Choosing a financial advisor to manage your money might be a difficult decision if you are not an expert in financial concerns. Because financial arenas can be so specialized, it is nearly impossible to be well-versed in all of them. Estate planning is not the same as selecting the best investments, for example. Managing a portfolio is not the same as creating a monthly budget.
If you're searching for someone to invest your money, make wise decisions, and help you create a financial plan, a robo-advisor could be a wonderful alternative. A good robo-advisor, such as Betterment or Wealthfront, may assist you in doing all of these things based on your goals and risk tolerance, while also charging you a reasonable fee. You can get started online in minutes and it's great for establishing a portfolio.
However, if youâre looking for more advanced advice, say, for estate planning, youâll want a human advisor. Hereâs what you should look for when choosing a human financial advisor, why you need a fiduciary and the traits you should demand to find the right one for your situation.
What to look for in a financial advisor
Finding the right financial advisor can take a lot of weight off your shoulders, but giving someone access to one of the most sensitive parts of your life can be emotionally challenging. As you hunt for a financial advisor, youâre actually hiring an expert to work for you. Itâs a job interview, so itâs important to pay close attention to all the answers the advisor gives. And watch out for the âadvisorâ that a financial company provides to you for free. These advisors are usually riddled with conflicts of interest â theyâre more salespeople than advisors. Thatâs why itâs critical that you have an advisor who works only in your best interest.
If youâre looking for an advisor who can truly provide real value to you, itâs important to research a number of potential options, not simply pick the first name that advertises to you.
âSpeak to friends and family to see who they would recommend and why,â says Bill Van Sant, managing director at Girard, a wealth management firm in the Philadelphia area.
âUltimately, you need to feel confident in the advisorâs competency, objectivity, and their responsiveness to your needs,â says Van Sant. âThe advisor-client relationship, like many relationships, is built on trust and communication, so doing the proper due diligence in choosing an advisor should provide long-term benefits and peace of mind for all parties.â
Here are six tips to help you choose a trustworthy financial advisor you can rely on.
1. Find a real fiduciary
The legal guidelines around who is considered a fiduciary are muddy, at best. Currently, many advisors have to act in your âbest interest,â but what that entails can be almost unenforceable, except in the most egregious cases. Youâll need to find a real fiduciary.
âThe first test for a good financial advisor is if they are working for you, as your advocate,â says Ed Slott, CPA and founder of IRAhelp.com. âThatâs what a fiduciary is, but everyone says that, so youâll need other signs than the advisorâs say-so or even their credentials.â
Slott suggests that consumers look to see whether advisors invest in their ongoing education around tax planning for retirement savings such as 401(k) and IRA accounts. These are complex accounts, and the laws change from time to time, such as with the SECURE Act of 2019.
2. Check those credentials
Consumers looking for financial advisors should also check their professional credentials, seeking out well-recognized standards such as chartered financial analyst (CFA) or certified financial planner (CFP). These designations require their holders to act as a fiduciary.
âThese individuals have mastered a complex body of knowledge, have passed a comprehensive examination (or in the case of a CFA charterholder, a series of examinations), and agree to abide by a code of ethics,â says Robert Johnson, professor of finance at Creighton University.
Johnson cites part of the code for CFA holders that exhorts them to âact for the benefit of their clients and place their clientsâ interests before their employerâs or their own interests.â
You can verify an advisorâs credentials at the CFA Instituteâs site or the CFP Boardâs site. While these credentials donât guarantee that someone is indeed working in your interest, they do indicate a certain level of education and competence, and those are valuable.
3. Understand how the advisor gets paid
âHow is the public truly going to know what they are going to get when they hire a financial advisor or planner,â asks Scott Bishop, CFP, and executive director of wealth solutions at Avidian Wealth Solutions. âThe financial industry is not a strong âprofessionâ in that when you see a doctor or lawyer, you kind of know what you will get â even though quality and expertise may be different among firms.â
Bishop notes the differences between the advice offered by wirehouses, insurance agents, independent broker-dealers, and independent registered investment advisors.
