Making your financial advisor selection is similar in many ways to the way you select any service professional: you want someone who is capable, dependable, and honest. Those traits are all at the core of choosing a financial advisor, as well as some additional considerations.
To decide whether someone is worth your trust, your instinct is probably as helpful as anything. In addition, look at such factors as:
For most people, the variety of financial needs they have, the types of assets in their portfolios (from stocks and bonds to real estate, commodities, etc.), and the complexity of their personal and business situations call for knowledge and experience with a broad array of investment options and financial products, as well as familiarity with related tax and legal issues. Ideally, your financial advisor selection should focus on finding someone who can act as quarterback, coordinating the services of the different professionals whom you need to execute elements of your plan. In addition, you may find it helpful if the person you choose is ready and willing to educate you in their philosophy of financial planning and relevant investment strategies.
Financial planning providers offer a range of capabilities. On the less costly (but generally less robust) end, individual practitioners can provide transactional-based services (like retirement plan rollovers, life insurance or investment management only). Practitioners who are solely focused on individual transactions often do not have the robust experience with other facets of financial planning necessary to develop and implement a comprehensive financial plan. On the more consultative end of financial planning, working with a comprehensive financial advisor within a wealth management team generally ensures at least some breadth of in-house expertise in a broad array of disciplines and services. Additionally, in a team environment, a financial advisor can more easily access colleagues with specialized knowledge in order to make the best recommendations on your behalf.
Among professional certifications, the CFP® mark is the one most pertinent to financial planning. To earn this designation, an individual must complete coursework, pass a rigorous and comprehensive exam, and gain experience working with actual financial planning clients. One of the key reasons the CFP® certification matters is that its holder commits to serving as their clients’ fiduciary, meaning that their official role is to act only in their clients’ best financial interests.
There are a number of ways advisors earn their living. Without trying to favor one compensation model over another, we’ll just observe that the potential advisor should be transparent about how he/she is paid. The more you understand that, the more confident you can feel about their reasons for making certain recommendations. Typically, there is a flat fee for the preparation of a financial plan itself, established at the outset. After the plan has been completed, you may choose to engage the individual or the firm to help you implement the plan. The fee for managing your assets is usually calculated based on a percentage of the assets under management. Insurance is typically earned as a percentage of premium. Of course, you also have the option of choosing another provider to implement the recommendations provided in your financial plan. You may even want to manage your assets yourself. If you want to establish a premium ongoing relationship with your advisor, you may also pay an annual fee to continually update the financial plan and receive advice on an ongoing basis.
It’s essential that you are able to speak openly with your financial advisor. You need to be confident that the person you are hiring is someone you could have an open conversation with regarding your and your family’s current financial situation and future hopes and dreams. If you don’t feel you can be open and honest with the individual, that person will never be able to give you the comprehensive advice you need to help you fulfill your financial goals. You want to feel comfortable going to this person for advice regarding every financial decision you make throughout your life. Such client-financial advisor relationships make for the most satisfied clients, and also the most meaningful experiences and outcomes.
Those are five key factors you may want to explore in order to determine how comfortable you are with a given financial planning practitioner. What’s generally less helpful is asking about the average rate of return of the financial advisor’s client portfolios, or whether their clients tend to beat a certain index.
While such questions might seem straightforward enough, they actually don’t provide much relevant insight into how well the advisor can help you. A sound financial plan isn’t designed to beat a certain index. It’s designed to help the individual achieve their personal financial goals, which can vary widely based on the individual’s age, current and future financial needs, other elements of their portfolio, and so on. To cite only one example, a couple who begin saving in their thirties and have many years until retirement, can generally afford to invest in more dynamic vehicles and markets. Unless you’re in their exact same situation, their rate of return will have little relevance to you.
A more important point to consider is how the financial advisor talks about customizing a plan to meet your particular goals. Do you want to set aside money for your children’s education? Do you hope to retire early, say at 60? How old are you, and what’s your tolerance for risk? How long do you have to make contributions before you must start withdrawing? Each of these factors weigh into how a financial advisor would help you structure your investments, and the eventual rate of return you would achieve.
The most important advice for people who are making a financial advisor selection is that you need an advisor whom you trust to do what’s right for you, your business, and your family. Referrals from trusted family and friends are a great way to come up with a short list of possible options. The additional criteria listed here can help you evaluate how good a fit each will be for you and your family. The CFP® designation in particular is an objective indication that an individual is not only knowledgeable and experienced, but will also have your best financial interests at heart.
* Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.