Thursday, April 21, 2022

Seven Tips for Choosing a Financial Advisor

Many people think about hiring a financial advisor when their personal finances start to get complex (e.g., accumulated wealth over time) or a major life event such as retirement, the birth of a child, or the death of a spouse occurs.

Three questions people often ask are “how can I find a financial advisor?,” “What factors should I consider when selecting one?,” and “how much do they charge?”  

Following are some tips for selecting financial services professionals:


Define Your Needs - What kind of services do you want?  Are you looking for comprehensive financial planning services which would include someone to give you advice, help you implement that advice, and be there when you need them on a recurring basis?  Or, on the other hand, are you simply looking for answers to specific questions or someone to review your financial situation just one-time only or occasionally as needed?

Get Prepared – Time is money when you are working with a financial advisor. To minimize the time required to explain your financial situation, prepare four things in advance: 1. a cash flow (income minus expenses) statement for a recent month or your spending plan/budget, 2. a net worth (assets minus debts) statement, 3. a list of questions for the financial advisor, and 4. copies of relevant documents (e.g., retirement plan statements and insurance policies). Personal financial information can all be recorded in one place using this worksheet.

Check Credentials - What credentials, licenses and education does an advisor have?  Look for specialized training in financial planning such as the Certified Financial Planner® (CFP®) license. To determine if a financial planner is a CFP® licensee, ask to see the planner’s current Certified Financial Planner Board of Standards certificate or check the Web site for the names of CFP licensees that are located in different geographical areas. Other common designations for financial advisors are ChFC® (Chartered Financial Consultant®) and CPA®/PFS™ (Certified Public Accountant®/Personal Financial Specialist™).

Look For Registered Investment Advisors - Because investment advice is often involved in financial planning, a financial planner also should be a Registered Investment Advisor or affiliated with a Registered Investment Advisory firm.  This registration is issued by the U. S. Securities and Exchange Commission or a state securities regulatory agency (depending upon the amount of assets under a firm’s management).  CFP®s must also agree to adhere to the Certified Financial Planner Board of Standards’ Code of Ethics and must disclose any investigations or legal proceedings related to their professional or business conduct. The Board reviews all disclosure statements carefully and investigates the backgrounds of planners whose disclosure statements indicate areas of concern.

Evaluate Experience - Practical experience counts for a lot in the financial services industry.  Look for someone who is both well trained and has worked with clients for a period of time.  CFP® licensees, for example, must have at least three years of previous financial services experience.  Since financial planning is a relatively new profession, you might also want to find out about work experience prior to the financial services industry.  Does the financial advisor come from a sales or services background?  Also find out what financial planning organizations an advisor belongs to. Professional association membership indicates a planner’s commitment to professional improvement.

Consider Specializations and Niches - Find out what areas of personal finance (e.g., life planning, tax planning, and investment management) and/or types of clients an advisor specializes in. Because financial planning is such a broad field, many planners tend to specialize. Determine if the planner’s specialties match your situation. Examples of financial planning specialty niches include older adults (baby boomers and silent generation), younger adults ( Generations X, Y, and Z), LGBTQ couples, military families, Spanish-speaking immigrants, and government employees.

Consider Compensation – Financial advisors can be paid by fees, commissions or a combination of fees and commissions.  Fees can be charged as a flat rate amount, an hourly rate, or on a “subscription” basis with monthly payments. Some advisors also charge fees based on a percentage of assets under management or AUM. Ask how a financial advisor is compensated before you enter into a working agreement.

In summary, take the time to consider these seven factors as you search online for local financial advisors. Next, review their websites to learn about their experience, pricing, and services and call at least two or three that seem most aligned to your personal criteria. Many advisors will provide a short complimentary consultation. Finally, if several advisors seem equally competent, choose the one with whom you feel most comfortable and “click” with.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

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