Introduction
Searching for the right financial advisor can often feel like searching for a light switch in the dark. You have an idea of what to do and where to look, but getting there can be a little hazardous. Of course, when you’re searching for a light switch in the dark, your biggest worry is stubbing a toe. But when you make a mistake with a financial advisor, you may pay for it far longer than a couple of weeks. You could put yourself years behind on your goals if you aren’t advised by the right person.
With October being Financial Planning Awareness month, there’s no time like the present to learn about the wide array of financial advisors and how they help different clients achieve their financial goals. The term financial advisor can refer to several professions, each with its guidelines and regulations to follow. Not all financial advisors are held to the same standard.
When hiring a financial advisor, you’ll need to take credentials, philosophy, and services provided into consideration. Plus, this could be a person you’ll be working with for decades, so a personality match is important too and it’s not as daunting as it sounds. Here’s how to get started:
In this guide we will cover:
When to Hire a Financial Advisor?
For most people, a financial advisor is someone you hire after you accumulate some wealth. But the ideal time to hire an advisor is actually before you start compiling your nest egg. A great advisor can set up a portfolio and put you on the right path early, allowing your money to compound efficiently at the earliest possible point. When Is It Time To Hire A Financial Advisor?
Of course, not everyone can afford or consider a financial advisor. Sometimes an event triggers the need for an advisor, like a windfall of cash, a new job offer, or an elderly parent falling ill. These are situations where precise financial advice can save far more money than you’d pay in fees to the advisor.
A few other situations where a financial advisor becomes crucial:
- Buying a House – Advisors can assist with home-buying decisions like fitting a house payment into a budget, finding an affordable mortgage, and answering questions about insurance and down payments.
- Starting a Family / Putting Kids Through College – Kids are expensive. Bringing home a baby is one of the happiest moments in the lives of any couple, but children also create huge financial challenges for families trying to stay on budget. And that doesn’t change as children grow up and college costs need to be considered.
- Planning for Retirement – When it comes to retirement planning, there’s no substitute for starting early. Young savers can afford to take on more investment risk in their portfolios and have more time to recoup losses from any bear markets. Retirement planning is a lifelong process and having an advisor along for the ride will ensure you maximize your savings.
Questions to Ask When Hiring a Financial Advisor
You’ll feel like you’re conducting a job interview when hiring a financial advisor, but that’s a good thing! Hiring an advisor is a big decision and you want to make sure you’ve got the right fit. Asking pertinent questions will lead you to the proper person. A few important questions to ask:
1) What Kind of Clientele Do You Work With?
Asking about the advisor’s usual clientele is a good way to gauge if they’ll be a good fit for you. Financial advisors in a broad scope work with pretty much everyone: small businesses, huge corporations, government institutions, high net worth individuals, and middle-class families. If you’re looking for an advisor to help with retirement planning, you’re likely to choose someone who works with clients with similar needs…
2) What Type of Services Do You Offer?
Financial advisors offer a lengthy catalog of services, many of which might fall outside your parameters. For example, if your goal is to build a nest egg through saving in 401(k) and IRA accounts, a CPA with expertise in corporate tax law isn’t a good fit. Someone with experience in investment strategies and retirement planning would be more suitable for your specific needs.
3) What Are Your Credentials?
What exactly is a CPA anyway? CPA stands for Certified Public Accountant and is one of the dozens upon dozens of designations handed out in the financial services industry. Some may have more prestige than others, but each one tells you about the advisor and the type of service you’d receive.
For example, a CERTIFIED FINANCIAL PLANNER™ (CFP®) usually works with families and individual clients while a Chartered Financial Analyst (CFA) works with businesses and institutions to manage corporate portfolios. Credentials will also tell you whether your potential advisor is a fiduciary or not. We’ll touch on that in the next section.
4) How Do You Get Compensated?
Advisors can receive compensation in a number of different ways. Some receive a commission from the products and investments they recommend, others charge a fee based on the number of assets under management, and still, others charge hourly or based on the type of financial plan they set up. Compensation packages usually vary based on the type of service or credential of the advisor.
5) What is Your Investment Philosophy?
Your advisor is there to guide you on the best possible path toward retirement, but as you might be aware, predicting the market is difficult. Even the best advisors won’t be able to predict with certainty where the stock market will be in 5, 10, or 15 years – they can only provide their best advice based on their education and experience. Investment styles can vary based on these types of macro predictions and past observations.
6) Does Anyone Else Benefit From The Advice You Provide?
Finally, you want to have any conflicts of interest laid out on the table. Do any firms or institutions benefit from the advice dispensed by the advisor? Is the advisor compensated for recommending a specific fund or insurance policy? This doesn’t necessarily need to be a deal-breaker, but you should know about these potential conflicts up front.
