” standard. Being a fiduciary means being required to put the client’s interest first at all times. Suitability means determining if a given product might be suitable for a client. There is a movement to require all financial advisors to be held to a fiduciary standard, but so far nothing has been put into place.
Compensation – Know Your Advisor’s Incentives
Financial advisors can be compensated in several ways. Fee-only advisors only receive fees directly from the client, often in the form of a flat fee or percent of the assets they manage for the client. On the other hand, commission-based advisors are compensated by commissions on the products they sell to clients. In between are fee-based advisors, which might earn both commissions and fees from clients. While there are certainly good commission-based advisors out there, the risk you run as a consumer is not knowing if the products the advisor is recommending are truly the best for you or if they just have the highest commission.
Services Vary Widely – Are You Looking For Someone To Create An Overall Plan, Manage Your Assets, Provide Insurance or Tax Advice?
There are many different types of financial advice available. Some advisors focus on selling insurance. Others offer tax advice. Others focus on investments. Many of those focused on investments want to manage your investments, and often have minimum account sizes or minimum fees to do so. There are also hourly or flat fee financial planners who don’t manage investments, but create comprehensive financial plans that include such things as portfolio allocation, retirement planning, college funding, estate planning and tax planning. It’s important to determine what services you need and then ask advisors what services they offer to see if there is a fit.
One good way to find an advisor is to ask friends and family nearby for recommendations. In addition, here are two websites that allow you to search for financial advisors near you:
- Financial Planning Association’s Planner Search Tool
FPA is the largest industry association of financial advisors and includes fee-only, fee-based and commission-based advisors.
- National Association of Personal Financial Advisors Find a Planner Tool
NAPFA is an industry association of fee-only financial advisors.
Choose The Right Fit For You
Choosing a financial advisor is a big decision with potential life-long ramifications, so it’s important to do proper research before making a decision. I’d highly recommend interviewing in person at least 3 advisors to make sure you make the right choice. The two websites mentioned above also have lists of questions you might ask. As with many professionals with which you share confidential information, it’s important to find one with whom you share a good rapport and who you feel you can trust.
In summary, it can be daunting to identify several prospective advisors and then decide which one is the right one for you, but it’s a task worth undertaking because the right advisor can free you from financial stress and allow you to rest easy knowing you are on track to accomplish your life goals.