With so many options in the financial advisor marketplace, settling on one person to help with your personal finances can be a complicated process. That’s because not all advisors come with the same qualifications or levels of expertise, fee structures, legal safeguards or types of services. Before hiring a professional to help you plan for your financial future, here are a few questions you should ask to help you decide who is the right advisor for you.
1. What are the services you offer?
Not all advisors can offer the same services. That’s why it’s important to ask a potential advisor if they are capable of doing everything that you need. You may be looking for help in creating a savings plan or seeking someone to dole out tax advice and preparation. You may also want an advisor that can help you manage a stock portfolio, or one that will help you with budgeting or getting out of debt. Some advisors are better equipped than others in helping you create investment strategies and retirement and estate planning. (For more on this topic, see: How to Find the Financial Advisor of Your Dreams.)
Whatever your needs are, make sure the advisor you choose can meet all of them, or that they will work with another professional who will fill in the gaps. It’s also within your rights to ask an advisor what actions he or she will take to take to implement, update and maintain any plan that you devise together. You may want to make a schedule for meeting with your advisor at set times during the year to review the results of their work and check on your investments. You should also find out if your advisor will always meet with you directly, or if he or she is part of a team that rotates client meetings.
2. What kinds of certifications do you hold?
If an advisor has a profile on LinkedIn you can start reviewing his or her background. Find out where they went to college and if they have any advanced degrees or certifications. Also ask to see their work resume, and find out which firms they may have previously worked for and why they left. You can find this kind of information on the advisor's Form ADV, a uniform submission used by advisors to register with state regulators and the Securities and Exchange Commission (SEC).
There are several different certifications that financial advisors can hold. Perhaps the most familiar among investors is the Chartered Financial Analyst (CFA). CFAs have a wide range of expertise in securities, financial analysis, investing, portfolio management and banking. The testing regimen for this certification is long and rigorous.
A Certified Financial Planner (CFP) has booked at least three years of industry experience and passed a series of comprehensive tests, abides by a code of ethics and meets continuing education requirements. You can check the CFP Board’s website to verify that your advisor or financial planner is a CFP.
There is also the Chartered Financial Consultant (ChFC) certificate, which uses the same core curriculum of the CFP, but does not require a comprehensive board exam and does not abide by a code of ethics.
If you are looking for someone with more of a retirement focus you may want to seek out a Chartered Retirement Planning Counselor (CRPC), who has completed intensive training in retirement planning through the College for Financial Planning. The other option is to go with a Certified Public Accountant (CPA) with a PSA designation. Or try a Personal Financial Specialist (PFS) who is a CPA but has also undergone additional education and testing, thereby offering more expert financial planning qualifications.
Of all of these options, the CFP designation is the only one approved by the National Commission for Certifying Agencies for comprehensive financial planning.
Remember: anyone can call him or herself a financial advisor, so checking out an advisor's certificates or degrees is key. Some financial advisors may be Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). That means they are compensated via fees and are financial fiduciaries, and so they must adhere to the highest ethical standards in the financial services industry. (For more on this topic, see: What is a Registered Investment Advisor?)
3. Can I talk to some of your current clients?
Check references. Ask your prospective advisor to put you in touch with some of his or her clients (though due to regulations and other factors they might decline or only provide positive references). Ideally, try to speak with people who have been looking for services that are similar to what you are seeking from the advisor, be it retirement planning or investing.
Ask them how often the advisor communicates with them and in what ways. Does the advisor respond quickly to questions? What do they particularly like or not like about the advisor? You could also ask the advisors’ current clients about the types of services they have provided, the amount of assets they manage, how the quality of their service has been or how they handled a task or strategy shift. Or more plainly, why they chose this particular advisor. Keep in mind, though, that if you're asking an advisor for a client to question they're likely to refer you to a happy one, not an unhappy one. And if they decline to give you a name or list of names, it's within your right to ask why.
Make sure you also meet the advisor in person to get your own feel for how they treat their clients, and how they ask and respond to questions. Conduct your own interview and ask the advisor to provide you with a presentation of their services. Once you have interviewed and researched a few advisors, and also checked out their Form ADV, you can compare and contrast them in order to make the right decision for you.
4. What is your performance record?
Ask any potential advisor to provide an example of how they've steered clients of varying risk tolerance through good times and bad. Do some background web searches on the advisor to see if they have been involved in any ethical lapses or disciplinary proceedings, or committed any fraud, such as excessively trading securities, misrepresentation, or been involved in any formal client disputes or legal action. If an advisor has been disciplined for any unlawful or unethical behavior it will show up on the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck site. You can also check their Form ADV, though that won't show insurance-related violations.
5. How are you compensated?
How advisors are paid for their services varies, but generally falls into two categories: fee-based and commission based.
A fee-only structure can include hourly, project, retainer or another sum that is derived from the percentage of assets being managed. A common benchmark for a fee based on assets under management is 2%. The payment may be one-time, monthly or quarterly but could be something different depending on the advisor. Advisors that are “fee-only” do not earn commissions for selling any investments to clients. For RIAs, Form ADV can be handy in finding out who takes commissions and who doesn't.
Others may earn a commission on securities and financial products when they are purchased. There may be a transaction charge at the sale of a product or there could be a surrender fee. Generally, such products need to only meet a suitability standard, rather than a fiduciary standard. (For more, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)
A combination of payment methods may also occur. Before you sign on to work with an advisor, you should make sure that the rates, fee structure and commission schedule are clearly laid out (preferably in writing, as RIAs are required to do by law) so there are no surprises later. (For more on this topic, see: Paying Your Investment Advisor: Fees or Commissions?)
The Bottom Line
Finding the right financial advisor will require some legwork and shopping around. Figuring out what you want out of such a relationship and service is the first step and could help you decide whether you need a full-service fiduciary or someone who can sell you products that suit your financial goals. You'll have to wade through an alphabet soup of certifications, and utilize both publicly-available databases and also your gut to decide on the right path to take. (For more on this topic, see: Shopping for a Financial Advisor.)