Here are seven steps to help you find the best financial advisor for your needs. To find the best financial advisor for your situation, you need to know what type of financial advice you need and what services a potential advisor provides. Here’s a brief summary of three main types of service offerings:
Financial planning focuses on all aspects of your financial life such as how much to save and what type of insurance you need. It is not just about your investments.Investment advisory services are focused on such investment management decisions as what investments to own in which accounts. The best investments are chosen only as part of an ongoing financial planning process.Retirement income planning is focused on how you coordinate all the pieces such as Social Security, taxes, investments, pensions, retirement date, and more, so they all align toward the goal of delivering a retirement paycheck for life.
To find advisors or financial planners with reputable credentials, look for someone who has their CFP (Certified Financial Planner) or PFS (Personal Financial Specialist) designation, or an investment advisor who has their CFA (Chartered Financial Analyst) certificate. Importantly, CFP professionals are bound by the fiduciary standard of care, meaning that they are required to always place their clients’ interests above their own. Credentials are obtained by passing an examination that demonstrates proficiency in the subject matter. To maintain the designation, an advisor must adhere to an ethics policy and meet continuing education requirements. Understand the difference between a fee-only advisor and a non-fee-only advisor. A non-fee-only advisor may be able to receive other types of kickbacks or incentives from their company based on meeting sales goals or objectives. There are no right or wrong ways for an advisor to be compensated. What works best for you will depend on your financial needs. For example, if you are buying an investment that you plan on holding on to for a long time—and for which you will not need ongoing advice—paying a commission may be the most cost-effective option. However, if you want someone readily available to update your financial plan and address ongoing questions, a commission-based fee structure is not the optimal choice. Many firms work with clients remotely. That allows you to pick an advisor based on expertise rather than location if you don’t need to meet face-to-face. Not everyone is comfortable working remotely, so you have to decide how important it is to meet someone in person rather than virtually. Using specific interview questions can help you determine how the financial advisor communicates, as well as their area of expertise and their ideal client. The key is in making sure you understand the answers—and if you don’t, feeling comfortable enough to ask follow-up questions. It’s always advisable to ask someone for references. However, due to privacy regulations, many advisors cannot hand out the names of other clients. Regulations prohibit financial advisors from using testimonials unless certain provisions have been met, including disclosing whether the person giving the testimonial or endorsement is a client and whether the endorser is compensated. Form ADV Part 2, a brochure that advisors are required to submit to the SEC, lists conflicts of interest the advisor might have. You may also want to check out ADV Part 1, which spells out an advisory firm’s ownership structure, and Form CRS, which discloses information about a firm or advisor’s business operations and compensation. You can find the first two on the Investment Adviser Public Disclosure website and ask an advisor for Form CRS. If the advisor you’re researching is regulated by FINRA, you can use the BrokerCheck feature on FINRA’s website to see whether there are any complaints on file. If the SEC regulates the advisor, then you can use the SEC Investment Advisor search feature on the SEC’s website to check out both the advisor and the firm they work for. Just because an advisor has a complaint, it doesn’t mean you should automatically rule them out. Formal customer complaints stay on a financial advisor’s record for a long time. The longer someone has been in business, the more likely it is that they will have at least one complaint on their record. However, if someone has multiple complaints, you may want to look for another advisor. Be cautious of advisors or firms who have custody of your money or own another related firm that serves as the custodian. That is how Bernie Madoff was able to pull off his Ponzi scheme. Take extra precautions when talking to advisors or firms that co-own other investments or other firms that they are recommending to you. The ownership structure and any potential conflicts of interest should be listed in form ADV Part 1, the firm’s disclosure document.