How To Choose Your Financial Advisor

Not sure what to look for or where to start when choosing a financial advisor? Lighthouse Financial can help! In summary, when choosing a financial advisor, consider these four key components:

  1. Credentials

  2. Experience

  3. Business Structure

  4. Values

The reality is that just about anyone can tout themselves as a financial advisor. Anyone willing to take a state exam through an organization called FINRA and pass the exam can call themselves a financial advisor. Since the title is a commodity in our industry, it means that you, as a consumer of the services, cannot use the title as an indicator of your advisor’s skill sets or knowledge. If you can’t use titles to parse out the right type of advisor for you, then what should you be looking for when selecting your long-term financial partner? That’s right! Find out your financial advisor’s credentials, experience, business structure, and values.

selecting your advisor
 

Credentials don’t make the person, but they can be an indicator of a specific level of learning. They can help determine the focal areas for your advisor. For example, your advisor has the abbreviations of CFA behind his or her name, this stands for Chartered Financial Analyst. CFA will tend to be someone who is concentrated on portfolio management and the education required to receive Chartered Financial Analyst status is rigorous.  The program is a three year, master’s level training program and is the highest level of training a person can receive for portfolio management.  This means that your CFA advisor will tend to talk more with you about the day-to-day investment decisions, transactions, and data analysis.  Your CFA advisor is a person who probably spends most of the working day keeping pace with the intricate market and economic fluctuations and making investment decisions. Alternatively, a Certified Public Accountant (CPA) enjoys looking at the tax implications for financial decisions and seeks to find ways that create efficiency and risk mitigation. They know the nuances in the law and understand how to maneuver through them to minimize tax liability and perpetuate wealth.

Beyond credentials, your advisor needs experience.  Everyone has to start somewhere; we were all new to our careers at some point.  However, it’s important for that new advisor to be couched in a firm that has experienced and highly trained advisors. When you choose a doctor, do you choose someone who is fresh out of school or do you want someone who has been around awhile, has seen a variety of different ailments and has learned what symptoms are run of the mill and which are more serious concerns? People want doctors to be credentialed, trained, AND experienced.  It’s the same thing when it comes to building your wealth.  You should partner with a firm that has the know-how you need today as well as the expertise you will need tomorrow.

Next, the business model and fee structure of the firm can be a terrific indicator of the values and motivations that drive the employees and their interaction with you as their client. If your advisor is primarily commission based, then it means their salary, employ-ability, and career sustainability is based primarily off of the ability to transact business. Transnational relationship tends to provide a specific product or security in which you purchase, for a price of course, and then you walk away from the relationship until you need to purchase another product or security.  A popular example of this type of transaction is an insurance agent. You need life insurance and they provide you with a policy.  The insurance company provides the agent a commission for selecting their company’s product.  Selling Mutual Funds or structured investment products works much the same way.  When you or your advisor purchases Mutual Funds for your investment account, there is a commission paid to the advisor.  Sometimes that commission is paid one-time and other situations the advisor might get a trail every year for selecting or selling the product to you. Additionally, commission-based firms create compensation structures for their employees that require them to sell so many widgets each quarter. This can motivate a financial advisor to sell a specific type of investment or financial product over another to meet goals.

On the flip side of a commission based financial firm you can select a FEE-ONLY financial advisor.  Fee-only firms do not earn commissions and are held to a fiduciary standard to put your best interests first.  Their only source of income comes directly from the client and not through back-end benefits or other commission-based offering.  Typically the fees are charged in two ways, either a percentage of assets under management, such as 1% annually, or fees are charged at a flat rate when it makes more sense to do so. Look for RIAs that are fee-only if you want a relationship with your advisor that puts your needs first and isn’t tempted by commissions and quotas.  They will be able to help you with most areas of your financial life – from budgeting, estate planning to investment and tax management. The only downside is that you have to purchase your insurance products through a third party.

The Hybrid Fee Structure, or more commonly known as FEE-BASED firms, operate utilizing some commission based features and products while also having the ability to charge a flat rate or fee for service. This model was created so that financial firms could have the freedom of providing products to clients when needed while also following industry pricing standards for investment management and planning. The problem lies within the reality that if your advisor experiences financial pressure in their job, they may offer commission-based products when a flat rate would have been more appropriate. Alternatively, they may charge an asset management fee while also receiving commissions for the investment products inside your account.  So, even though fee-based was started with good intentions, it opened up some true risks for the investor. If you are partnered with a Fee-based firm, you want to do some extra research to ensure that your advisor is doing their best for you.

Once you’ve decided which type of credentials, expertise, and business model you prefer, you can then compare apples to apples and hire the advisor that is the best fit for you!  The final step to hiring your advisor involves the soft skills side of money management.  Is your advisor someone you can talk to openly?  Dose he or she value the same types of things you do?  Does your advisor share the same philosophy for wealth building that you do?  These relationship qualities are imperative to a long term relationship.  If you believe in day-trading or technical investing and your investment advisor is a fundamentalist, then they may not be a good match no matter the skill level of the advisor. Follow these simple guidelines and you’ll find that the process of hiring an advisor is less complicated, more empowering, and an exciting adventure.

 

Sources

  1. http://www.letsmakeaplan.org/other-resources/types-of-financial-advisors, CFPboard.net. Types of Financial Planners and advisors pulled 9/28/2018.

2. Glassman, B. (8.1.2016). The Four Types of Financial Advisors https://www.glassmanwealth.com/blog/four-types-financial-advisors/, pulled 9/28/2018.

3. Marketwatch.com, Francavilla, W. (5.26.2018). Opinion:  Stay away from these 3 types of financial advisors (and that’s coming from an industry insider). https://www.marketwatch.com/story/beware-these-3-types-of-financial-advisers-says-this-industry-veteran-2018-04-05. Pulled 9/28/2018.

4. Nerdwallet. Coombes, A. (5.23.2018). What is a Financial Advisor and How to Choose One. https://www.nerdwallet.com/blog/investing/how-to-choose-a-financial-advisor/. Pulled 9/28/2018.


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.