What Should You Look for in a Financial Advisor?
What Should You Look for in a Financial Advisor?
If you’re serious about securing your financial future, you are likely considering the help of a financial advisor (or are already working with one). Without that critical relationship, it’s too easy to make mistakes or ignore a blind spot that can derail your plans. There’s simply too much at stake to go it alone.
But here’s the key: it has to be the right financial advisor. Sadly, many people choose a financial advisor without delving into the details. That can be a very expensive mistake.
Unfortunately, research suggests it is also quite common. In fact, a Council of Economic Advisors Task Force report estimated that bad financial advice costs American investors over $17 billion every year.
Financial Advisors are Not Created Equal
As you can see, it’s well worth your while to choose carefully, since not doing so can be costly. Fortunately, there are a few ways to separate the best financial advisors from the pack quickly. Here are some tips on what to look for, both when hiring as well as evaluating your current advisor.
Avoid Financial Advisors with Conflicts of Interest.
When you walk into a Chevrolet dealer, you likely already know that the salesperson will help you find a car that fits you, but it will be a Chevy. That sales representative won’t likely recommend a cheaper Ford or used car as the best car for you. Why? Because they are paid on commission. So, you are getting help, but you are probably not getting the best advice.
What most people don’t know is that financial advisors at many of the large brand-name firms are also paid on commission. So instead of getting advice on what is really in your best interest, you may be getting product recommendations.
Believe it or not, that’s perfectly legal, as many of these advisors are only required to recommend something “suitable” to you…even if it pays them a higher commission.
Fortunately, you can steer clear of this entire issue by working with a certain type of financial advisory firm called a Registered Investment Advisor (or “RIA”). These companies and the Investment Advisor Representatives that work for them are legally held to a higher standard. The financial advisors who work at RIAs must act as your legal fiduciary.
Insist on Working with a Fiduciary.
A fiduciary is required by law to always put your interests before their own. While that seems like it should be required of all people with the title “advisor”, it is not.
Financial advisors who work at RIAs are required by law to act as your fiduciary. But it is best to confirm this. So, to be sure, just ask any prospective advisor (or one you’re already working with, too): do you agree to act as my fiduciary? Then, ask them to put it in writing for you.
Yes, it can feel awkward, but know this: the highest quality financial advisors appreciate educated clients and will completely understand your request. If someone hesitates, that is a valuable red flag that you may not be getting the quality of advice your future deserves.
Find a Specialist Who Is Familiar with Your Challenges.
Because your financial advice needs tend to change over time, it is usually best to look for someone who specializes in helping people with similar needs to yours.
For example, my firm specializes in helping members of the LGBTQIA community, since they often experience similar challenges related to same-sex partnerships. Or, if you’re a young professional with significant student debt, you may be best helped by a firm that specializes in student debt management.
That way you can spend more time addressing your challenges than describing them.
Look for Extensive Experience and Knowledge.
A financial advisor may specialize in serving people like you, but if they are not good at their jobs, that won’t help you much. Bottom line, you need someone who knows what they are doing. That’s where credentials and designations can help.
But when you look at financial professionals, you’re going to find an alphabet soup of initials after their names. According to FINRA, the financial industry regulator, there are more than 180 credentials in use in the financial advice world. Some of these designations are well-respected and difficult to earn. Others, however, might be little more than a marketing ploy, with little study or testing required.
Financial advisor credentials that are well-respected include:
- CERTIFIED FINANCIAL PLANNER™ (CFP®)
The CFP® designation is known as the gold standard for financial planning. This mark requires advisors to meet rigorous study, experience, examination and continuing education requirements. The education required covers all primary areas of financial planning including insurance, investment management, tax strategies, estate planning, employee benefits, and retirement planning. By choosing a CFP®, you’ll be reasonably assured you’re working with an advisor with the knowledge to serve you properly.
- CHARTERED FINANCIAL ANALYST® (CFA®)
Often referred to as the “Mount Everest” of financial credentials, the CFA® program requires applicants to complete extensive study and pass a very difficult series of exams. These exams are so daunting that even after years of study, fewer than half of the candidates passed the exams in 2021.ii
The CFA® mark can be more useful on the investing side of the equation, as it helps assure that you’re working with a professional capable of performing more advanced investment analysis.
