The most important decision you can make in your financial life isn’t what house to buy or 401(k) investment to use. It’s choosing the right financial advisor.
“A good advisor can turn fuzzy intentions such as ‘save more’ or ‘retire early’ into quantifiable and actionable goals,” says financial planner Dana Anspach, CFP. Advisors can help you stay disciplined and make smarter decisions about saving, investing, taxes and retirement. Most importantly, they can gather all the various elements of your finances into a coherent plan tailored to your goals and life situation.
Problem: “In the US, anyone can call themselves a financial advisor,” says Anspach. Finding a trustworthy financial advisor is a daunting task. You have to navigate a confusing landscape where different types of professionals offer different services and are held to different regulatory standards. Fees are confusing. Credentials vary widely. “Many people pick someone a friend or family member uses,” says Anspach. “But that’s not always the right choice. Your financial situation may be quite different from theirs, and you may end up with a fee structure that does not align with your needs or fail to get the expertise your particular situation requires.”
Bottom Line Personal asked Anspach for a step-by-step guide to choosing the ideal financial advisor…
Understand Your Financial Needs
Your first step is deciding what you need a financial advisor to do for you…
For broad comprehensive advice, look for a holistic advisor or a certified financial planner (CFP). These professionals typically examine your full financial picture—income, expenses, savings, debts, investments, estate planning—and build a long-term roadmap. They offer ongoing planning but also can be available for limited help or individual projects.
For more specific advice, you may want to consider paying a specialist depending on the scope of your problem and the service you require. Examples: For tax issues, a certified public accountant (CPA) is best…for investing, a registered financial advisor (RIA)… for life insurance, an insurance agent…and for annuities, an annuity broker.
| Credential | What it stands for… | Best for… |
| CFP | Certified Financial Planner | General financial advice |
| CFA | Chartered Financial Analyst | Detailed investment advice and portfolio expertise |
| CPA | Certified Public Accountant | Advice on tax law and minimizing taxes |
| RIA | Registered Investment Advisor | Creating and overseeing portfolio |
| CLU | Chartered Life Underwriter | Life insurance, insurance-based wealth transfer |
Types of Financial Advisors and Key Credentials
Professional credentials can be useful in understanding the kind of expertise financial advisors offer, the training they’ve had and the standards to which they adhere. “But there are also lot of junk credentials out there that require little more than paying a fee and passing a simple test,” warns Anspach. Reputable credentials to look for…
Certified Financial Planner (CFP). This is the gold standard for general financial advice. To earn a CFP designation, an advisor must take extensive coursework and have 6,000 hours of financial-planning experience.
Chartered Financial Analyst (CFA). A CFA is best if you require detailed investment advice and sophisticated portfolio expertise.
Certified Public Accountant (CPA). A CPA can offer general advice on tax law, tax filing and accounting, as well as strategies for minimizing taxes and structuring your finances efficiently.
Registered Investment Advisor (RIA). An RIA is best to create and oversee your investment portfolio. RIAs are required to register with the SEC and/or state regulator agencies and adhere to strict standards.
Chartered Life Underwriter (CLU). Getting a CLU credential requires coursework and experience in dealing with life insurance and insurance-based wealth transfer.
How Financial Advisors Are Paid
Financial advisor fees can directly affect the advice you receive and whether it’s aligned with your goals. Different fee structures create different incentives, and that can influence even the most well-meaning advisor’s recommendations. Here are the most common payment models and how they affect the advice you get…
Fee-only model. You pay the advisor directly for his/her services. Charges can be structured in a variety of ways, including as a percentage of assets under management, (typically 1% annually)…a flat fee for a particular project ($1,500 and up, varies greatly by scope of project)…hourly rates (typically $200 and up).
How the fees affect the advice: “This is the simplest and most transparent payment model for most people, ” says Anspach. Because fee-only advisors don’t earn commissions from products, they have less incentive to recommend specific investments for their own benefit. But it can still be confusing—some advisors may charge a flat fee for some advice and an hourly rate for other advice.
Commission-based model. You don’t pay a direct fee upfront for advice. The advisor is typically paid through a commission from the specific financial products. As the client, you still are paying for the advisor’s service—but the costs are embedded inside the one-time or recurring charges from the product.
