It’s not hard to find a financial advisor. Finding the right one, however, is difficult. Why? There are more than 250,000 financial service professionals in the country. In a crowd that size, it’s easy for an ill-equipped person to pass themselves off as someone with a financial road map and an interest in your personal wellbeing rather than short term profit. It can pay to take a beat. As the CFP Board Ambassador for New York and second-generation certified financial planner who has grown up in the industry, I’ve seen this happen. Here’s how I tell people to avoid that poor outcome: Look for a financial advisor who offers objectivity, actionable advice, and excellent client service.
To find that person, you need to consider who they are, what they know, and how they work.
1. Their Background and Experience
You should be deeply interested in knowing that the person put in charge of your personal finances has a clean compliance record, has not bounced around from firm to firm, and has actually been an advisor for at least three years. Ideally, you want more that that because it means the advisor has been through more economic conditions, both good and bad. Remember, you can’t become a legitimate (or competent) FA overnight. It takes years.
Fortunately, industry regulators have done a solid job of providing resources for examining an advisor’s background and experience. For those registered with a broker dealer, check out FINRA’s BrokerCheck website. For those working with an investment advisor, there’s the Investment Advisor Public Disclosure. Both will generate a detailed report containing everything from disclosure events and employment history to licenses and credentials. Running these reports is 100 percent free. I tend to immediately look at the disclosures, as it’s usually where you can see an advisor’s past mistakes.
2. Their Education
When it comes to finding the right advisor, I believe there are more important criteria than a degree from a good school, but it’s reassuring to know they have one and indicative of a stronger background. The process of uncovering their academic background can also be, in and of itself, revealing. Request something called the ADV Part 2B. This brochure will contain the advisor’s educational background and more. If they don’t know what form you’re talking about, it’s probably best to move on.
3. Their Designations
There’s no shortage of designations for financial advisors, but knowing which ones to look for is important. As an ambassador for the CFP Board of Standards, I am obliged to tell you that the CERTIFIED FINANCIAL PLANNER designation is the one that matters most because the CFP mark is widely accepted by the financial planning industry and media as the gold standard. This is because CFP professionals have demonstrated rigorous education, examination, experience, and ethics requirements.
Out of the more than 250,000 financial advisors in the U.S., approximately 76,000 are CFP professionals. I am not going to tell you that should only work with a CFP. There are indeed many great advisors that don’t have these letters after their name, but it might be worth asking why they didn’t pursue the designation. Perhaps they’ve amassed decent experience elsewhere. Don’t be bashful! Remember what you’re entrusting them with. Nonetheless, I highly recommend that you consider working with a CFP professional. Moreover, CFPs must abide by the fiduciary standard, which brings us to a very hot topic in the financial services industry.
4. Their Compensation Structure
Over the past few years, there’s been a big ado about something called “The Fiduciary Standard”. What this means is that, above all else, a financial service professional should act in your best interest. Now, one would hope that this would automatically be the case when hiring someone to help you with your finances but, sadly, it’s not.
Not too long ago, a financial advisor was basically a stock broker, interested in earning commission by trading stocks and other investments. While the industry continues its transformation from transactions to relationships, the sales-fueled culture of brokers (made sexy by movies like Wall Street, Boiler Room, The Wolf of Wall Street and by bros everywhere) lingers in the industry today. This is why it’s incredibly important to seek out professionals that are fiduciaries.
How to tell? Well, a lot of it stems from how the advisor is paid. Failing to do so could leave you susceptible to Wall Street greed. Here are some compensation structures to know:
When an advisor is managing your assets, they are bound by the fiduciary standard. Some of these advisors are fee-only advisors. To be a fee-only advisor means you cannot accept commissions from the sale of financial products. By instead charging a flat fee or a percentage of assets, the compensation structure is assumed to be more aligned with the interests of the client.
However, an advisor can still sell commission based products and be a fiduciary. These are “fee-based” advisors. Fee-based advisors (who may also be fiduciaries) are obligated to demonstrate to their clients that any commissions they receive are from recommendations that are truly in their client’s best interest. This is only achieved through providing full disclosure and proper education. For example, I am a fee-based advisor because I choose to sell insurance, something I’d prefer my clients purchase through me than an agent.
As much as “fee-only” advisors will tell you that no one is more objective than they are, I can’t say that one is definitely better than the other. Again, what’s most important is that your financial advisor is completely transparent with how they are paid and they are putting your interest above all else as a fiduciary. Both fee-only and fee-based advisors are capable of doing this. While fee-only advisors might have less explaining to do, it’s not worth missing out on a solid advisory relationship because of it.
5. Their Relatability
Your financial advisor is hopefully someone that you will have a long and fruitful relationship, which is why it is imperative that you find someone with whom you genuinely mesh well. Unfortunately, there are more CFPs over the age of 70 than under the age of 30, which makes this process challenging. This is not to say your average advisor (usually a 55-year-old white male) can’t be a good fit, it’s just less likely that someone 20 to 30 years your senior is coming from a similar place in life as you. Just be sure to consider this.
6. Their Main Focus
Lastly, great financial advisors do more than just invest your money. They are your coach, counselor, consultant, and confidant. To receive this level of value from your advisor, you should work with someone who leads the client-advisor relationship with financial planning, not investments. Financial planning is a rigorous process that encompasses all areas of your financial life including cash management, insurance, investments, financial independence, taxes and estate planning.
In the end, working with a trusted, relatable professional can deliver immense value and save you precious time. Once you’re ready, you can start your search by visiting Let’s Make a Plan.org or by visiting the Financial Planning Association. Good luck.