Selecting a Financial Advisor
If you’re on this website, there’s a good chance you are looking for someone to help you with a financial question or concern. Perhaps you’re worried about one thing in particular, want an assessment of your current financial situation, want to know if you’re on track to retire (or meet some other financial goal), or something else. In any case, something/ someone gave you the idea to consider professional financial advice.
But where in the world do you start?!
Before we discuss the details you might encounter in your search, let’s consider some basic terms and concepts.
Types of Financial Advice Professionals
Financial Advisor – There is no standard definition for this job title. Generally speaking, a financial advisor is licensed to provide investment advice, which means they can recommend how to invest your money.
Financial counselors and coaches – Counselors and coaches focus on helping clients tackle a particular area of their financial situation (budget, debt, learning how to save, etc.). Coaches and counselors are not licensed to provide investment advice. Note that anyone can call themselves a financial counselor or coach (social media is full of people who call themselves financial coaches and counselors!).
Brokers—Brokers are sales professionals who sell a financial product or security. For example, stock brokers sell securities like stocks, bonds, mutual funds, etc. Insurance brokers sell insurance products like life insurance and annuities. Sales professionals earn a a commission when they sell something. They are not required to meet a fiduciary standard but must meet the standards of their licenses and applicable laws. (Fiduciary means that you have to work in the client’s best interest).
There are tons of other financial professionals, but when it comes to financial advice, you will encounter these most common types of financial professionals.
How Clients Pay for Financial Advice
Now that we have a basic idea of the type of financial professionals you might encounter searching for advice let’s talk about how financial professionals get paid. Some financial professionals volunteer some portion of their time to provide pro-bono advice to clients who could not otherwise afford financial advice. Aside from volunteer work…
Every. Financial. Professional. Gets. Paid. No exceptions.
Financial professionals receive compensation whether the client pays them directly or not. Simply speaking, there are three common types of compensation for financial professionals:
- Fee-only – collect a fee from the client; cannot be compensated for advice from any other source besides the client
- Commission-based – earn a commission from selling products;
- Fee-based – collect a fee from the client and can earn commissions from selling products
Financial services companies pay commissions to salespeople who sell products like mutual funds, insurance, annuities, etc.
Some financial professionals can only collect fees from their clients. They cannot collect commissions for product sales. These professionals are called “fee-only.” A fee-only professional may collect money directly from the client or bill an investment account they are managing for the client.
Some financial professionals are only paid when they sell a product and receive a commission. The professional does not charge the client for services. Instead, the product the client purchases incorporates one or more charges. The sales professional must provide a sales document (prospectus, etc.) that outlines the costs.
Some financial professionals are paid by collecting a fee from the client for some of their work and may also earn a commission when they sell a product to the client. These advisors sometimes use the term “fee-based.”
Fee-based vs. fee-only – it’s confusing, right? Bottomline – fee-only advisors are paid only by their clients for client service. Fee-based advisors may also sell products and earn a commission.
Common Services Financial Advisors Offer
Now, let’s review common ways financial advisors work with clients.
Ongoing Advice – Your financial advisor provides a given level of service for as long as you both choose to continue working together. Advisors will either charge an “asset under management” (AUM) fee or a monthly/ quarterly fee. (AUM fees mean the advisor is managing your investments for you and is (usually) charging a percent of the assets they manage.) You must agree on the level of service and the fee upfront.
Project-based: You hire a financial advisor to provide a service with a clear start and end point. For example, you might want a financial advisor to review your investments and recommend changes. You might also want a comprehensive financial plan with recommendations you will implement independently. You agree on the project scope and cost upfront.
Hourly-based advice – You hire a financial advisor to spend time with you to address a specific problem.
Specializations and Certifications
We noted above that there is no standard definition for a financial advisor. However, not all financial advisors are the same. Some have specialized expertise in a particular area or for a specific type of client, and some hold credentials.
The Military Financial Advisors Association is an excellent example of a group of financial advisors with specialized expertise for a specific type of client – military personnel. We’ve all experienced the military lifestyle and have firsthand knowledge and experience with the benefits.
Other financial advisors specialize in working with small business owners, employees who earn a lot of equity compensation, women, young families, teachers, etc. If you can imagine a group of people with unique financial considerations, an advisor somewhere probably specializes in working with those clients. There can be additional value in working with someone who understands the nuances of your situation.
Some advisors hold credentials. Credentials can indicate an area of specialization and a commitment to upholding a given standard. The CERTIFIED FINANCIAL PLANNER™ designation is widely considered the industry’s “gold standard” credential for financial advisors. While the term “financial advisor” is not defined, the CFP Board governs using the title CERTIFIED FINANCIAL PLANNER™ (also known as a CFP® Professional). A CFP® professional has met specific academic requirements, passed a rigorous exam, met an experience requirement, and signed an ethics declaration before being awarded the marks. A CFP® professional must always act as a fiduciary to their client. (A fiduciary is someone who must always put the best interests of the client first).
There are a plethora of other credentials in the industry today. While credentials are sometimes a positive indicator that the advisor is committed to professional development, a given set of practice standards, and specialization, they aren’t an endorsement of the advisor by any organization. You must do your homework.
How to Vet An Advisor
Let’s assume you’ve decided to work with a financial advisor, that you’ve decided whether you want a fee-only, fee-based, or commission-based advisor, and that you’ve found a group of advisors with the type of expertise you prefer. It’s time to vet the advisor.
First, review the US Securities Exchange Commission’s (SEC) Investment Advisor Public Disclosure website. Search for the names of the financial advisors you are considering. The website provides an overview of industry experience, where they worked, which licensing exams they’ve passed, and whether there is any disciplinary history/ action.
Then, schedule an interview/ consultation with the financial advisors you are still considering. During the meeting, consider:
- Do you like this person? Does your spouse like this person?
- Can they explain their services, processes, and fees in a way you understand?
- Are their services a fit for your situation?
- Can you afford their fees?
- Can you commit to the process and the timeline?
- Are you willing to share the type of information the financial advisor will request?
- Does this person have the knowledge and expertise you hope to find?
If you answer yes to all of these questions about more than one financial advisor you’ve interviewed, then compare how each financial advisor fits your needs and personality.
Selecting the Advisor
Once you’ve selected your preferred advisor, let them know you want to proceed. And don’t forget to let the advisors you didn’t pick know that you’ve chosen another advisor. It’s absolutely ok. It’s part of the job. So let everyone know when you’ve made your decision.
Then, get ready! Your new advisor will give you a ton of homework to get started. And, hopefully, it’s the beginning of a great relationship with someone you like and trust and who can provide meaningful insight to you and your family.
MFAA has numerous advisors you can talk to to find your perfect match. You can find them here.
