Working with a financial advisor can be helpful if you need advice on creating a retirement savings plan, getting out of debt or reaching another financial goal. But they’re working with your money and have to earn your trust. You can find this trust by interviewing potential advisors or using recommendations from others you trust, as well as some other tried-and-true methods. As you search for an advisor, here are some steps for how to find a one that you can trust.
What Is a Financial Advisor?
The term “financial advisor” covers different types of financial professionals. Generally speaking, a financial advisor helps you manage your financial life and achieve your goals.
A financial advisor can have one or more specific designations. They indicate that an advisor has special knowledge, skills and/or expertise in a certain area. For example, your advisor may be a Certified Financial Planner who helps people to create a comprehensive financial plan. Or, they may be a Registered Investment Advisor focusing on investment advice.
Understanding those distinctions is an important first step toward finding a financial advisor you can trust. For example, you might want to work with someone who’s well-versed in how to build wealth using certain types of investments. Or you may need help with creating a financial legacy to leave to your children. An advisor with that experience may be better suited to your needs than someone with more general expertise.
Different Types of Financial Advisors
The next step in locating an advisor is deciding which type of financial advisor is best. There are two ways to approach it. The first is determining whether you’d prefer to work with a robo-advisor or a human advisor.
You can look at financial advisors based on what they do. For example, many accountants, estate planning attorneys and stockbrokers have earned a CFP designation.
Some of the other financial certifications you may encounter include:
- Chartered Financial Analyst (CFA): Individuals typically specializing in stock analysis and money management.
- Chartered Financial Consultant (ChFC): Similar to a Certified Financial Planner, they help people create workable plans for their financial goals.
- Certified Public Accountant (CPA): These financial experts specialize primarily in tax planning for individuals and businesses.
- Chartered Mutual Fund Counselor (CMFC): Individuals specializing in offering investment advice on mutual funds.
- Chartered Investment Counselor (CIC): Professionals offering high-level investment advice for managing assets.
Many financial advisors also can serve as be Registered Investment Advisors (RIAs). An RIA is an advisor who’s registered with the U.S. Securities and Exchange Commission (SEC). Registration automatically confers fiduciary status on an advisor.
Secondly, robo-advisors also provide unique financial advisory services. However, when you invest with a robo-advisor, your financial guidance comes from an algorithm. That computer program generates investment recommendations for you, based on your goals, age, time frame for investing, risk tolerance, and other factors.
A robo-advisor might appeal if you want hands-off way portfolio management. Robo-advisors can also be inexpensive since many of them charge low flat fees.
On the other hand, a robo-advisor lacks a human touch. If a market correction looms, for example, a human advisor can help you make strategic moves and minimize losses. They can also talk you down from making emotional, rash decisions with your investments. Robo-advisors don’t have that ability.
What Is a Fiduciary?
If you’re looking for a financial advisor you can trust, then knowing whether they’re a fiduciary financial advisor is important. Under an ethical obligation, a fiduciary acts in your best interest at all times when managing your investments. In other words, they can’t make decisions with your money that counteract your financial goals. Also, they can’t benefit themselves at the cost of your goals. If an advisor fails to honor their ethical obligation to act in your best interest, that’s a breach of fiduciary duty.
Broker-dealers, stockbrokers and insurance agents aren’t held to a fiduciary standard. They follow a suitability standard instead. This means that they can recommend investment or insurance products to you, without considering your best interest first. For example, if an insurance agent could make a higher commission by recommending that you purchase Annuity A instead of Annuity B, they’re allowed to do so.
The simplest way to find out if an advisor is an RIA and therefore, a fiduciary, is to look up their credentials. As part of the registration process, RIAs are required to file a Form DAV with the SEC, disclosing what services they offer, how they’re paid and any past disciplinary or legal issues. The SEC offers a helpful online lookup tool that you can use to find an advisor’s public disclosure forms.
How to Find a Financial Advisor You Can Trust
Finding a financial advisor you can trust really comes down to asking the right questions. Here is a list of seven questions that you could pose to a prospective advisor:
- What services do you offer?
- How do you make money?
- When and how do you talk to clients?
- What’s your investment strategy or style?
- What is your typical client like?
- Do you hold any professional certifications or designations?
- How long have you been a financial advisor?
Ask a professional if they are a fee-only or fee-based advisor. A fee-only advisor charges fees based on the services they offered. They can charge you by the hour, as a percentage of your assets under management, using a retainer system or as a flat fee.
A fee-based advisor, on the other hand, makes money by charging a combination of fees and earning commissions on the investment products they sell. So if an advisor suggests investing $5,000 into a particular mutual fund and they earn a 5% commission, $250 of what you invest would go to them as a fee.
Also, ask yourself what kind of services you need and what you would like an advisor to be able to do for you. It may also be helpful to look for an advisor whose existing client base has a similar financial background to yours. If you’re a millennial, for example, it might make more sense to choose an advisor who’s also a millennial or works primarily with 20- and 30-somethings, versus an advisor who mainly advises retirees.
Finding an advisor you can trust may take some research on your part but it can be well worth the effort. Knowing that your money is in good hands can take some of the stress out of creating a financial plan now and for the future. Whether it’s a fiduciary or a designated professional, a trusted advisor can be as valuable as the assets they handle.
Financial Advisor Tips
- Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider trusting your instincts when shopping around for an advisor. Avoid financial professional who make claims or promises that seem too good to be true. Similarly, question those reluctant to share details about their fees or investment strategy. Those red flags indicate an advisor may not be trustworthy.
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