Finding a good financial advisor takes work, but it’s not that complicated once you get down to it. In my experience, 75% of people who find a new advisor are working with one for the first time. They’re not firing their old advisor. Good advisors have strong client retention, so a great way to find one is a referral from someone you trust. Advisor referrals come from two main sources:
- Clients: ask your friends, family, or colleagues in the same situation if they have an advisor they’d recommend.
- Other professional advisors: your CPA, estate planner, insurance advisor, corporate lawyer, etc. likely knows many good advisors. Since they understand your financial situation they’re in a position to make a good recommendation.
Armed with names, reach out and start your research. The CFP® Board through their Let’s Make a Plan initiative designed to educate Americans about accessing sound financial planning has a helpful list of 10 Questions to Ask Your Financial Advisor. Here they are along with my thoughts on strong answers.
What services do you offer?
Find an advisor who provides comprehensive financial planning and investment management. Many advisors offer both for a fee of 1% or less of the portfolio they manage. Avoid advisors who charge more, or the same but offer minimal financial planning advice.
There’s no strict definition of what constitutes “comprehensive”, but a a thorough advisor will ask about your background and current situation, understand your goals, learn your long-term plan for your money your money, create a retirement plan to guide future decisions, provide insurance advice, set appropriate savings targets, share tax planning suggestions, and will discuss your estate plan and charitable goals.
Most important, they are proactive about it and meet with you multiple times a year.
What are your qualifications and credentials?
Since we’ve already established that you want an advisor who does planning and investing, it’s important that they have the right credentials to do both. The financial planning services should be provided by a CERTIFIED FINANCIAL PLANNER®, and the portfolios should be managed by Chartered Financial Analyst® charterholders. These credentials demonstrate professional commitment, the proper educational background, mastery of requisite core knowledge, and the ability to pass difficult qualifying exams. They also have continuing education requirements and strict ethical standards.
To earn the CFP® certification, you have to complete the CFP® Board of Standards’ education requirements in the financial planning areas listed below, develop a financial plan, and pass a difficult comprehensive exam that, in 2019, had a 62% pass rate.
- Professional conduct and regulation
- General principles of financial planning
- Education planning
- Risk management and insurance planning Investment planning
- Tax planning
- Retirement savings and income planning Estate planning
The CFA® program is a rigorous graduate-level program that takes at least four years to complete and more than three hundred hours of studying per level. There are three levels, and the historic pass rate for each is between 40 percent and 60 percent. The levels cover economics, corporate finance, investments, quantitative modeling, financial reporting and analysis, various investment asset classes, ethics, portfolio management, and wealth planning.
Will you have a fiduciary duty to me?
Find a fee-based fiduciary to be your advisor instead of a broker. A fiduciary provides advice in your best interests and disclose conflicts of interest. Their compensation is typically based on a fee tied to the assets they manage (the 1 percent or less from above), or some kind of hourly or fixed planning fee. They don’t sell things like commission-based mutual funds or insurance. They’re also usually independent, which means their firm doesn’t have their own investment products to push.
Brokers follow a lower standard called the suitability standard. If you are a growth-oriented investor, a broker needs to merely recommend investments that are appropriate for a growth-oriented investor. They don’t have to disclose if the investments are more expensive than something else you could be invested in. If they are recommending it because it’s their company’s own product, that’s okay. If they are getting paid more to recommend this fund over others, that’s not something you’ll see in their presentation to you.
What is your approach to financial planning?
I covered this in the answer to question one (explanation of comprehensive).
What types of clients do you typically work with?
Part of finding a good financial advisor is finding someone who works with people with the same types of finances, goals, and challenges as you.
Will you be the only advisor working with me?
A team-based approach means you’ll have more than one point of contact who knows you well, depth of practice and specialization, and continuity if anything happens to your primary advisor.
How will I pay for your services?
I covered this in the answer to question one.
How much do you typically charge?
I partially covered this in the answer to question one. The fee should be 1% or less, with the less coming by way of fee breakpoints. For example, it could be 1% on the first $2 million, and then .75% from $2 – $5 million, then another drop at $5 million…
Do others stand to gain from the financial advice you give me?
I covered this in the answer to question three.
Have you ever been publicly disciplined for any unlawful or unethical actions in your career?
Research the advisor you’re considering. Their own website is fine, but check out their public filings for any customer complaints or violations. The SEC’s investment advisor disclosure site (adviserinfo.sec.gov) provides the firm’s Form ADV and compliance history. The Form ADV has information about the firm’s key personnel, assets under management, services provided, fees charged, and past disciplinary action.
Suggested Further Reading
Your Wealth Management Checklist – Good decision-making builds wealth. Here’s a personal checklist to get you started.
15 Essential Questions to Ask a Financial Advisor Before You Hire Them – I contributed to this piece on some good questions to ask during your advisor search.