Five Steps to Finding a Financial Advisor You Like
Did you know 87% of women don't like their financial advisors? Yikes!
Hiring a financial advisor can be a hard thing to embark upon if you do not know what you are looking for. Did you know 87% of women don't like their financial advisors? Yikes! Below is a step by step guide on how to pick the right financial advisor for you:
1. Know the difference between a financial planner and an investment advisor.
They are not the same thing. Most financial planners are investment advisors, but not all investment advisors are financial planners. Investment advisors help you chose what investment strategy you want to use and where to invest your money. Financial planners often help you with your investments but also usually do a deep dive into all aspects of your financial life, work with you to create financial goals and make recommendations on how best to achieve these goals. Think, planning for retirement, saving for college and managing cash flow. At Somerset Advisory, this includes the CLARITIES process.
2. Know what services you need.
We all seek financial help for different reasons. Be prepared to lay out what you need and make sure your advisor can act on it. For example, if you are in your mid-thirties and need help with cash flow, budgeting and debt management, going to an advisor that specializes in retirement preparation may not be the best fit. Instead, look for an advisor that is willing to help you in a more holistic way. In our private practice, many women come to us because they want another woman who has dealt with the same issues they have to serve them. Most of the time, picking the right advisor is not about one advisor being better than the other. It is more that one is a better fit for you and your situation than the other.
3. Know what services you are paying for.
Look for a firm that has a transparent fee schedule that makes it easy to see exactly how they get paid. Most firms charge a flat fee for asset management, but many times there are hidden costs such as trading fees and commissions. Do not be afraid to ask for a list of costs you will be responsible for. Each firm handles fees differently and it is important to ask specifically who absorbs these costs. Also, ask if there is a separate planning fee or if planning is included in the already stated cost.
4. Know how the advisor is paid.
Generally advisors are paid one of three ways.
Commission based. These advisors often offer advice for “free” but are paid based on the products they sell such as life insurance or annuities. For someone whose fee is based on how many expensive products they sell, the incentive is to sell more. This is not always in the client’s best interest. In addition, some companies only allow their advisors to sell the company’s proprietary products. This can create a conflict of interest because the advisor is being encouraged to push a certain product that may not be in the best interest of the client. No doubt, these financial incentives can impact the recommendations they make.
Fee only advisors charge the client a fee for their advice. The advisor can recommend any product that will help you reach your goals and receives no commissions. Fee only advisors can charge for their services in a number of ways. The three most common ways include a percentage of assets under management (the benchmark in the industry is usually 1% of AUM), an hourly fee or a monthly retainer. Fees usually cover financial planning advice and investment management.
Fee based. These advisors are a combination of the two. They charge a fee for their advice and receive commissions on the products they sell. This does not mean they will not give good advice it just means you need to be aware that they may receive a kickback for selling one product over another.
5. Know what Standard of Care the advisor owes you.
As an attorney, I was very surprised to find that not all financial advisors owed their clients the same duty or care as is the case in the legal industry. The two most common standards of care found with financial advisors are:
A fiduciary standard. A fiduciary is legally bound to put their client’s interests first and to disclose any conflicts of interest. All Certified Financial Planners® are held to this standard.
A suitability standard. Many fee-based advisors are bound by a “suitability” standard. This means the advisor can make recommendations so long as the recommendations are suitable for their client’s goals, risk tolerance and financial situation.
In talking to clients who are just beginning their search for an advisor, it is very clear that many do not understand the difference between these two standards. We assume that all advisors will put our interests first when helping us achieve our financial goals but that is not always the case. As is the case with so many things in life, it is a little more complicated than what it appears to be on the surface.
To help illustrate this concept I have seen the use of a car dealership as an example. Let’s say you want to buy a car. You do not know exactly what kind of car you want, but you know what you need. If you go to the Mercedes dealership you can be relatively certain they are going to try to sell you a Mercedes. The salesperson is obligated to sell his company’s product. He is unlikely to suggest you go down the street to the Audi dealership to find what you need. This is the same standard with financial brokers and agents who are operating under the suitability standard. They are obligated to sell their company’s product and often do not have the authority to go outside of their company’s products. However, this is not the case with a fiduciary. The fiduciary is obligated to help you find the best product for you. They can look across the industry and find a number of products that meet your criteria and then help you decide which one is the best fit.
Tips and take-aways:
Don’t be afraid to ask each advisor you interview the five questions we have listed in this article, and above all, look for an advisor that you connect with, who makes you feel heard, shares the same values and creates an environment where you feel free to ask questions. With an advisor like this on your team big things are possible!
Know if your advisor is acting ALL the time (not just some of the time) in your best interest, serving as a fiduciary. If your advisor doesn't answer this question in a straightforward way, with a resounding YES, keep looking.
It's okay to know, like, and trust someone, and for that person not to be qualified enough to be your financial advisor. If you are feeling extra brave, express that you would love to trust this person with your money, if they could align themselves with a firm that served clients under the fiduciary standard of care.
If you are interested in financial planning, make sure your advisor or potential advisor carries the CFP® or CERTIFIED FINANCIAL PLANNER® marks. These planners MUST act as fiduciaries so that helps!