So often I have written to advise my Personal Finance readers to consider getting their advice from a financial advisor. Sometimes, I will even throw in some helpful hints on how to search, vet, qualify, and know just what you’re getting into when you take this step.
This article goes into more depth so that you can do a better job of identifying the right and best advisor that suits you in terms of your unique needs surrounding affordability, transparency, reputation, careful investment selection, and someone who won’t churn your investment portfolio simply to maximize their own commissions and compensation.
Your Financial Needs
Think of a financial advisor as a partner, a mentor, a subject matter expert, and an ally. Before you even begin your search, write down your financial needs, goals and objectives.Examples include:
- Developing a financial budget
- Dealing with reducing debt
- Determining your own tolerance for risk
- Deciding what types, how much, and which insurance company policies you need
- Drawing up the savings needed for major purchases and your planned retirement
- Digging into the intricacies of estate planning
The next step is to choose what type of financial advisor you think best suits you in terms of circumstances and comfort level. After that we talk about the assessment process.
Different Types of Financial Advisors
- Certified financial planner and financial consultants: Anyone can claim to be a financial advisor or a financial planner, but a certified financial planner (CFP) has met the requirements of the Certified Financial Board of Standards.This is a mark of subject matter expertise and competence, as the rigor of the exam and the amount of experience means they know what they’re talking about, though they may also be a bit more expensive.
- Investment advisors: An investment advisor will provide stock and bond advice. They are registered with the U.S. Securities and Exchange Commission (SEC) and required to hold and maintain a securities license. They can be self-employed or work in a large financial firm. The benefit with this choice is they aren’t pushing any fund family. They may be credentialed—or not—so with this choice you need to ask.
- Broker/dealer: This is someone who buys and sells securities on the clients’ behalf, is SEC registered, and generally works on commissions.
- Financial analyst: An analyst constructs investment strategies for both companies and clients. They monitor economic trends, create financial models, and analyze financial statements. We find this type are generally working in large corporations.
- Wealth manager: This is someone who is sought out by high-net-worth clients with investable assets of more than $1 million. Many of these managers hold multiple designations, such as CFP, CPA, or CFA.
- Robo-advisor: A digital advisor that will automate your investments using custom algorithms developed from the questionnaire you complete. Questions around risk tolerance and goals leads to a selection of investments and periodic portfolio rebalancing. Fees are relatively low, from a quarter of one percentage point up to one percentage point of the assets under management (AUM).
Assessing Financial Advisors
We mentioned earlier that before you even begin the search, you should first write down your financial needs, goals, and objectives. After that, ask trusted friends, relatives, and colleagues for financial advisor recommendations. You can also go to websites to learn more:- The National Association of Personal Financial Advisors: www.napfa.org
- Financial Planning Association: financialplanningassociation.org
- Certified Financial Planner Board: cfp.net
- How do your fees and commissions get calculated? Commissions-only structure can be a conflict of interest as they can result in certain lucrative products being pushed. Fee-based is preferable as it is usually tied to the market value of the assets under management.
- What are all the services you offer? This can run the gamut—from stocks and bonds to gold and cryptocurrency, real estate, foreign stocks, insurance, saving for college, a new home, or retirement.
- Length of experience and number of clients managed. Years of experience, licenses, and certifications, references, and anything you can find on the internet paint the picture of the level of trustworthiness, competence, experience, and subject matter expertise.
- What resources beyond your office do you rely upon? Good to know the sources or your financial advisor’s information and advice.
Summary
If you have a modest net worth, say less than $100,000, either DIY (do-it-yourself) or sign up for a robo-advisor. Betterment may be the best overall, but Fidelity Go is recommended for beginning investors. And if you’re focused primarily on retirement financial planning try Vanguard.Once you have narrowed your list of potential financial advisors, the choice may come down to intuition and your personal chemistry. If the advisor checks all the boxes covered in this article, go with your gut instinct and choose the one you liked best. But don’t get these requirements reversed. I made the mistake of picking someone who had a great personality, a lot of knowledge, and an impressive title and financial firm, only to have him churn my portfolio with too many trades, too much risk, and virtually no safeguards.
Costly lesson, indeed.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