Why a Fiduciary Advisor Should Manage Your Finances
Advisors who earn certain designations like CFP® and CFA are fiduciaries, which means they’re held to a strict ethical standard when advising clients. Fiduciaries can only make recommendations on investments that are in the best interest of the client.
No advice can be given that would benefit the advisor or their firm at the expense of the client. This means complete transparency from the advisor to ensure you are receiving the most appropriate insurance policies, best-suited investments at the lowest cost, and the peace of mind that comes with knowing you’re getting the best possible advice. A fiduciary can invest on your behalf and you’ll know your capital is in good hands.
Non-fiduciary advisors aren’t held to the same standard. They’re still heavily regulated and can’t just throw you in some expensive mutual funds and call it a day. Non-fiduciaries must abide by the ‘suitability standard’, which gives a little more flexibility when it comes to accountability and giving recommendations.
As long as the investments are suitable to the client based on their wealth, age, and risk tolerance, the non-fiduciary is free to recommend funds that send a nice commission back the other way. You don’t have to worry about your non-fiduciary taking off in the middle of the night, but you might lose a few basis points from your retirement portfolio.
Understanding Financial Advisor Compensation Structures
Financial advisors usually receive compensation in one of three ways:
- Fee-Only – Advisors who work for fees only don’t earn a commission on their recommendation, but they can charge clients in several ways. Some fees are taken directly from the assets under management with the advisor, others are charged hourly or by the service rendered. Some advisors charge monthly or annual fees to be kept on retainer. All of the fees in a fee-only relationship are paid by the client or directly from the client’s assets.
- Commission Based – When an advisor works for commission, they get compensated directly from the company they placed their clients’ money with. This can include insurance companies, certain investment companies, and other alternative investment strategies. In some instances, commissions aren’t inherently bad and may even lower the overall cost of services. However, conflicts of interest do remain prevalent.
- Fee-Based – A fee-based advisor will charge a fee where applicable but may also recommend an investment or insurance that pays a commission. Fees are paid by the client as a flat fee, retainer, or from the assets under the advisor’s supervision. Commissions are paid from the companies for which the advisor invests their clients’ money.
Getting Ready to Retire
For many, the most important service a financial advisor can provide is a comprehensive retirement plan. Running out of cash or improperly positioning hard-earned savings in retirement is a nightmare scenario for far too many Americans. A financial advisor will create a customized retirement plan that allows the recipients to spend their golden years comfortably and free from financial worry.
Most people begin to think about retirement between the ages of 40 and 60, but it’s beneficial to start earlier to maximize your nest egg. Retirement planning is a lifelong process. Hiring the right advisor can help avoid costly missteps with taxes, expensive investments, or estate planning mistakes.
Managing income levels in retirement while keeping a certain lifestyle is the key to achieving happiness and peace of mind in the post-work world. A financial advisor can help you meet your retirement goals and put your dreams within reach.
How to Hire the Right Financial Advisor For You
Now that you have an idea of what type of advisor you’re looking for, it’s time to put the plan into action. Hiring an advisor is much simpler when you have a nice little checklist to run through. Follow these steps and you’ll find the right advisor in no time.
- Decide on the type of service you want. This could be retirement planning, wealth management, estate planning, or everything in between. Know what you’re looking for before you start making phone calls.
- Ask the proper questions. Use the list provided above to learn the most about your potential advisor candidates.
- Make sure long-term investment strategy is a match. Your views on everything don’t need to align, but if your advisor and you are frequently clashing on investment philosophy, you’ll want your money elsewhere. Your opinion still matters!
- Does your advisor have their own funds in the investments and securities they recommend? You want your advisor to handle your money as if it was their own, so it’s not a bad idea to learn what they do with their capital.
- Walk away if the fit doesn’t feel right. Remember when your mother used to tell you there’s plenty of fish in the sea? Same deal with financial advisors. If you aren’t sensing a good match, move on.
Conclusion
Working with the right Certified Financial Planner™ for your particular situation is an excellent investment of your time and money. With the high standards for CFP® certification, you’ll know you’re getting the expertise and knowledge of a highly-trained and educated professional who will always act in your best interests and with the loftiest ethical standards.
The team of retirement planners and investment advisors at Advanced Retirement Strategies in Bountiful, Utah includes two Certified Financial Planners™ who specialize in helping diligent savers with $250,000 or more of investment and retirement assets (not counting your primary residence) prepare for and then transition into retirement.
If you’re looking for a CFP® to help you live the retirement you have dreamed of, contact us today.
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