A financial advisor is an equivalent of the Chief Finance Officer (CFO) for your business or family. When hiring, you need to follow a disciplined process to find someone who is up to the task. The process may take more time but will give you peace of mind when you make the right choice.
Here are four steps that will help you hire the best financial advisors:
1. Reason to seek financial advice
You may need a financial advisor for various reasons. For instance, when you have received a huge amount of money from insurance when a relative passes on, or you win a lottery. Parents also seek financial advice after having a baby. It is wise to plan for the future of the child by setting college funds and real estate investments that convey wealth to future generations. The need for advisor changes during different phases in life.
A well-structured investment plan is needed during retirement. A young worker can change the future by making investment decisions as guided by an advisor. As one nears retirement, investing methods, need to change to ensure the money lasts long, especially where the company offers lucrative early retirement packages.
Such events are critical in one’s life and financial stability. Hiring a financial advisor will ensure you manage the financial affairs.
Types of financial advice
Financial advisors vary in terms of areas of practice, income levels, type of clients, products, and investment strategies. Some offer their services within a limited geographical location, while others are available globally. Advisors help you in your taxes, insurance needs, retirement planning, and real estate investing. Some will work with young clients while others deal with retirees. Depending on the life stages, business planning, and distribution strategies, you can find the most appropriate advisor.
These experts manage every aspect of your personal life, business finance by giving quality suggestions.
Understanding the types of financial advisors
Some financial advisors offer planning services but not investment management. Others provide little financial planning while others manage investments. Some experts specialize in retirement income planning for people in retirement or near retirement. Some also help with wealth accumulation for people who are far from retirement.
Understanding what type of financial advice you need helps you in hiring the best financial advisor.
The main services offered by financial advisors:
Financing Planning: Focuses on all financial aspects of life, such as investments, how much you need to save, and the type of insurance to take.
Investment advisory services guide you on picking the best investment functions from the ongoing financial planning process.
Retirement income planning: Puts focus on coordinating your Social Security, Taxes, pensions, retirement date, investments, among others. They align your retirement finance for future cash flow.
2. How to find good financial help
How do you find the right advisor? First, figure out the type of financial assistance you need. If it is all about your taxes, you can hire a Certified Public Accountant (CPA). The CPA could be a financial advisor or not.
Investment management-Financial planners
Financial planners are professionals who help individuals and businesses make investment plans that match their long-term goals.
These are the right professionals to approach if you are looking for investment strategies for your portfolio, savings plans, retirement planning, debt management, or saving for your house. There are comprehensive and individual financial planners who can be consulted for various needs.
For firms, they have a staff of experts that includes a financial advisor. Small businesses may not have the advantage of exploring the full range of services offered by professionals. They can, however, work hand in hand to access the services in areas of interest.
Financial planners have designations such as:
- Chartered Financial Analyst (CFA)
- Certified Financial Planner (CFA)
- Chartered Financial Consultant (ChFC)
- Certified Fund Specialist (CFS)
- Certified Investment Management Analyst (CIMA)
There are many other designations associated with financial planners. Their roles vary based on the experience and successful completion of exams.
Locating a planner is a simple process. Start with referrals from friends, colleagues who seem to be managing their finances successfully. You can also rely on professional recommendations from a lawyer or an accountant. You can use the Financial Planning Association (FPA) to find a planner in your area.
Managing money- Financial advisors
A financial advisor is a term that covers many types of professionals. Their roles include managing investments by facilitating buying and selling of securities. They include bankers, accountants, stockbrokers, insurance agent’s real estate planners. They handle many matters on behalf of individuals or businesses.
Financial advisors work independently or in registered financial firms. Advisors who work with the public must have a current Series 65 License. You can start your search by inquiring from the National Association of Personal Advisors (NAPFA).
Know how financial advisors are compensated
Financial advisors charge varying rates for their services. Knowing the amount that a financial advisor will be compensated is crucial when hiring one. The fee-based advisors are the most objective and unbiased since they charge an asset-based fee, hourly fee, or commissions for participating. Non-fee-only advisors receive other kickbacks or incentives from their firms based on meeting sales or set objectives.
There is no standard method for compensating advisors. For example, if you intend to invest in a property and hold on to it for long, paying a commission is the most cost-effective option. On the other hand, if you need an advisor to update your financial plan and address ongoing investments constantly, a commission-based structure is not the ideal choice.
Free-Only vs. Fee-Based
In a fee-based structure, charges are hourly, project, retainer, or a flat commission that is a percentage of the assets being managed. The greater the assets, the lower the percentage.
Commission-based means the planner charges a fixed commission per product.
Be keen when hiring a planner. Some are stockbrokers by wirehouses who sell mutual funds and stocks. The fee-based are incentivized, and they push products offered by their firms and earn commissions. Some wirehouses are more concerned with the amount of commission they will earn rather than offering quality services.
Fee-only advisors carry designations such as Investment Advisor Representative (IAR) or Registered Investment Advisor (RIA). They are very knowledgeable, making them very reliable. Once they receive a request from a potential client, they provide a Form ADV Part II. It is a uniform form used by advisors to register with regulating bodies and the Securities and Exchange Commission (SEC).
Form ADV Part II is completed every year. It entails personal information. It helps identify the individual’s style of investment, the firm’s assets under Management (AUM), and the officers of the firm.
