Finding a trusted financial advisor was already hard. Recently, the court of appeals reversed the pending Department of Labor's fiduciary rule confusing financial consumers even more. It is critically important to understand if your financial advisor will be acting as a fiduciary for you or, instead, seeking investments that are suitable for you. It is also important, though, to learn if this is a trusted person that understands your needs, offers an approach that feels comfortable, and has the experience you seek for your unique circumstances. To help navigate the sometimes stressful search, we have put together our top five recommended questions when seeking a financial advisor.
1. Are You a Fiduciary?
The fiduciary standard legally obligates advisors to put your interest before their own. Advisors that work under a fiduciary standard must disclose any conflict of interests and share with you whether they benefit from recommending any products or other professionals. They must be transparent as to fees the advisors gets for that advice.
In contrast, the suitability standard is a standard requires advisors to suggest investment products that are appropriate for you. There is no standard to conclude that the investment will help you achieve your goals or is in your legal best interest. Also, there is no requirement to fully disclose any conflicts of interest, possibly allowing an advisor to recommend products that may provide higher commissions for themselves instead of similar products with lower fees.
There are wonderful advisors and poor advisors that work under both the fiduciary and suitability standard. We work under the fiduciary standard and highly value the trust we know it provides.
2. What are Your Credentials?
An advisor's professional designations and experience matter. It gives you great insight as to the advisor's knowledge and areas of expertise. There are over 100 different types of credentials and they can be very confusing. If you are looking for a financial advisor, you might be well served to at least be familiar with these three credentials that reflect a broad level of training and commitment:
CFP® – CERTIFIED FINANCIAL PLANNER ®
CFP® professionals have completed university level financial planning coursework, met experience requirements, and passed the CFP® board's rigorous exam covering 72 topics ranging from investment and risk management to tax and retirement planning, legacy management and the integration of all these disciplines. They also commit to ongoing education and a high ethical standard. More information: http://www.cfp.net
CFA® – Chartered Financial Analyst ®
To earn the CFA credential, professionals must pass 3 rigorous exams, each of which demands a minimum of 300 hours of master's degree level study that includes financial analysis, portfolio management and wealth management. Professionals must also accumulate at least four years of qualified investment experience and annually commit to a statement of high ethics. More information: www.cfainstitute.org
CIMA® – Certified Investment Management Analyst®
CIMAs focus on asset allocation and portfolio construction. The program of study covers 5 core topic areas and applicants must meet experience, education, examination and ethical requirements. CIMAs must also commit to ongoing professional education. More information: www.imca.org
3. What Services and Products Do You Offer?
Make sure you seek out an advisor and firm that fits your needs. If you need someone to help you with your investing, you might seek out a firm that has a range of investment solutions such as an asset management firm.
If you need help assessing your current circumstances and creating a plan for you to reach various goals in your life, you might seek a financial planner. This advisor can help you consider retirement and college needs, tax strategies, risk management and possible wealth transfers.
If you need both financial planning and investment advice, then you should seek a wealth manager. This advisor has broad expertise and takes a holistic approach to guide you through comprehensive planning and portfolio management.
4. How are You Compensated?
Don't be shy; ask about fees! Every professional deserves to be paid for their expertise and services. By understanding how the advisor is compensated, you can determine whether the advisor's interests align well with yours.
Commissions only – these advisors are compensated based on the investment products you choose such as mutual funds, structured products, insurance policies or annuities they buy or sell for you.
Fee only – Independent advisors often offer fee only advising. Their fee is often stated as a percentage of the assets they manage for you so that they, too, benefit if your portfolio grows and are penalized when it declines. They may also offer fixed fees for specific services.
Fee-based – these advisors may charge a fixed fee for financial planning services they provide and collect a commission on any financial product you buy or sell. These may include mutual funds, Real Estate Investment Trusts (REITs), annuities and insurance.
5. What is Your Approach for Someone Like Me?
It's important to know that the advisor you seek has experience working with people in your circumstances. This is especially true if your financial situation is complex due to the wealth you've accumulated through-out your career. Ask the advisor to tell you about a client with common challenges and to share what solutions were offered.
Finding the right financial relationship can feel a little overwhelming sometimes. It is a bit like dating; you have to meet a variety of people, ask lots of questions, and wait until it feels like a good fit. Rest assured, no matter what your circumstances, you can find an advisor that is excited to work with you and has experience with clients just like you.