If you’re thinking about working with a financial advisor, how do you go about choosing which one to work with? Would it surprise you to find out that many, if not most, people choose the first advisor they talk to, typically based on a referral from a friend or colleague? And very few people bother to check out the advisor’s credentials, employment history, or disciplinary record, even though these can be quickly and easily obtained. Why? I honestly don’t know. Selecting a financial advisor is surely one of the most important decisions of your life, right up there with choosing your doctor, finding your dream home, and selecting a good tax professional.
To get started, think about why you need a financial advisor in the first place, and what type of advisor might be able to help you handle your needs. Are you looking for someone to help you decide what to invest in, or how to determine a proper asset allocation? Or are you in need of someone who can help you solve the myriad financial challenges throughout your lifetime? These might include putting money aside to buy a car or a house, navigating the financial aid offers as your kids shop around for the best-fit college for them, saving and investing for retirement many years or decades in the future, understanding a pension or profit-sharing plan or buyout offer, deciding which funds to use inside your 401k plan at work, figuring out how much and what type of life insurance you and your family need, or deciding whether to put money into a 401k, 403b, traditional or Roth IRA. If you’re a business executive, you may have incentive stock options, deferred compensation plans, equity grants, or other similar plans as part of your executive benefits package. Do you own a business? Business owners typically face more financial complexity than the average employee. Dealing with tax issues can be a huge challenge for business owners, along with deciding what type of retirement plan to provide for your employees and how to structure it.
Another big factor in selecting a financial advisor is time – your time. Even if you feel like you have enough background or general financial knowledge to handle many critical financial decisions yourself, do you have the time necessary to keep up with the changing financial landscape and product offerings, do the analysis and sort out the alternatives to make these decisions? And will you continue to make time to monitor your finances, keep up with your investment selections as well as establishing and tracking goals for retirement planning? It’s also important to understand what your insurance needs are and what’s in your policies, and how to locate your investments to keep your taxes at bay. Sure, some financial decisions are relatively quick and straightforward, but many are not. And like most things in life, you get out of it what you put into it. In other words, if you really don’t have the time, or interest, to deal with the complexities of life’s financial challenges, consider hiring someone who can take the load off by doing the heavy lifting and allowing you to live your life with less day-to-day financial stress.
Still unsure how to choose? I suggest thinking about what you really need in an advisor, putting together a few questions and/or a checklist, and interviewing several financial advisors before making your decision. There are many resources available online to help you formulate your questions or checklist. And before you call to set up these appointments, make sure you do your homework first. You’ll want to dig into the advisor’s background online and ask around to better calibrate the person(s) you’re considering. Find out the advisor’s reputation and, if possible, talk with a couple clients to get their perspectives. Four of the more important factors to consider, in my experience, are Compatibility, Capability, Competence, and Credentials – the 4 C’s. Of these, compatibility is #1. You want to work with someone you get along with, and can effectively communicate with. It’s not imperative you become best friends, but it is imperative you communicate on an equal level. In other words, this is a relationship that only works if there’s mutual respect. You should feel confident the advisor will listen to your concerns, answer your questions in a manner you can understand, and treat you with respect. After all, you’re doing the hiring, and you control the firing. Get what you want, or better yet, who you want to work with.
It’s also important the advisor you select has the capability to handle your financial issues in a competent manner. Don’t take this for granted. Advisors come in all shapes and sizes, and some have more education, experience, and training than others. And make sure you take the time to check out their employment and disciplinary history. Brokers, who typically earn their keep by selling financial products for a commission, are regulated by FINRA, the Financial Industry Regulatory Authority. FINRA maintains a database on all registered representatives called BrokerCheck, which lists the broker’s financial industry employment history, exams passed and licenses obtained, and disciplinary actions, if any. Just google “FINRA BrokerCheck” and input the broker’s name and firm. Investment advisors, who typically make their living by charging a flat or asset-based management fee, are regulated by the SEC or the state. You’ll want to review the advisor’s and firm’s disclosure information on either the SEC or state website. For SEC registered investment advisors, go to adviserinfo.sec.gov and enter the advisor’s name and firm. Click the “Get Details” button to view the advisor’s employer, qualifications, registration history, and disciplinary disclosures, if any. At the bottom of the page, click the “View Detailed Report” button if you want a printable report on this investment advisor. Finally, you might also want to look over the latest Form ADV and Part 2 Brochures which provide information about the advisor’s firm. These forms are also accessed on the SEC or state website by clicking the “Firm” button near the top (instead of the “Individual” button).
Another important thing to consider are the advisor’s credentials, or industry designations. Some of the most respected and meaningful designations are the CERTIFIED FINANCIAL PLANNERTM, or CFP®, the Chartered Financial Consultant, or ChFC, and the Chartered Financial Analyst, or CFA. These designations require college-level coursework, passage of examinations, and sometimes an experience and ethics criteria as well. You can be sure advisors obtaining one of these credentials are committed to their profession. And make sure to tie these credentials back to your needs. For example, if you’re looking for a well-rounded financial advisor or consultant who can help you with a myriad of financial challenges and is certified across the many disciplines of consumer finance, you may want to select an advisor with a CFP® or ChFC designation. CFP®s and ChFCs have passed tests on taxes, insurance, investments, employee benefits, retirement planning, educational savings plans, and estate planning. On the other hand, if you’re only looking for investment advice, and specifically portfolio management, a CFA designation signifies someone who is certified as a financial analyst. CFAs have been tested in accounting, economics, security analysis, and money management. My perspective is that most consumers seeking a financial advisor don’t need a CFA; but that’s not to say they shouldn’t hire a CFA or that a CFA designation isn’t important. It is important, but it’s more of a credential requirement for mutual fund or hedge fund managers than it is for brokers or financial advisors. But again, it depends what your needs are. If you’re specifically looking for a financial analyst, you may want to hire a financial professional with a CFA designation.
What’s the bottom line? Hire someone you trust, period. This is a relationship business, and you want to work with someone who has your best interest at heart, and who will treat you with respect. Trust needs to be earned, not assumed. Good financial advisors are also good listeners. They listen more than they talk, at least in the “getting to know you” phase, but also as you invariably bring new financial challenges and concerns to the table. Spend time thinking about what you need, and researching advisors who may be able to meet those needs. And always remember – you’re in charge, you can fire an advisor as easily as you hired him or her. Good, trustworthy advisors welcome constructive dialog, even criticism. If you do find someone you enjoy working with and who earns your trust, thank your lucky stars and nurture the relationship. It’s not a marriage, but it could be one of the most important and prosperous relationships you build in your entire life.
Good luck with your search!