Seeking a financial advice is a major step in achieving your personal and financial goals. Financial advisors have been instrumental in helping clients maintain well balanced, disciplined, long-term focused approach towards their personal finances and retirement planning. Finding a good financial advisor is like finding a personal doctor. The chances are you will stick with that the person for a long time. In this article, we will give you several suggestions how to choose a financial advisor.
Lately, financial advisors have been under increasing pressure from clients, various regulatory bodies and new fintech competition. Furthermore, many financial advisors are facing questions about fee structure, legal organization, and fiduciary duties.
So how to pick your financial advisor? The financial industry has done a great job confusing the public with various titles and role functions. Financial advisors call themselves investment advisors, wealth advisors, financial coaches, wealth managers, and brokers. Additionally, insurance agents, accountants, and lawyers provide some type of financial advice to their clients.
So let’s breakdown several questions you need to ask yourself and your new financial advisor before you move forward.
1. Business model
There are two main models under which financial advisors offer their services – Registered investment advisor (RIA) and broker-dealers.
RIAs are independent fee-only investment companies that often provide both financial planning and investment management services. They charge a flat fee or a percentage of the client’s assets under management. RIAs are usually boutique companies run by their founders. Moreover, independent advisors have a fiduciary duty to work in their customers’ best interest. Most RIAs provide a holistic goal based financial advice based on their clients’ particular economic circumstances, lifestyle, and risk tolerance. If you prefer to receive personalized fiduciary financial services, then the RIA model is probably the best fit for you.
Brokers offer commission based financial services. They receive compensation based on the number of trades placed in their client accounts. The agents often belong to large banking institutions like Wells Fargo and JP Morgan Chase. Other times they are independent houses offering a wider range of services including insurance, accounting, tax, and estate planning. Brokers do not have a legal fiduciary duty to work in their clients’ best interest. However, with the new Department of Labor rule, brokers must perform fiduciary duties in retirement accounts like 401k plans and IRA. Nevertheless, the new law does not cover taxable investments accounts. If you favor an established relationship with a large financial institution with access to multiple services, then the broker model might be a better fit for you.
What is your financial advisor education? Make sure that you are comfortable with your new advisor’s credentials and educational background. Many financial professionals hold at least bachelor or master degrees in Finance or Accounting. For those that that lack the financial education or work experience, regulators require passing series 65 for RIAs and series 7 and 63 for brokers. Additionally, there are three popular financial certificates – CFA, CFP, and CPA, Advisors that hold any of the certificates have gone through a significant training and learning process.
Chartered Financial Analyst
CFA is a professional designation given by the CFA Institute. The exam measures the competence and integrity of financial analysts. Candidates have to pass three levels of exams covering areas such as accounting, economics, ethics, money management and security analysis.
CFA is considered the highest ranked financial certificate and widely recognized across the globe. CFA program takes at least three years and requires passing three level exam. Level 1 exam is offered twice a year in June and December. Level 2 and 3 are offered only once a year in June. Candidates also need to pass strict work requirements regarding their work experience in investment decision-making process.
Certified Financial Planner
CFP refers to the certification owned and awarded by the Certified Financial Planner Board of Standards, Inc. The CFP designation is awarded to individuals who complete the CFP Board’s initial and ongoing certification requirements. Individuals desiring to become a CFP professional must take extensive exams in the areas of financial planning, taxes, insurance, estate planning, and retirement. The exam is computer-based taken over a three-day period. Attaining the CFP designation takes experience and a substantial amount of work. CFP professionals must also complete continuing education programs each year to maintain their certification status.
Certified Public Accountant
CPA is a designation given by the American Institute of Certified Public Accountants to those who pass an exam and meet work experience requirements. CPA designation ensures that professional standards for the industry are enforced. CPAs are required to get a bachelor’s degree in business administration, finance or accounting. They are also required to complete 150 hours of education and have no less than two years of public accounting experience. CPAs must pass a certification exam, and certification requirements vary by state. Additionally, they must complete a specific number of continuing hours of education yearly.
