Choosing a financial advisor can seem overwhelming when you first start…especially if you’ve never delved into the financial world yourself. It can be tough knowing what to look for. However, there are some strategies that you can utilize to find the advisor that gels with your needs the most and will help you reach your ultimate goal. Making use of these three questions will undoubtedly help you assess and ultimately hire a financial advisor that can help you trek down the path you desire.
“Most people don’t realize when choosing a financial advisor who is not a fiduciary, that this person does NOT have to act in YOUR best interest“Click to tweet
So to put that in layman’s terms, a fiduciary is doing what’s in your best interest. Most people don’t realize when choosing a financial advisor who is not a fiduciary, that this person does NOT have to act in YOUR best interest. They just have to meet what is called a “suitability requirement”. In other words, there may be other options out there, but they don’t have to tell you about them; they’re only required to give you something that will be acceptable for your need.
Here’s a great illustration — you ask me to find you a coffee cup, so I go out to find you one. I bring you back coffee cup that is porcelain with rhinestones and it even has your name engraved on it. I convincingly point out all the amazing attributes of the coffee cup I’ve brought you and sell it to you. Here’s the problem with that… I didn’t ask you all the important questions that might’ve assured you ended up with the coffee cup to best benefit your needs. Will you need it to be a travel mug? Does it need to be disposable? Is it important to you that it be made in the USA? How long will it need to keep the coffee warm? Without asking these questions, I can’t show you ALL the options that would’ve allowed us to filter out all the unnecessary choices that don’t really meet your objectives for buying the coffee cup in the first place.
If a fiduciary relationship is what you’re after, you’ll need to know that there are only three different financial advisors that are required to act in a fiduciary capacity. The first is a CERTIFIED FINANCIAL PLANNERS™. By the board of standards, CFPs® have to be a fiduciary, hands down, no questions asked. Next would be a Fee-Based Planner that is governed by the National Association of Personal Financial Advisors or NAPFA. The last group includes some Certified Public Accountants and Attorneys that do some financial work and have to follow rules instructing them to act in a fiduciary capacity. So it’s important to know if your advisor is adhering to rules that would land them in this category.
There are basically three conventional ways for advisors to get paid. They will either earn a commission, get paid a fee based on assets or they charge a flat fee for a particular service. So someone that earns a commission is going to be the ones who often sell annuities, life insurance, loaded mutual fund’s, etc. Their revenue comes from the product they sell you. Here’s an example – say you give someone $10,000 to invest in a mutual fund for you, which you may lose $500 of deposit to commission upfront. It’s also possible, that just by selling you a certain product the advisor is earning a trip or a bonus or some other kickback that’s not beneficial for you. Therefore commission based sales can be tricky.
A fee-based advisor is going to charge you a percentage of the assets. Let’s say you give someone $100,000 to manage for you and they’re going to charge you a 1% – 2.5% fee on that total you’ve given them to manage…that fee is based on the assets for the service that’s being yielded to you.
The final option for payment is a flat fee. This can run the gamut. You may hire somebody and pay them to look at one particular area of your financial life. If you’re being sold life insurance, you would have them review it to tell you what works best for your situation and you pay them that fee for doing so. Or you may want to hire someone to come in and completely manage your finances for you – basically a private Chief Financial Officer. You pay them a flat rate per year to do that.
If you are not satisfied with his answer to the question above, or the advisor loses you in the industry vernacular, you may just ask this simple question: How much money is going to leave my pocket (and earnings) and land in the hands of those you’ve hired. For example, your advisor is charging 1% to manage the investment account. But they go out and buy a mutual fund with a 2% internal cost, then 3% of your earnings could actually be going into the pockets of others and not yours. If you don’t understand what you’re doing it can be easy for an advisor to mix up the jargon and costing you money. So ask (and make him explain if you don’t understand) how your advisor is getting paid.
This is where you are basically asking them, “what are you going to do for me?” Some financial people will only manage money—take your funds and grow it for you—and that’s all they do. Others may be fee-based and you hire them to go out and build you an insurance package—handling the ins and outs, making sure you get what you need—that’s considered a limited scope.
The other pendulum of these selections is comprehensive planning work. This is where you’re going to find most of your CERTIFIED FINANCIAL PLANNERS™. Comprehensive work could include doing quarterly reviews, dealing with bankers, meeting with their CPAs, contacting their attorneys, doing profit and loss statements, negotiating on their behalf, handling their investments, college planning and the list goes on and on and on…they are inherently involved in every aspect of your financial life. The CFP® is going in and scrutinizing their finances in order to help that person or company reach a goal.
When it comes to the answers they supply, one isn’t necessarily better than the other. Rather there’s a time and place for every single one of these courses of action. There is no right or wrong answer when investigating what your financial advisor can do for you…it merely comes down to what you want. So, ask these three questions to any advisor, but know what you’re looking for when you do. That will ensure you pick the right financial planner to help you meet your goals.