How can I determine if a Financial Advisor is a trustworthy fiduciary?
The financial services industry does a very poor job of differentiating roles. Many "advisors" are not really advisors. The advisory world is full of salespeople and financial planners biased by products and commissioned sales. Investors are challenged to find highly skilled, unbiased investment advice. If an advisor is truly a fiduciary, they will put it in writing. Here are a few questions you should always ask:
1. What are my choices? You can work with advisors with many different backgrounds. Large brokerage firms, banks, independent advisory firms, etc. Working with an independent advisor may be a good choice for you. They are generally affiliated with many different firms to assist with complex needs and aren't dependent on a one size fits all mentality. If the independent firm is an RIA, they must fully disclose all of their compensation and typically are fee-based only. This means they are sitting on the same side of the table with you. Their compensation is directly tied to your success.
2. What are your credentials? The financial services industry has more designations than a bar does beer. Just kidding, but you know what I mean. The advisor's professional designations can tell you a great deal about his/her education and areas of expertise. The CFA designation is considered the gold standard of investment management. CFAs must pass 3 exams, each of which demands a minimu of 250 hours of stucy and includes corporate finance and financial statement analysis. The CFP is a planning designation requiring a completion of financial planning coursework and passing a 10-hour exam covering a variety of topics. If your advisor just sat through a weekend seminar and received a designation, you may want to question their commitment to their profession.
3. How is the advisor compensated? Knowing how your advisor is compensated can tell you a great deal about their objectivity. If they are receiving high commissions on certain products, they may have a bias to push these products onto you instead of offering a lower cost option. Remember, commissioned sales people are not required to serve in your best interest like fiduciaries. They are held to a lower, suitability standard.
4. How do you approach investing? Many advisors will simply allocate your assets and ride the ups and downs of the market. While this buy and hold strategy may work for some people, it's not for everyone. Ask your advisor about their investment strategy and what makes them qualified to manage investment strategies. Just because they put on a suit and read the Wall Street Journal doesn't make them qualified to manage money.
5. Where is your money held? Most independent advisors use a third party custodian to hold and report on client assets. We use Schwab, but there are many other great custodians. If your advisor is using a company you never heard of to hold your money, you should ask questions.
"Financial Advisor" can be used in several different job descriptions in our industry. It's unfortunate we haven't done a better job of distinguishing the differences. For example, an insurance agent who happens to also do "financial planning" may refer to themselves as a financial advisor. But in reality, they're a salesperson.
The key to finding a true fiduciary advisor is working with one that limits there conflicts of interest to the bare minimum. Meaning they don't SELL products, only their advice, and guidance through financial planning. These types of advisors are referred to as FEE-ONLY advisors. In the case of the insurance agent, he/she may be a great financial planner as well, however, they will always have a potential conflict of interest due to the fact they are able to sell insurance and receive a commission from it. In order to eliminate that conflict, a fiduciary advisor only "sells" their advice and would refer their client to a insurance provider they know and trust, but who offers no kickbacks or commissions as a result.
In addition, certifications such as the CFP (certified financial planner) requires continuing education for advisors who hold the designation. It's become an industry standard for advisors offering financial planning and advice.
A great resource for getting started on your search is to use the website Napfa.org. They provide a directory of fee-only financial advisors.
Best of luck,
Answers here have the challenge of being potentially self-serving, so I will try to provide some insights that are transparent and objective.
- Consider screening for potential advisers by choosing one or more certifications or affiliations that require advisers to follow a specific code of ethics. For example, CFP® practicioners must complete continuing education every year, including a course on ethics to earn and maintain the designation; members of the National Association of Personal Financial Advisors (NAPFA) must adopt a strict code of ethics; etc.
- Understand the different ways that financial service providers can be organized, regulated, and paid. A "broker" or "agent" will generally be compensated by commission on financial products, investment transactions, and insurance sales. A "registered investment adviser" will typically be paid a flat fee for financial planning or a fee for investment management. Each type of "adviser" has different incentives that main align better with your needs
- Ask your friends and colleagues, and be discerning in listening to their advice. Oftentimes, when asked for a referral or recommendation, people will simply relay who they know or use. It can be more productive to ask follow up questions: "WHY do you like this person or firm"; "how has their advice impacted your life?"; etc
- Interview a few candidates, and be prepared to ask them all a similar set of questions. The answers may make a choice between the options obvious; talking to a few may also reveal a better match for your particular personality and set of needs.
The CFP® website for consumers provides a list of potential interview questions when evaluating financial planners; you may find these useful in informing your own search:
I heard you loud and clear. That’s the fear—finding a trustworthy and knowledgeable advisor--for everyone, myself included. Just because I am a CFP®, it doesn’t mean I can do every aspect of financial life by myself. Even though I read the entire estate planning book from cover to cover when I was in my graduate school to get the MBA, I still need to find the estate planning attorney to do mine and my clients’ Will, Power of Attorney, etc. Before I obtained my EA (Enrolled Agent) license, I can’t file any tax return for my clients either.
The point is at some point of your life, you will need some professional guidance to coordinate your financial life with the maximum efficiency. Yes, you can google a question to get the answer(s) nowadays. Occasionally you may even get multiple and contradictory answers, but which one to believe? Having the CFP® on your side, you have a second set of ears and eyes to hear you and give you the direct answer you need, with some further explanations for your full understanding.
There’s no way to find the one that matches your needs without first interviewing some. Many of my colleagues give a free meeting for the first time; that’s where you can get some ideas: 1) How knowledgeable is the planner? 2) Does he/she hear my concerns, or he/she just likes to talk about himself/herself? 3) What credentials does he/she have? 4) Any follow-ups from the post meeting? Ideally you start with family/friends’ recommendations, but don’t limit yourself to the local. With the internet and many facetime apps, you can find the best and brightest CFP® anywhere in the country. Best!
This is a great question, and you're not alone in your confusion of our industry. As I read your question though some key words popped out to me that made me think it might be helpful to narrow your search. As a fee-only advisor I would agree with the previous comments about working with a fiduciary, although I believe like everywhere else in life you'll find good people that are brokers and not great people that are fee-only advisors. You mentioned finding someone that can help you manage your debt strategically, so I think you might find a benefit in looking at Dave Ramsey's "SmartVestor" network. You can search for local advisors in your area by clicking here.
The Garrett Planning Network is also a great group of advisors that can help in this area, and instead of charging an asset based fee, can work with you for an hourly rate or on an annual retainer. I think you will find this type of setup to be more beneficial in helping you logistically get everything situated. You can learn more about this group of advisors by clicking here.
I hope that is helpful to you, best of luck!