There is no doubt that many of us would like some guidance with our finances. Between our busy work days, personal endeavors, and everything in between, our financial goals often get sidelined. Keeping on track with our broader financial goals, and formulating how to best reach them, sometimes requires the help of a qualified professional. But how do you determine which one is right for you?
Here are a few tips to choose the right financial advisor:
Financial advising is really a pretty general term that encompasses a wide range of different services and compensation models. Some financial advisors receive their compensation mainly in the form of commissions from products and services they recommend. These individuals act very much like sales agents, and they earn their living by making recommendations based on products they consider "suitable" for you. These advisors generally work for large brokerage houses (think UBS, Morgan Stanley, etc.).
Others receive a percentage of the assets that they manage for you (so the better you do, the better they are paid). Still others charge hourly fees, or flat rates. In both cases, these advisors are generally called fee-only, and they typically have more transparent free structures. These advisors generally work independent of a brokerage house, and are often found at a Registered Investment Advisor, such as my firm (RGA Investment Advisors LLC).
Of course, there are financial planers who receive compensation from both commissions and fees. These advisors are generally affiliated in some way to a broker dealer, and they may also sell insurance products. The key point is to determine how transparent and forthright an advisor is about disclosing his or her fee, and whether or not you feel comfortable with the idea of paying commissions. While I firmly believe that fee-only advisor maintains a compensation program that is more aligned with that of the interests of his or her client, there are certainly very competant advisors who are paid via commission, or through some sort of hybrid method.
There is a myriad of self-proclaimed financial advisors in the United States. Of them, only a small subset of advisors have what I consider to be adequate or credentialed backgrounds. You should vet a potential financial advisor according to their credentials, including what certifications are held, and to which professional organizations they belong. Make sure that the advisor is properly licensed in your state, and that they maintain the proper securities licenses if they will be managing your money and/or selling you products.
There are a few professional designations I'd like discuss here, as clients have so often cited their confusion in comparing and contrasting between them:
Beyond these credentials, be sure that your advisor has experience providing guidance for your specific needs. Some advisors have more experience with retirement, while others specialize in business succession planning and self-employment issue. It's not easy to find an advisor that has a comprehensive suite of skills, so be sure to interview around for that perfect fit.
Consider Your Best Interest
The last point I'd like to make is on whether the advisor acts as a fiduciary or not, that is, whether he or she has your best interests in mind. This is a critical point in making an informed and thoughtful decision in who you will hire to help care for your financial well-being. A fiduciary is a legal and ethical relationship of trust between two parties. The fiduciary is obligated to the fiduciary standard (or fiduciary duty), which is the highest standard of care that anyone in financial services (or law, or accounting, etc.) can provide. It means that an advisor acting as fiduciary is morally and legally bound to act in the best interest of his or her client. This is an important criterion when selecting an advisor. Many brokers, registered representatives of brokerage firms, or financial planners who sell products are not subscribed to this fiduciary standard. Instead, they adhere to something called the 'suitability standard,' which in essence means that recommendations made are consistent with the best interests of the underlying customer. There is wide gap in the requirement of care between these two standards. Be sure that you fully understand to which standard your advisor adheres.
I hope this information is helpful. Please feel free to contact me with any questions. Good luck with your search!
Jason M. Gilbert CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.