If you’re concerned about making good financial decisions and planning for the future, you might benefit from working with a financial advisor. But how do you know if you’ve found the right one? Here are three questions you should ask a prospective advisor during your first conversation.
When you work with an advisor, you’re trusting that person with a lot of personal information and important decisions, so it’s only natural to expect transparency about how they make money.
There are two main types of payment arrangements in the industry: fee-only and commission-based. Sometimes, one advisor will offer both types of services to clients (called a “hybrid” model).
Fee-only financial advisors typically charge a percentage on investment assets under their management. For example, you may be charged 1% of your account balance per year. In many cases an investment advisor will include financial planning services as part of this fee.
Other advisors might charge an hourly or flat rate for their services. Your advisor might provide a financial plan in exchange for a flat dollar amount or a time-based fee. These arrangements are more common with advisors who focus on financial planning services.
That said, some financial advisors may be fee-only for their investment and financial planning advice — but may also offer insurance services, which may provide them with commission income. Don’t hesitate to ask your advisor about the way they’re compensated for different types of products.
Commission-based advisors are compensated for selling certain products and may receive commission income from trading fees or from selling mutual funds and insurance products.
From our point of view, commission-based compensation can lead to conflicts of interest. After all, if an advisor benefits from recommending one path over another, can the advisor really be objective? It can also be less transparent because these fees aren’t always understandable or disclosed in a way that we believe makes sense to the average investor.
While a great financial advisor doesn’t always have acronyms behind their name, it’s useful to have an understanding of your advisor’s credentials and public record in the industry.
A good starting point is Investment Adviser Public Disclosure (IAPD). This resource is managed by the U.S. Securities and Exchange Commission (SEC). Depending on the advisor’s registration background, this site gives you the ability to view multiple public records at once.
If the advisor doesn’t have a history on IAPD, it may redirect you to the BrokerCheck database, which maintains records for advisors registered to sell securities. BrokerCheck is maintained by the Financial Industry Regulatory Authority (FINRA).
In terms of credentials, there is an alphabet soup of certifications and acronyms in use in the financial services industry. The two we generally believe are more valuable are the CFP® certification and the Chartered Financial Consultant (ChFC) designation.
The CFP® certification consists of seven courses, and the mark is awarded after candidates pass a 10-hour board examination covering the entire curriculum. The CFP® mark also requires participants to submit to a background check and pay a fee. Candidates must have at least an undergraduate degree in order to start the CFP® program.
The ChFC program covers all of the same topics that the CFP program covers, plus two additional personal financial planning electives. This designation does not require a final board examination. Rather, candidates take a test after completing each course. The program doesn’t require a college degree, but candidates must have at least three years of professional experience in the financial services industry.
Both credentials require periodic continuing education.
Again, these aren’t by any means the only two designations out there, and many advisors have credentials and experience outside of these programs.
However, asking your potential advisor to talk about their experience and education is an important part of understanding how well they might suit your needs.
This is more of an internal question for you: Do you feel that the advisor you’ve spoken to understands your life and your goals? In general, what you’re looking for is a sense that your potential advisor is curious about you and is interested in getting to know more about you — before suggesting particular products or strategies.
After all, working with an advisor who understands your unique circumstances is critical.
Begin by learning how the financial advisor gets compensated. After all, there is no such thing as free advice — and a transparent compensation structure is beneficial for both advisor and client. Understand the advisor’s credentials and how they align with your needs. Finally, look for an advisor who offers a free initial consultation and use that time to gauge whether they really listen to you and are willing to put your interests first.
All investments include the risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit.