Pick the wrong hairstylist, and you might be wearing a hat for a few days. Hire the wrong travel agent, and you might be stuck enduring a week of rain and lumpy beds. But choose the wrong financial advisor and you could be paying for it — literally — for the rest of your life.
A good financial advisor is more than a stock-picker. “[They] take a more comprehensive view. They listen to your life and financial goals and help you achieve them,” said Edward Gjertsen II, CFP, vice president of Mack Investment Securities, Inc. and volunteer president for the Financial Planning Association.
Those goals could include assessing insurance needs, saving plans, tax strategies, estate planning and more. “If all you get back is what stocks you should invest in, that’s not a financial plan,” said Gjertsen.
7 Steps to Picking a Financial Advisor
To find the person best qualified to help you draw up a financial plan and achieve your financial goals, follow this seven-step guide on how to pick a financial advisor.
Step 1: Review Your Financial Advisor’s Credentials
If you practiced medicine without a license, you could get arrested. Same goes with practicing law, or even veterinary medicine. But almost anyone can call themselves a financial advisor.
Not just anyone can claim to be a Certified Financial Planner (CFP), though, said Eleanor Blayney, CFP and CFP Board consumer advocate. The CFP Board is a licensing body for financial planners, and its certification carries a lot of weight. “Without it, there’s no way to hold [financial planners] accountable,” said Gjertsen.
In order to practice as a CFP, a financial advisor is required to undergo a lot of training, education, experience and ethical requirements. “So you have the brand assurance that that person worked hard to get that certification,” explained Blayney. “It’s the gold standard of financial planning.”
Here’s a partial list of some of the requirements to become a CFP:
- Education: College-level personal finance program or the equivalent, and at least a bachelor’s degree from an accredited college or university. CFPs also must complete an additional 30 hours of education every two years.
- Examination: Passing the CFP Certification Examination.
- Experience: Three years’ experience as a professional financial planner or two years as an apprentice, with additional requirements.
- Ethics: Agreement to adhere to the CFP Board’s Standard of Professional Conduct. Also, CFPs must disclose information about their background, including such things as customer complaints, bankruptcies, criminal inquiries and more. The CFP Board then does a detailed background check.
Step 2: Find Out If Your Financial Advisor Is a Fiduciary
According to the CFP Standards, a fiduciary places their client’s interests ahead of their own. And when it comes to your life savings, you probably agree that this is vital.
“If the planner is not a fiduciary, you’re not sure if you’re getting the best solution for you or the best solution for the planner offering the advice,” said Gjertsen. For instance, if there is a conflict of interest — such as the planner is also the salesman for an investment, insurance or other product — as a fiduciary, he or she must disclose that. That way, you have all the facts. After all, your retirement could be on the line.
If you are in doubt whether the financial advisor you are considering is held to the fiduciary standard, check with the CFP Board, suggested Gjertsen.
Step 3: Consider the Pay Structure
Typically, a financial advisor gets paid in one of three ways: fee-only, commission-based or fee-based. All have their pros and cons, but it’s likely that only one will work for your situation. Here’s what each one has to offer:
Fee-Only: In this structure, the financial planner is sometimes paid on an hourly rate, but is usually compensated based on a percentage of your assets under management. An industry standard for middle-class-sized portfolios is 1 percent per year, said Blayney.
With a fee-only pay structure, it might be easier for you to estimate how much you’ll have to pay the advisor. You might have less of a conflict of interest since they do not make money for transactions or product sales. And most of the time, the financial advisor’s interests align with yours: The more you are worth, the more they get paid.
Still, a fee-only system could be more expensive for people who don’t do a lot of buying and selling of investments.
Commission-Based: Here, the financial planner only makes money when you complete a transaction, such as buying or selling stocks. The advisor might also be the salesman for a product, such as insurance.