- CERTIFIED PUBLIC ACCOUNTANT (CPA)
The CPA designation is difficult to obtain, and those who have earned it have demonstrated a strong understanding of accounting and taxation issues. While it isn’t necessarily as comprehensive for personal financial planning, it can be a very valuable addition for tax planning purposes.
- OTHER DESIGNATIONS
In addition to these general designations, there are other specialist designations that might be useful for you. If you are part of an unmarried partnership, for example, an Accredited Domestic Partnership AdvisorSM (ADPA®) might be helpful. Offered through the College for Financial Planning, the ADPA® advisor has passed an exam testing the advisor on wealth transfers, federal taxation, retirement planning, and planning for financial and medical end-of-life needs for unmarried couples.
Or if you’re going through a divorce, a Certified Divorce Financial Analyst has been specially trained to help untangle the often complex issues that come with splitting assets in a fair and amicable fashion.
Ask about the Financial Advisor’s Succession Plan.
You may have a financial advisor you really like, and, after ten years of working together, they know everything about your life, goals, and investment preferences. What happens when that person retires? Or what if they get hurt or die?
This can be extremely disruptive to you. That’s why it pays to add one more question: do you have a succession plan?
According to a recent CNBC article, most advisors don’t. So if they retire, die, or become disabled, it might leave you in a lurch.
This is why many people feel safer working with a large firm. But surprisingly, this can be even worse. If your advisor retires or leaves, you’ll likely be randomly assigned to a new advisor. S/he may contact you to continue the relationship, but until you respond, they’re likely not going to do much investment management/oversight for you. Plus, the advisor may not have a specialty in your areas of need or be a poor personality fit for you. In fact, this has been highlighted as a recent issue by regulators, as employee turnover has increased recently.iv
A financial advisor who creates a succession plan is more likely to select another advisor with a similar personality and approach, making for a much easier transition for you.
Consider a Second Opinion for Big Changes.
Even after you’ve worked with an advisor for a while, it’s important to not let down your guard. It’s your money and no one is going to watch it as carefully as you.
One good practice is getting a second opinion if the advisor recommends big changes to your strategy that may cost you a significant amount of money, lead to large commissions for the advisor, or that make you uncomfortable. Here are two examples:
- Let’s say your financial advisor initially put you in commissionable (load) mutual funds and you paid 5% upfront to purchase those funds. Then, s/he recommends changing to a fee model, where you’ll pay a percentage every year. Depending on how soon you make the change after your initial investment and what your new portfolio will look like, you could be paying more in fees for similar advice. (or worse, you could be paying for advice on money you’ve already paid a handsome amount on)
- Maybe your advisor is recommending that you buy a VUL (Variable Universal Life Insurance policy). While this can be an appropriate product for some clients, we find the extremely high fees tend to negate the benefits for most people. VULs can also pay advisors large commissions. Usually, you can accomplish similar goals for less using term coverage or universal life.
Just like with a recommendation on major surgery, getting a second opinion should be standard practice. You probably don’t have to even pay for it either because most quality financial advisors will offer you a free second opinion. If a free consultation is a concern, you can consult a fee-based financial planner as another option.
The Personal Side.
Finally, when choosing a financial planner, the last step should be more of a gut check: is this person a good personal fit for me? After all, the most successful financial planner/client relationships are based on trust. You want this to be someone you can share the details of your financial life with so they can help you achieve your goals and dreams. Only you can determine if the fit is right.
Like any other important relationship in your life, the foundation should be built on trust. That’s why it’s critical to evaluate this personal side, too, alongside the other factors.
Here are more resources to help you further research your options:
FINRA Investor Information:
State of Maryland Investor Education:
Securities and Exchange Commission:
Questions and Consultations
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Partnership Wealth Management is a comprehensive financial services company. We are committed to providing our clients with financial planning and wealth management services to help them make the most of their investments. At Partnership Wealth Management we have a long history of working with the LGBT community. Among our many services, we offer financial planning for gay couples and lesbian couples as well as estate planning for gay couples and lesbian couples. Financial planning is an important part of preparing for the future, contact us today to get started: www.partnershipwm.com. We always try and provide the best information – We are not responsible for information on third-party sites. Thanks for reading!