3 Questions to Ask Potential Financial Advisors

Did you know that most wealth is created by careful planning, budgeting and investing? Working closely with an advisor to develop a plan can help ensure that you enjoy the retirement lifestyle you’ve always wanted. But finding the right advisor can be difficult.

The brokerage industry does not produce investment minds, they produce salespeople. And that’s why you should understand the difference between a broker and an advisor.

In the financial services industry, there are those that follow a fiduciary standard (investment advisors) and those that follow a suitability standard (brokers). What’s the difference? Fiduciaries are required to serve the best interest of their clients, regardless of the benefit to themselves. While many individuals think their advisor is a fiduciary, many are not. If he/she is a fiduciary, they are required to disclose it in writing and are held to a higher standard. (For related reading, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)

When searching for an advisor to work with, you should ask these important questions:

1. What Are Your Credentials?

The professional credentials your advisor holds can tell you a great deal about his or her commitment to the profession and the type of expertise they bring to your relationship. While there are many credentials in the financial services industry, certain designations are more difficult to attain than others. Two of the most difficult designations worth noting are the CFA and CFP.

  • Chartered Financial Analyst (CFA) – CFAs must pass a schedule of extremely rigorous exams over a three-year period and have four years of professional investment experience. The curriculum includes subjects such as economics, financial reporting and analysis, corporate finance, fixed income and equity analysis, derivatives, alternative investments and wealth planning. Known as the gold standard of investment management designations, CFAs are subject to the most rigorous ethical standards in the industry. (For related reading, see: An Introduction to the CFA Designation.)
  • Certified Financial Planner (CFP) – CFP professionals must pass the comprehensive CFP certification exam, which tests their ability to apply financial planning knowledge to real-life situations. The exam covers the financial planning process, tax planning, employee benefits and retirement planning, estate planning, investment management and insurance. This comprehensive exam ensures that a CFP professional is highly qualified to develop a financial plan and is held to the CFP Board’s standards of professional conduct that require them to put the client’s interest ahead of their own at all times.

2. How Are You Compensated?

Understanding how your advisor is compensated can tell you a lot about their objectivity. Advisors can work on a fee-only basis, commission basis, or some combination of the two.

Most RIAs work on a fee-only basis. Their compensation is tied to the assets under management and are aligned with the client. This method rewards the advisor for growing your portfolio.

Some advisors receive commissions on investment products they buy and sell for you. This compensation method may encourage the advisor to recommend certain products that benefit them more. (For related reading, see: Paying Your Investment Advisor—Fees or Commissions?)

3. Where Will My Assets Be Held?

In today’s world of identity theft, it’s important to know where your money is being held. Most RIAs work with large brokerage firms or banks to safeguard their clients’ assets. Among the largest custodians are Charles Schwab and Fidelity. These custodians will provide statements, tax forms, transaction reports, etc., so clients are always aware of the activity in their account. Clients should stay away from firms that produce their own internal reports without any verification from a third party. (For related reading, see: Six Things Bad Financial Advisors Do.)

Managing people’s wealth is serious business. Take the time to understand what your advisor does, the commitment he or she has to the industry and how they will work with you to achieve your specific goals. After all, the advisor you choose to work with will determine whether or not you have the retirement you’ve always wanted. (For related reading, see: Find a New Financial Advisor Who's Right for You.)