Finding a knowledgeable, trusted financial advisor with whom you can develop a good working relationship may feel like looking for a needle in a haystack. Not only are the stakes high, but the options are varied. Although the ultimate decision is yours, a review of different types of financial service firms and advisors could help you find the right fit.
Regardless of your age, confidence in your financial advisor is important. For those starting out in their careers, the key consideration is finding an advisor who can work with you to develop a viable blueprint for how to save and invest so that you maximize your greatest assets – time and talent. For those in mid-career (and probably mid-life), you may be looking for greater clarity about your current financial situation and the steps you should take to achieve your key goals: payoff mortgage; finance children’s college; care for aging parents; save for retirement. For those on the cusp of retirement or in retirement, you may be searching for an advisor who can help you maintain and effectively withdraw your hard-earned savings to ensure a lifetime of financial freedom.
Complex and Conflicted Landscape
When it comes to personal finances, there are many different types of advisory firms and different credentials for financial advisors. It can be difficult to decipher the differences.
Most firms fall in these general categories: large wirehouse brokers, independent broker/dealers, registered investment advisers (RIA), or online automated investment management (“robo” advisors). Large players are typically big-name broker/dealers, who’ve spent a fortune on marketing: Merrill Lynch, Morgan Stanley, UBS, Edward Jones, Wells Fargo, Ameriprise. A secondary-tier of this type of firm has grown over the past couple decades as independent advisors with their own business identity run their businesses through broker/dealers like LPL, Commonwealth and dozens of others. These firms have historically built their businesses on transactional compensation (commission) sometimes combined with advisory fees. Generally, these firms have operated from a suitability requirement rather than a fiduciary standard, which requires that their investment recommendations and advice be in the best interest of the client. (Read The Fiduciary Debate: Does Your Advisor Act in Your Best Interest?)
Investment firms like Vanguard, Fidelity and Charles Schwab, have historically been mutual fund providers or low-cost brokers. However, in recent years, they have expanded their offerings to include financial advice.
RIA firms typically have a local, or regional, presence and independence from any particular investment providers. RIAs are usually much smaller than broker/dealers; work with a larger custodian like Charles Schwab or TD Ameritrade; and accept a fiduciary obligation to act in the best interest of their clients. Often, they use a fee-based compensation model that wraps financial planning, investment management, tax planning, estate questions, college savings, retirement income and other topics into a single advisory fee rather than transactional, product-centric compensation (commission).
RIAs do vary in size and service. Some RIAs have billions of assets under management (AUM) while others just a few million. RIAs have some limitations compared to nationally branded firms, but they typically offer conflict-free advice and have relationships with other independent professionals (e.g., attorneys, accountants) to deliver comprehensive financial guidance.
More recently, “robo” advisors, such as Wealthfront or Betterment, have emerged with the singular emphasis on computer-based, low-cost investment management offerings. Many such firms provide little or nothing in terms of financial planning or broader advice regarding financial decisions and their impacts.
Credentials and Licenses
In addition to size and service, another filter for potential advisors is credentials. The most recognizable, respected designations are CERTIFIED FINANCIAL PLANNER™, Chartered Financial Analyst® and Chartered Financial Consultant®. These credentials require significant commitment to educational curriculum, exam standards and professional experience.
For example, obtaining the CFP® designation requires one to pass seven classes and a two-day exam that covers an array of financial planning topics: retirement planning, investment management, estate planning, insurance, employee benefits. This curriculum is designed to give practitioners breadth and depth needed to help clients with wealth management. Certainly, there are some advisors who have not earned these designations who do very good work for their clients. Still, if you’re looking for a filter to help you decide which advisor or firm to work with, the designations can be a clear differentiator.
Questions to ask prospective advisors
During an initial meeting with prospective advisors, it’s often best for the Q&A to go both ways to help ensure a good fit. (Read Good advisors ask questions.) Here’s a list of questions that you might ask an advisor before making your decision:
- Do you offer thorough financial planning or only investment management?
- How are you compensated (fees from clients only or commissions paid by product marketing organizations)?
- What are the costs of investment management and financial planning?
- Will you act as a fiduciary for me? Are you legally obligated to act in my best interest?
- What professional licenses and/or designations do you have that allows you to serve as a financial advisor?
- How long have you been working in the financial industry?
- How many clients do you have?
- How do you determine the right investment strategy for a client?
- What are your core beliefs about managing money?
- How often would you review my investments and my goals?
- What type(s) of communication will I receive from you and your firm?
- Have you ever been sued or had any client complain about your work as a financial advisor?
NOTE: You can access a deeper checklist of questions here.
Looking for a financial advisor may feel daunting. However, a little research and some legwork can go a long way in helping to ensure your financial security.
- FINRA Broker Check: Learn more about registered representatives of brokerage or insurance-based firms – employer history, licenses held and if the advisor has infractions or lawsuits on their record.
- SEC Advisor Info: Learn more about Registered Investment Adviser firms you are considering.
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