Despite the availability of financial advisors, a significant majority of people choose not to engage with their services. According to a study, nearly 65% of Americans had no financial representative or advisor. There are several reasons for this, including the perceived high cost and lack of trust in advisors. However, choosing not to work with a financial advisor could potentially lead to missed opportunities for financial growth and stability.
Financial advisors are professionals who can help you make informed financial decisions. They have the expertise and experience to advise on investments, retirement planning, estate planning, debt management, and other financial matters. By working with a financial advisor, you can better understand your financial situation and make smarter decisions. Whether you want to save for retirement, buy a home, or start a business, an advisor can provide guidance and support to help you achieve your objectives. A financial advisor can provide you with peace of mind and help you navigate the complex world of finance.
If you're considering working with a financial advisor, selecting the right one for your needs is essential. This article discusses how to select a financial advisor you can trust. Whether you're just starting your financial journey or looking to take your financial planning to the next level, these tips can help you choose the right financial advisor.
What are the different types of financial advisors?
Financial advisors vary by their areas of specialization and expertise.
Here are some of the most common types of financial advisors:
1. Certified Financial Planners (CFP): CFPs are professionals who have completed a comprehensive CFP certification which is awarded by the Certified Financial Planner Board of Standards. These advisors have proficiency in various financial services and can assist clients with financial planning, investments, retirement planning, estate planning, and tax planning.
2. Registered Investment Advisors (RIA): RIAs are licensed professionals registered with the Securities and Exchange Commission (SEC) or a state regulatory agency. They provide personalized investment advice and management services to clients.
3. Wealth managers: Wealth managers are financial advisors who typically work with high-net-worth individuals (HNIs) and families. They offer comprehensive financial planning services that may include investment management, tax planning, estate planning, and risk management.
4. Insurance agents: Insurance agents specialize in insurance products such as life insurance, health insurance, and annuities. They assist clients in selecting insurance policies that fit their needs and goals.
5. Tax advisors: Tax advisors specialize in tax planning and preparation and can assist clients in minimizing their tax liability while ensuring compliance with tax laws.
6. Estate planning attorneys: Estate planning attorneys specialize in creating and implementing estate plans. They assist in creating wills, trusts, and other legal documents to manage assets and distribute wealth.
Let us look at some tips on how to select a financial advisor that suit your financial needs.
6 Tips for Selecting a Financial Advisor
Tip #1: Understand your financial needs and goals
When engaging with a financial advisor, it is essential to have clarity of your needs and wants. Without a clear understanding of what you want to achieve, you may end up with an advisor who does not align with your objectives, leading to dissatisfaction. For instance, assume you want to retire in the next decade and aim for a comfortable retirement. If you fail to communicate this to your financial advisor, they may suggest investments that do not align with your long-term retirement goals. However, if you convey your needs and wants to your advisor, they can create a customized plan that aligns with your objectives.
Furthermore, if you are an HNI or a business owner, your needs may call for niche expertise. For instance, business owners may require financial advisors specializing in succession planning, tax-efficient strategies, and business transition planning. In contrast, HNIs may need guidance on philanthropy, estate planning, or risk management.
Also, the stage of life you are at may demand a different kind of professional experience from your advisor. The need of a young professional may vastly differ from someone approaching retirement. If you have large debt obligations or unstable income, the approach to your financial planning may differ, influencing the type of advisor you choose.
Tip #2: Research potential advisors available to you
One of the best ways to find an advisor who fits your needs is to conduct thorough research on potential advisors. The following are some ways you can research potential advisors:
1. Look up online directories
Several online directories can help you find financial advisors, including the Securities and Exchange Commission's Investment Adviser Public Disclosure (IAPD) database, the Financial Planning Association (FPA), or the National Association of Personal Financial Advisors (NAPFA). These databases provide information on an advisor's credentials, disciplinary history, and other critical details, helping you make informed decisions.
2. Ask for recommendations from friends or family
You may contact friends, family, and colleagues who have worked with financial advisors. They can provide first-hand information about their experiences and recommend advisors who align with your needs.
3. Check online reviews for financial advisors
Check online reviews from reputable sources such as Yelp, Google, etc., that can give you insight into the experiences of previous clients, both good and bad.
4. Consider using a free advisor match service
Online advisor match services are typically free and provide matches to pre-screened advisors based on your specific financial needs. WiserAdvisor is one such service that has been successfully connecting consumers with experienced and vetted financial advisors throughout the United States since 1998. With WiserAdvisor, you can either browse their directory to find a local financial advisor or utilize their free advisor matching tool. All you have to do is answer a few simple questions based on your financial needs, based on which the service can help match you to 1-3 suitable financial advisors. Every advisor in their database is an experienced and highly skilled professional who has undergone pre-screening for factors such as years of experience, a clear FINRA/SEC record, and methods of compensation.
Tip #3: Check the advisor's credentials and licenses
When selecting a financial advisor, their education and license are arguably the most important factors to consider. Read below to understand the credentials and licenses that advisors may need to possess to impart financial advice.
1. Review their level of education and certifications
To gauge an advisor's qualifications, inquire about their education and certifications. Check if they earned a degree in finance, economics, or a related field. Are they certified as a Certified Financial Planner (CFP), Certified Public Accountant (CPA), or Chartered Financial Analyst (CFA)? These credentials indicate that the advisor has a strong financial planning and investment management foundation.
2. Review their licenses and disciplinary history
Ensuring that an advisor is appropriately licensed is crucial, particularly if they provide investment advice or manage investments for you. Such advisors are required to be registered with the SEC or a state regulatory agency. You can verify an advisor's registration status and disciplinary history using the SEC's Investment Adviser Public Disclosure (IAPD) database or FINRA's BrokerCheck.
3. Review their professional associations
It is important to verify if the advisor is a member of any professional associations, such as the National Association of Personal Financial Advisors (NAPFA) or the Financial Planning Association (FPA). These associations often have strict membership requirements that ensure advisors adhere to high standards of ethics and professionalism.
It's important to ensure that your chosen advisor has the appropriate qualifications for your needs. For instance, if you want to plan retirement, a CFP may be an ideal choice since this certification requires extensive education, experience, and adherance to a strict code of ethics. For tax planning, you may engage with a CPA who can provide valuable guidance on minimizing tax liability and ensuring compliance with tax laws. Alternatively, if you are looking for investment advice, engaging with an advisor holding specific licenses (such as a Series 7 license for recommending securities or a Series 6 or 7 license for mutual funds) may be ideal.
Tip #4: Understand the advisor's investment philosophy
An advisor's investment philosophy refers to their approach to managing investments, including the types of assets they recommend, the level of risk they are comfortable taking, and their investment time horizon. As such, finding an advisor whose investment philosophy aligns with your investment goals and risk tolerance is important.
When evaluating an advisor's investment philosophy, it is critical to ask questions about their investment process, including how they analyze investment opportunities, construct portfolios, and manage risk. A competent advisor should be able to articulate their investment approach clearly and concisely and provide evidence to support their investment recommendations.
An advisor's investment philosophy should also be consistent with their client's financial goals and objectives. For example, if you are seeking long-term growth, it would be important to find an advisor who focuses on investing in growth-oriented assets and has a long-term investment horizon. In addition to aligning with your investment goals, an advisor's investment philosophy should also be grounded in sound financial principles and proven investment strategies. It is important to avoid advisors who rely on speculative investments or who make promises of high returns with little risk.
Finding the right financial advisor will require you to conduct due diligence and ask difficult questions. By understanding an advisor's investment philosophy, you can ensure they have a sound approach to managing your investments and finances.
Tip #5: Assess the financial advisor's experience
The experience of a financial advisor is a crucial factor in determining their expertise and the quality of services they can offer. The following are some of the factors to consider when evaluating the experience of a financial advisor:
1. Review the types of clients they have handled
An advisor who has worked with various types of clients, including individuals, families, and businesses, may better understand different financial needs and can provide a broader range of services. For example, if you are a business owner, you may want to work with an advisor who has experience working with other business owners and understands the unique financial challenges of running a business.
2. Assess their history of working with clients
A financial advisor's track record can be a useful indicator of their success rate in helping clients achieve their financial goals. Enquire about their experience in managing investments and ask for examples of their successes in helping clients reach their financial goals.
Tip #6: Evaluate the advisor's fees
When selecting a financial advisor, it is important to understand their fee structure to ensure that you are comfortable with the costs associated with their services, and to prevent any surprises down the line.
Here are the different ways in which a financial advisor makes money:
1. Percentage of AUM (Assets Under Management)
Most financial advisors charge a percentage of assets under management. This fee can vary depending on the size of your portfolio but typically ranges from 0.5% to 2%. For example, if you have a $500,000 portfolio and your advisor charges 1%, you would pay $5,000 per year in fees.
2. Flat fee
Some advisors charge a flat fee for their services which can range from a few hundred to several thousand dollars, depending on the level of service you require. A flat fee can be a good option if you have a smaller portfolio or prefer a more predictable fee structure.
Some advisors earn commissions on the products they sell, such as mutual funds or insurance policies. While this fee structure can be attractive because there may be no upfront fees, it's essential to know that the advisor may have a financial incentive to recommend products that may not fit your needs best.
It would also be wise to watch out for hidden fees, such as trading fees, account maintenance fees, or other administrative fees, as they can eat into your investment returns over time. Ultimately, you want to choose an advisor who provides value for the fees they charge and helps you achieve your investment objectives.
When it comes to managing your finances, the decisions you make today can significantly impact your financial future. By working with a financial advisor, you can minimize the risks and maximize the opportunities for financial growth and stability. An advisor can provide a personalized financial plan that considers your unique goals and circumstances. They can also help you stay on track and make adjustments to ensure you attain your objectives. Overall, the benefits of working with a financial advisor usually outweighs any costs involved.
Use the free advisor match tool to match with experienced financial advisors who can guide you effectively on how to secure your financial future. Answer a few questions based on your financial needs, and the match tool will help connect you with 1-3 financial advisors that may be suited to help you.