To those unfamiliar with the financial world, financial advisors might seem like this intangible service for the ultra-rich, but that's not necessarily true. Financial advisors offer a wide range of services that cater to every type of financial identity. The key is figuring out what you're looking for in an advisor and whether that fits with your current financial situation.
Here are three questions you should answer for yourself before looking for a financial advisor.
Why Do I Want a Financial Advisor?
Everyone can use a word of advice from time to time, but knowing what you want out of the interaction will start your search on the right foot. If you know exactly what you're looking to get out of the interaction, you'll waste a lot less time in finding success.
Maybe you want to find your financial footing, but you don't know where to start. Many people hit this point when they get their first "real job" and learn the joys of expendable income. You know you should be smart with your money, but you don't know how. That's why you need someone to show you the ropes. This could also apply to someone who recently went through a major life event. Maybe you got married and want to know how to best merge your financial situation with your spouse's. Maybe you want to know how a recent inheritance affects your financial plan. A financial planner can help with all of these things.
Maybe you want to maximize your investments, but you don't have the time or energy to research. If you have enough money to get serious about investing, it's worth getting some advice about the best way to do so. You can get some one-time advice about how to best balance your portfolio, or find someone who will take care of everything for you on an ongoing basis.
Maybe you'd like a third party to weigh in on your current financial strategy. Even with hours and hours of research, you're unlikely to DIY your way to an understanding of finances that matches a professional. You don't have to hand over the reins to your brokerage account completely, but if you're serious about financial success, you might benefit from having an impartial observer comment about your strengths and weaknesses. If you're tackling student debt, an advisor can help you make good decisions to get out of debt. It's also a good idea to check in for professional advice before making a major purchase, like a home.
What Makes a Good Financial Advisor?
Someone who understands your financial aspirations. A good financial advisor will understand what you're trying to accomplish with your money, and turn those wishes into concrete steps and goals.
Someone with the ability to clearly explain complex financial situations to you. 401(k)s, debt reduction, insurance policies and mortgage rates – these are all extremely complex processes that require great attention to detail to master. A good financial advisor tells you what you want and need to know in a clear, concise way. This is especially important for families, which share interconnected financial lives.
Someone who keeps you on track. Setting goals and understanding your finances won't mean anything if you never actually reach those goals. A good financial advisor knows how to keep you motivated and on a path to financial success. If you get off track, your advisor should know how to correct course without discouraging you.
What Should I Ask a Potential Financial Advisor Before I Hire?
What are your specialties? Financial advisors use specialties as a way of branding themselves, but there are also different certifications that show a level of expertise in an area. For example, Certified Financial Planners, or CFPs, usually specialize in taking into account a client's overall financial situation – not just your investment portfolio. This makes them good resources for long-term planning. If you're looking for advice on a more regular basis, you could look for Chartered Financial Analysts, or CFAs. CFAs actively manage your accounts and help you invest in stock with the goal of making sure you're always getting the most of financial markets. Some financial advisors have multiple certifications, but it's still a good idea to ask what their specialties are and how those specialties will best serve your financial goals.
How do you make your money? You wouldn't buy something without knowing how much it costs, and you shouldn't hire a financial advisor without knowing the cost, either. If you're looking for a one-off session, you can find advisors that will charge by a flat fee or hourly rate. For long-term arrangements, advisors may charge a percentage of the total amount of assets they manage, or take a commission on certain investments and insurance products. It's important to know whether your financial advisor is making money by selling you specific products or by making specific investments on your behalf. Taking bonuses doesn't mean a financial advisor isn't good at their job, but it's something you should be aware of, and it might not be information that they offer up unless asked.
Does your firm sell proprietary investments or share revenue with mutual funds? In addition to a financial advisor receiving personal bonuses for pushing clients toward certain investments, an advisor might work for a company that depends on that practice for financial stability. The company might offer its own investments and encourage financial advisors to drive business its way. The company might also partner with another company to sell specific products. Like with an adviser's bonuses and commissions, you should know about it, but you might have to ask to find out.
Do you have any complaints? This can usually be done before meeting up with someone, thanks to online resources. Check FINRA's BrokerCheck or the SEC's Investment Adviser Public Disclosure for any complaints or significant disclosures about this advisor. Some complaints may be minor or old, but if anything concerns you, ask them for more details about that situation and how it got resolved.
Are you a fiduciary? This is a key question that ultimately determines how dedicated this advisor will be to your financial situation. Fiduciaries are bound by law to offer advice in your best interest. That means they can't make suggestions based on bonuses or commissions they'll get paid. They can only consider your financial future. If they offer you subpar advice, they could have to answer to the Securities and Exchange Commission. If a financial advisor isn't a fiduciary, they probably use what's called a "suitability standard." They don't have to offer you the best advice, only advice that's deemed "suitable." This category includes many stockbrokers. These types of advisors aren't regulated by the SEC. Instead they fall under the Financial Industry Regulatory Agency's governance. The good news is, since they make money through bonuses and commissions, they might not charge as much for their services (though you could wind up paying more if they offer you bad advice).