How the fees affect the advice: Commission-based advisors can offer you a wider variety of certain products including “load” mutual funds that charge investors a fee…insurance…and/or annuities, which are primarily sold with commission structures. Problem: “There is a strong potential for conflicts of interest, especially if the incentives aren’t clearly revealed,” says Anspach.
Fee-based model. This is a hybrid version of the fee-only and commission-based models. Example: You may be charged a set advisory fee for certain services and charged commissions when you buy certain products.
How the fees affect the advice: This model requires careful scrutiny to understand the differing levels of transparency in the products and services you receive.
Steps to Finding the Right Financial Advisor
Get appropriate recommendations. Ask people with similar financial situations and income as your own who they use. Don’t just inquire if they like their advisor. Instead, ask, “What does your advisor actually do for you?”…“How are you charged, and has that caused any conflict?”…“How has the advisor helped you make a major decision?” Use reputable directories to search for advisors in your area, including The National Association of Personal Financial Advisors (NAPFA.org) and The Certified Financial Professionals Board (CFP.net).
Build a short list of advisors, generally two to four, who you are considering. Compare the differences in approach, fees and philosophy.
Schedule a consultation. Most advisors will give you a complimentary 30-minute session on the phone. Ask the following questions…
Are you a fiduciary? “This is one of the most important questions to ask,” says Anspach. “Otherwise, you may receive recommendations that aren’t solely based on your best interests or that don’t fully consider the range of available financial products and costs.” A fiduciary is a person or firm that is legally and ethically required to act in your best interests and put those interests ahead of their own compensation. CFPs and RIAs are required to be fiduciaries. On the other hand, advisers such as stockbrokers are generally held to a “suitability standard,” meaning that their recommendations must fit your goals, but they are not required to put your interests above their own.
How would you help me define my goals? Build a plan?
How have you helped people in similar situations as mine?
What are my total all-in costs likely to be?
Find out the advisor’s investment style and strategy. Ask…
What types of investments do you recommend and why?
How do you control fees and taxes?
How do you help clients during market downturns?
Clarify what your ongoing relationship would look like. Ask…
How often would we meet?
What can call I call you about?
How fast do you usually respond?
Take note of how the advisor communicates. Does he explain clearly or hide behind jargon? Does she listen and build on the details you provide or does her approach sound like a generic sales pitch?
Bring your spouse to the consultation. “For many couples, one person is in control of the finances…the other spouse is uninformed and/or disinterested,” says Anspach. “That’s dangerous if the lead spouse suddenly dies or declines in health. Your advisor should understand that you both are clients. Ideally, you both should attend meetings and receive communications.”
Red Flags and How to Protect Yourself
Be wary if an advisor does any of the following…
Recommends proprietary or “in-house” investment products right away. If the advisor does this, he needs to explain why he’s not using cheaper or better alternatives.
Has a vague or confusing fee structure. You should be able to easily understand how the advisor gets paid.
Offers guaranteed returns or promises very high returns. Make sure you understand the context for stellar investment performance. To achieve his returns, the advisor may have to take outsized risks that you may not be comfortable with.
Self defense: Vet the advisor. Ask for a copy of his Form ADV (Uniform Application for Investment Advisor). All RIAs are required to have an ADV, which provides information such as relevant credentials… how the advisor is paid…conflicts of interest…fee structures…and disciplinary history. You can also check for complaints and disciplinary actions of stockbrokers and brokerage firms at BrokerCheck.FINRA.org.
Making Your Final Decision
“Even if one or more of the advisors check all your practical boxes and requirements,” says Anspach, “keep in mind that you need someone who is not just capable and has technical skills and knowledge but is also compatible.” This needs to be a professional you can trust and can help guide your decisions during uncertainty and that you can stick with for years without second-guessing your financial future.
Do a final gut check. Ask yourself…
Do this advisor make me feel understood, informed and in control…not intimidated or rushed?
Do I feel comfortable being honest about my money and mistakes?
Would I trust this advisor during a stressful financial moment or if the stock market dropped 30% next year?
Bottom Line Personal interviewed Dana Anspach, CFP, president of Sensible Money, an investment advisory and financial-planning firm that oversees more than $500 million in client assets. She is author of Living Off Your Acorns: Your Guide to the Four Phases of Retirement. SensibleMoney.com
