Finding a financial advisor is one of the most important financial steps you can take. However, finding the right financial advisor for your needs can feel overwhelming. One of the first issues you may encounter is that there are a lot of people who use the term “financial advisor” but they may provide very different services. This is why I strongly suggest thinking about what you hope to gain by working with a financial advisor. In what areas do you need help? Are you looking for a one-time engagement to address a single issue or for an ongoing relationship? Take your time in determining where you need help and the type of relationship you desire with a financial advisor.
When beginning your search, consider checking out the home page of Let’s Make a Plan where you can search for financial advice and find CFP® professionals in your area.
Once you’ve identified a potential financial advisor, either from the LMAP website or referral, it’s time to interview him or her! Use these five questions as a guide:
1. Are you a fiduciary?
Finding a financial advisor doesn’t have to be hard. Think of financial advisors in two broad categories – fiduciaries and non-fiduciaries. Fiduciaries are legally obligated to put their clients’ interests first, whereas non-fiduciaries can offer advice that is not in your interest as long as it is “suitable” to you. In my opinion, it doesn’t make sense to pay for advice when the advice doesn’t have to be in your best interest. Period.
It’s important to understand this distinction: a fiduciary is someone who is legally obligated to give you advice that is in your best interest, and yet, the majority of financial advisors do not have to put their client’s interests ahead of their own. Yes, you read that correctly. That surprises a lot of people, and for good reason. I’m hopeful that one day all financial advisors will be fiduciaries who are required to put their clients’ interests first, but until then, this should be your first question when seeking any potential financial advisor.
2. Do you provide comprehensive financial planning?
Comprehensive financial planning is important for all individuals regardless of age. A good financial advisor will be able to look at your entire financial picture and make adjustments and recommendations in areas such as taxes, asset preservation, insurance planning, cash flow and income strategy. However, not all financial advisors provide comprehensive financial advice. When you are finding a financial advisor, it’s important you ask what services they provide. A comprehensive financial advisor can help you see the big picture and show you how seemingly small decisions may affect your overall financial success.
3. Are you a CERTIFIED FINANCIAL PLANNER™ professional?
I strongly recommend working with an advisor with the CERTIFIED FINANCIAL PLANNER™ (CFP®) certification because this means the individual has passed a comprehensive exam, completed a series of courses, agreed to a code of ethics and has several years’ worth of professional experience in financial planning. The CFP® mark is arguably the most recognized comprehensive financial planning designation available. Are there other designations? Yes, literally hundreds. Some are strong and some don’t mean much. The CFP® mark shows that the advisor has an in-depth understanding of comprehensive planning – an understanding of tax, estate planning, investments, insurance, college and retirement planning and cash-flow management. Even more, the CFP® mark ensures that the financial advisor will be working in your best interest at all times.
4. How do you make money?
There is nothing wrong with getting paid to provide expertise and a service. At the same time, you need to know who you are working with and how they get paid. There are multiple types of ways that CFP® professionals can be compensated. One is through fees; another is commissions and there is also something called “fee-based” which is a combination of the two. A fee-only advisor is someone who is paid directly from their clients and cannot accept other sources of compensation. A fee-based advisor is paid by both clients as well as other sources such as commissions on products. And obviously, commission only means that advisors are only getting paid based on what they sell.
When determining which financing model is the best for you, it’s important that you are ultimately getting value and expertise that exceeds what you are paying. If you work with a good financial advisor, this shouldn’t be too difficult. There are many ways to reduce your taxes, plan your estate, build an appropriate asset allocation, and help you create lifetime income to live on in retirement. Good advice should more than make up for the fee.
One other thing: make sure that the advisor tells you how they are getting paid – and have it writing.
5. Do you have any regulatory/legal issues?
If something is wrong with your car, you might go online to read the reviews of local auto mechanics. You don’t want to trust your vehicle to just anyone. Unfortunately, there are a lot of people who don’t do the same level of research on something much more valuable – who they are entrusting with their nest egg. You are trusting that your financial advisor will help you make good financial decisions, so it makes a lot of sense to verify your advisor has not had any legal, regulatory or license issues. A quick way to do this is to use the FINRA BrokerCheck website as a starting point. If the financial advisor reports he or she has the CFP® certification, verify he or she is in good standing with CFP Board’s “Verify a CFP® Professional” online tool.
Don’t forget, this website serves as a great tool to help you find a CERTIFIED FINANCIAL PLANNER™ professional, ask the right questions, and learn more about financial planning best practices.