Choosing a Financial Advisor

The first question you have to answer is: Do I need a financial advisor?

Many people can find answers to their questions in books, blogs and by using calculators and budgeting tools. If you have a complicated financial picture then you may need an advisor.

The cost of an advisor can be prohibitive, so it's important to understand their role and the fees they charge.

All advisors are not the same, some get paid a fee and others may be paid for selling products. It is important to have an advisor that is working in your best interest. You should always ask because you could end up paying a significant amount in fees and commissions, depending how the advisor gets paid.

Not all advisors are fiduciaries

Make sure your advisory acts as a fiduciary, meaning that he or she will be putting your interests ahead of his or hers.

Ask how they get paid

Financial advisors are typically paid a percentage of the value of the assets they manage for you; an hourly fee; a fixed fee; a commission on the securities they sell; or a combination of these methods. Ask the advisor to disclose in writing all forms of compensation he or she will earn, including bonuses, commissions, etc.

Your objectives and philosophy

Ask questions to find out if the advisor has an aggressive or conservative investment philosophy. You can verify answers by reviewing his or her records. If he or she works for an investment firm, you can also request information about the firm’s philosophy.

The advisor's credentials

Some have credentials such as Certified Financial Planner (CFP®) certification or Chartered Financial Analyst (CFA) designation. But no state or federal law requires these credentials. Many states do require their advisors to pass a proficiency exam or meet other requirements.  Generally, there are two types of financial advisors, registered representatives and registered investment advisors:

Registered representatives

Must pass the General Securities Representative Exam, known as the Series 7 exam and be registered with the Financial Industry Regulatory Authority (FINRA). In fact, you can check on the background of a registered representative using the FINRA BrokerCheck.*  Ask your advisor to put in writing if he/she is a fiduciary.

Registered investment advisors

Most financial advisors must fill out a form called Form ADV. This is filed with the Securities and Exchange Commission (SEC) or state securities agency in the state where they have their primary place of business. It contains information about the advisor’s education, business, service, fees and strategies, as well as if they’ve had any problems with regulators or clients. You can ask your advisor for copy or obtain one from your state securities regulator or the SEC.

Is there a conflict of interest?

Some agents or advisors may receive a significant financial reward for recommending a particular investment. For example, some agents, brokers or advisors may work for a particular 403(b) vendor and represent only their employer's or insurance company's products. Others are not employees of a 403(b) vendor and can represent many different 403(b) vendors. Always ask why they are recommending one product over another. In addition, ask the advisor if he or she is acting in a fiduciary capacity.

Once you’ve chosen an advisor

Your advisor should provide and explain information, such as financial market overviews and potential investment risks, to help you make informed and intelligent decisions. The written investment plan you have developed with your advisor should be followed unless he or she has discussed making changes with you. Continual education about your portfolio’s results and the effects of current and expected trends in the financial markets is key to your investment success.

Choosing a financial advisor probably won’t happen overnight. Do your homework and take ample time to make your decision so you can be sure you’ve found an advisor you’re comfortable with. Remember, you are the client. Your financial advisor works for you.