The debate between the two structures
Advice from free advisors is deemed superior since they do not have a conflict of interest. The integrity of commission-based advisors is often compromised since they want to sell products that have high payouts.
In their defense, they argue they are paid based on their Asset Under Management (AUM). They are likely to recommend products that increase their AUM but are not in the client’s best interest. They also say they charge affordable commissions.
More investors are shifting from the traditional commission set up to the modern-fee-only approach. With the new fees, some questions have been raised. They include:
- “How will I be billed”?
- “What is a fair fee”?
The average mutual fund charges an expense fee of approximately 1.4%. It is safe to say a total fee of 1.8%-2% is fair. When you find an advisor who offers an investment program that includes the investment cost, trading, custody, and professional fee for 1.8% or less, you are getting a great deal. The costs are now billed quarterly.
Before signing to work with the advisor, check out the rates, commission schedule, and fee structure laid out in writing. It is a legal requirement for RIAs.
3. Evaluating the professional
Anyone can call himself or herself a financial analyst, advisor, planner, consultant, wealth manager, or investment consultant. Financial Industry Regulatory Authority (FINRA) urges individuals and firms to be vigilant when hiring a financial professional. Even an individual who has passed the Series 6, 7 and 63, do not have the advisory experience needed.
The following certifications are useful educational and ethical requirements for any financial advisor:
- A Chartered Financial Analyst (CFA): Has extensive knowledge and expertise on securities, investing, financial analysis, banking, and portfolio management.
- A Certified Financial Planner (CFP): Must hold a bachelor’s degree and completed the college-level study in personal financial planning or another acceptable equivalent. Must also have at least three years’ experience backed with success in a series of comprehensive tests. Meeting the code of ethics is another requirement.
- A Chartered Financial Consultant (ChFC): Holds a certificate like the CFP but does not require comprehensive board exams or abide by any code of ethics.
The CFP and ChFC are considered the best for creating a general financial plan. If you are looking for a professional who will focus on the retirement plan, find a Chartered Retirement Planning Consultant (CRPC). He or she must have intensive training in retirement planning and hold a college certification on Financial Planning.
When you have concerns over taxes, find a Personal Finance Specialist (PFS). The personnel must be a CPA and have attained mastery as a Chartered Life Underwriter (CLU).
Seek financial advisors with reputable credentials
Credentials of financial advisors depending on the institution they are working with. Find a Financial planner with any of these reputable credentials: The CFP (Certified Financial Planner) or PFS (Personal Financial Specialist), or an investment advisor with (CFA®) Chartered Financial Analysts certificate.
These credentials are attained by passing several tests that show proficiency in the subject. Advisors also need to adhere to their work ethics and constantly advance their education.
Use search engines to screen for criteria
Online searches are reliable for finding and narrowing down advisors in your Zip Code with the right credentials and billing structures. These five search engines allow you to put specific criteria of an advisor you are looking for.
NAPFA (National Association of Personal Financial Advisors)
Most firms work remotely with clients. You can also search for firms with options like skype or facetime if you are not comfortable working remotely.
Ask these questions before hiring
Asking critical questions ensures you hire the right professional. Asking questions about the areas of expertise ensures no doubt when hiring. It is advisable to ask for references from other individuals who have hired some financial experts before and know their experience. It is unlikely for advisors to give client information because it is against their work ethics.
Verify credentials, check for complaints
Doing a background check on an advisor is vital when hiring. You can get the advisor’s credentials from the Financial Industry Regulatory Authority (FINRA), the Security Exchange Commission (SEC), and the CFP Board. The organization in which the advisor is registered with will also provide the needed information. Brightscope, an online site will also disclose the information of the organization of financial advisor you are looking for.
Some advisors will have some complaints lodged against them. It is advisable that you look for more details about the matter before ruling them out.
4. Learn how to spot fraud risks
There are cases where financial advisors hold custody of client assets using third party custodians. The advisor may open accounts with firms like Fidelity or Charles Schwab and offer services and trades to your account. Verify your signatures in such cases and ensure you get the reports from the third-party custodian.
Beware of firms own related firms that serve as custodians. That is how Bernie Madoff managed to pull off his fraud scheme.
Avoid advisors who own other custody firms or are recommending to you. The ownership of such firms must be disclosed on the ADV Part Two document.
Benefits of Fiduciary Standard
Regardless of the services you need, ensure the advisor is held to fiduciary standards. It charges them with the responsibility of acting in the best interest of the investor. RIAs must abide by the fiduciary standards. Stockbrokers only need to abide by suitability standards, which is less rigorous.
The department of labor’s Fiduciary Rule phased on June 9, 2017, expanded the types of professionals who must meet the fiduciary standards. See more on DOL Fiduciary Rule: Everything You Need to Know.
Registered investment advisors are registered with state residence or the SEC and are regulated under the Investment Advisors Act of 1940.
A financial planner can help you in making complex financial decisions. He or she can offer to advise on buying a car, a house, saving for college, refinancing your mortgage, just to mention a few. They interact with many clients and other financial professionals and they have the latest financial information.
Great financial planners will help you make more money from your investments, achieve your goals, save money, and avoid risky investments throughout your lifetime.
For the best experience and maximizing financial advisory services, meet your advisor regularly. Always ask for their word before making any decision that involves your finances, investments, and legal matters.