This structure could possibly be less expensive if you do not do a lot of buying and selling of stocks or financial products. After all, no transactions means no costs. But, there is a possibility that your planner will not pay attention to your needs between transactions. Also, conflicts of interest can be inherent since the advisor only gets paid when you buy or sell.
Fee-Based: These financial advisors charge a fee for advice, but they also make a commission for certain products that they sell. So, they’ll have a bit of the pros and cons from both the commission-based and fee-only structures.
Step 4: Consider Your Financial Advisor’s Track Record
You probably don’t pick a Fantasy Football team without considering the players’ track records first. So when it comes to real-life money — especially yours — it’s crucial you know whether your financial advisor is an all-star or a benchwarmer.
Fortunately, said Blayney, in the age of the internet, it’s easy to check a CFP’s record — or at least make sure he or she doesn’t have one when it comes to disciplinary actions.
First, you’ll need to know who the planner’s regulating body is, which you can get by simply asking. “Also, they could have more than one,” said Blayney.
Next, check the appropriate site or sites. Each regulating body should have a way to look up the financial advisor by name, said Gjertsen. If you’re in doubt, just check them all.
- For CFPs, LetsMakeAPlan.org will bring up any public disciplinary action by the CFP Board, said Blayney.
- For advisors who sell stocks, bonds, mutual funds and other securities, visit the Financial Industry Registry Authority (FINRA) at BrokerCheck.FINRA.org.
- For investment advisors, check the U.S. Securities and Exchange Commission (SEC) at adviserinfo.sec.gov, where you can search names.
Step 5: Ask a Lot of Questions
A good financial advisor will ask you a lot of questions about your financial goals and history. But before you choose a financial advisor, you need to ask questions as well. “And you should ask a lot,” said Gjertsen.
If you’re wondering what to ask, the Financial Planning Association has an eight-page, 35-question document entitled “Choosing a CFP Professional: Questions to Ask” on its website. “Consumers should hand that to a CFP they’re considering, and ask them to fill it out,” said Gjertsen.
The questions cover a range of topics, mostly financial in nature, such as how the planner is compensated, company affiliations and more. Gjertsen said it’s also a good idea to ask questions that might not be strictly financial in nature. Get to know the person, their values and their interests.
“The best question a client ever asked me was, ‘What do you read on a regular basis?’” said Gjertsen. “It was great because they wanted to know that I didn’t just show up to work and never think about it again. They wanted to know I cared about what I’m doing and constantly learning.”
Step 6: Consider Your Advisor’s Typical Clients
If you’re a minivan-driving salesman hoping to save enough money for a modest retirement and college for your kids, chances are you don’t want a financial advisor with a client list of jet-setting multi-millionaires. Why not? Because you might not get the attention you deserve.
“I think that makes sense,” said Blayney. “I often say you want to be very average for that planner, right in the middle of the mix.” That way, she explained, you’ll get plenty of attention.
Gjertsen advised asking for a list of the types of clients an advisor handles, preferably like you. He also said the important thing is that you trust the advisor to get you to where you want to go financially.
So, you should interview more than one financial advisor. Three is preferable, said Gjertsen. When it comes to your future, you can’t be too picky.
Step 7: Review Your Financial Advisor’s Investment Philosophy
You should thoroughly understand your financial advisor’s investment philosophy: Does he or she favor a very aggressive approach or lean toward a more conservative attitude?
But, it’s far more important that you trust your advisor will take the appropriate approach for you when it comes to your investments.
“As a CFP, the investments are dictated by the needs of the client,” said Blayney. “The portfolio I put together for a couple in their 50s might look very different than the portfolio I would manage for a young single adult.”
Keep reading: 5 Reasons Millennials Don’t Trust Financial Planners
Putting in the time to find the right financial advisor for you could pay dividends for the rest of your life, so take the search seriously. “We spend more time planning our vacation than we do choosing a financial planner who might have huge impacts on our lives,” says Blayney.
And the funny thing is: Spending the time to find the right financial advisor could just get you that nice Tahitian vacation you’ve always dreamed of.