Some salespeople are posing as advisors, especially those employed in a company where the main business is not advising clients, such as an insurance company or a fund management firm. In such cases, the advisor is often just selling you the companyâs products and services.
While you may be more likely to find unbiased advice from an independent advisor, youâll still want to be careful. Even independent advisors can end up being salespeople for a company.
A few questions you can ask include the following, says Brian Walsh, CFP, senior manager of financial planning with SoFi, a personal finance company: âDo they earn commission on insurance sales? Do they earn commission on stock transactions? Are they affiliated with a financial company that offers proprietary products?â
So be very careful around an advisor that youâre not paying for service. As the old saying goes, âHe who pays the piper calls the tune.â
4. Look for fee-only advisors
One way around the conflict of interest in the financial industry is perhaps the most obvious: you need to find an advisor who works for you and is paid only by you and other clients like you. Of course, that means money comes out of your own pocket, but youâre likely to come out ahead.
The reason is that various financial âsolutionsâ such as annuities typically contain huge sales commissions built into the price. When you purchase these products, youâre paying a huge cost for the product on the advice of a conflicted salesperson, but the cost is usually obscured. Ultimately, this advice could cost you tens of thousands more than the cost of a fee-only advisor.
âThe advisor should not be incentivized to push his own agenda but by always doing what is best for the client,â says Brooks Campany, regional manager at Argent Trust Company in Oxford, Mississippi. âA fee based on a percent of the assets managed is a safe arrangement. When the clientâs assets increase, then the advisorâs fee increases.â
Another approach is to charge a per-hour fee for service. This arrangement may work well for higher-net-worth clients since they pay for advice once and not for how much money they have.
By sticking with a fee-only fiduciary advisor, youâre paying the piper and calling the tunes. With such an advisor, after an initial consultation, you might go back in once a year for a check-up and have the advisor adjust your plan if your life situation or financial goals change.
5. Search for clarity
Any advisor should be able to explain everything clearly and to your complete satisfaction. If an advisor makes you feel incompetent or unintelligent for asking questions, simply walk away. You canât build a long-term relationship with such an individual.
âAn investor may suspect an advisor is not working in their best interest if they offer only proprietary products, charge fees without explaining why, or actively trade your account without your authorization, especially if doing so on a commission basis, where they get paid for each transaction,â says Van Sant.
If your advisor does any of these things and canât provide a clear answer why, then you need to get out. If you havenât authorized these transactions and the advisorâs explanation is not clear to your full satisfaction, itâs not enough to get the advisor to stop. You need to find a new advisor.
Many financial advisors make money by obscuring what theyâre doing. Make sure your advisor is clear about whoâs paying her or him.
6. Find an advisor who keeps you on track
âCompetency, humility, empathy are the three characteristics that make an advisor good,â says Campany. âPerhaps the most important characteristic is empathy. Being able to understand your clientâs feelings and communicate to them that you are able to address those feelings provides a level of comfort that is incredibly important to your role for them.â
Many consumers underestimate the importance of an advisor for listening to their needs, but thatâs not the only way the advisor can ultimately address the clientâs specific life situation and goals. A good advisor wonât just tell you what to do, but will also keep you motivated, too.
âA perfect financial strategy on paper means absolutely nothing if you do not implement it,â says Walsh. âThat is where the advisorâs understanding of human psychology and behavior comes into play. A good advisor should establish trust, ask probing questions, and consider the unique steps that will immediately help you become better with your money and make progress.â
Sometimes the advisor might have to calm you down after a particularly grueling or exciting time in the stock market or even your life. In the end, the advisor must keep you on track to reach your goals, and sometimes that means being a psychologist.
âIn times of market volatility, your advisor should be a steady voice of reason, helping you to avoid emotional decisions that could lead to costly mistakes,â says Sue Christoph, partner at RMB Capital in Chicago.
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