While receiving a degree in Finance, Accounting or Economics or passing a test doesn’t always guarantee that the person has the right set of skills to be an advisor, the lack of any of these credentials should be a warning sign for you.
There are many professionals with engineering, medical, legal or other degrees that pursue a financial career. Many of them build relationships with clients from their particular field. If this is something that you are comfortable with, at least make sure your advisor works with people who have solid financial credentials.
If you are planning to give your retirement savings in the hands of a financial advisor, make sure that this person has prior financial experience. Some of you may remember the commercial with the DJ who was imposing as a financial advisor. Would you want to work with this guy? He might be a great person, but it’s your money after all. Do your due-diligence before you meet them for the first time? LinkedIn is a great place to start your search.
4. Investment Style
Do you know your advisor’s investment style? Does your advisor regularly trade in your account or is more conservative and rebalance once or twice a year? It is important to understand your advisor’s investment style. Frequent trading can increase your trading cost substantially. On the other hand, not trading at all will bring your portfolio away from your target allocation and risk tolerance.
5. Investment options
What are the investment options provided by your financial advisor? Some advisors prefer to work only with ETFs. Others like using actively managed mutual funds. A third group favors trading single name stocks and bonds. All strategies have their benefits and shortcomings. ETFs come with lower fees and broad diversification. Active mutual funds seek to beat their benchmark and lower risk. However, they may lack tax-efficiency if sitting in investment accounts. Finally, trading single name stocks provides very high upside but also a large downside.
Who is your advisor’s custodian? Custodians are the financial companies that actually hold your assets. Most RIAs will use a custodian like Pershing, Fidelity, TD, Schwab or Interactive Brokers. Your advisor’s custodian to a large extent will determine (or limit) the selection of ETFs and funds available for investing. Additionally, custodians may have different rules, document requirements, technology platform and transaction fees.
How large is the company that your advisor works for?
Some advisors are one-man-shop. They consist of their founder and potentially one or two assistants or paraplanners. Other advisors including RIAs could be a part of much larger regional or national network. Smaller companies have more flexibility but less capacity. Bigger companies have more bureaucracy but may have more resources.
What have you learned from your advisor in the past few years or even at the last meeting?
Advisor’s role is not only to manage investments but also to coach and educate clients about best financial practices, tax changes, market developments, estate planning, college savings and such.
Additionally, many advisors offer workshops to clients and prospect where they talk about the economy, retirement planning, tax strategies and other financial topics.
9. Communication and customer service
How is your financial advisor communicating to you? Is your advisor responsive? Communication is an essential part of the advisor-client relationship. Good advisors always stay in touch with their clients. Remember what I said earlier, advisors are like doctors. You need to meet them at least once a year. So during your meeting, talk to them about your progress to achieving your goals. Also get updates on your portfolio performance. And finally, update them regarding any changes in your life.
Also, financial advisors have a duty to protect their clients’ privacy. Make sure your advisor uses secured channels to send and receive sensitive information.
How is your advisor handling client queries? Can you speak to your advisor personally if you have an urgent question or unexpected life event? Or do you need to call 1-800 number and wait for your turn in line?
Is your financial advisor tech savvy or old school? The current environment of constant tech innovations provides a broad range of tools and services to financial advisors and their clients.
New sophisticated financial planning software lets advisors change plan inputs just with one click of the mouse. This software allows clients to have access to their personal financial plans to amend their financial goals and personal information. Therefore, clients can see in real-time the progress of their financial plans and make better financial decisions.
Account aggregation tools allow clients to pull different accounts from various financial providers under one view. The aggregated view helps both advisors and customers to see a comprehensive picture of the client’s finances with only one login.
Additionally, services like DocuSign and LazerApp let financial advisors go completely paperless. Thus clients can receive and sign documents online.
About the author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to individuals and families.