It's understandable why so many investors choose the easy route and rely on referrals from friends and family who have little experience managing money. It also shouldn't be shocking that less competent advisors who are also excellent marketers can attract clients, while competent but less slick financial experts toil in the shadows.
People skills are crucial while seeking financial assistance because these are very private things, therefore you need to feel at least somewhat at ease with the person you're entrusting with your affairs. However, you must also do your homework before agreeing to work with an advisor. The procedure can be divided into two rather simple parts. The first step entails assessing your true needs in terms of consuming advice: What are you truly seeking for? The second phase, which I'll concentrate on today, is to use the knowledge you have gained about your own requirements and objectives to find a financial advisor who can assist you in achieving them.
Five Important Issues to Ask a Financial Advisor
- Are you primarily an investing advisor or a financial planner?
- A fiduciary, are you?
- How are your services priced?
- What titles or qualifications do you hold?
- What's your contingency plan?
01.) Are you primarily an investing advisor or a financial planner?
There are wealth managers/investment advisers and financial planners, which is one of the first forks in the road that investors will come across when exploring the world of financial advisors.
Financial planners, who take into account all important components of a financial plan, not only investments, including insurance, estate planning, and household budgeting, to name a few, have a broader scope than the earlier sort of advisor, which is limited to investments. However, it's important to remember that while many financial planners have excellent investing knowledge, the finest investment advisors consider their clients' strategies holistically. Therefore, there isn't always a clear cut answer.
Ask potential financial planners about their areas of specialisation and the demographic groups they generally serve if you're looking for one. Ask the planner whether she has expertise with scenarios similar to yours if you've identified any particular areas that need improvement, such as understanding how owning a small business affects the rest of your personal financial plan. Additionally, search for someone who has acquired the chartered financial consultant or certified financial planner designations, which are covered below.
Does the advisor approach their profession with a healthy amount of humility? Softer but no less significant. Asking about the expected returns on a balanced portfolio over the next ten years will help you learn more about it. Any advisor who forecasts portfolio returns over the mid-single digit range for the upcoming ten years is either being unrealistic or may be taking unnecessary risks.
02.) A fiduciary, are you?
Another important query to put to potential advisors is this one. Simply defined, being a fiduciary means that while advising on portfolios and plans, the advisor must put the interests of their customers ahead of their own. Although it should be quite evident that anyone delivering financial advice should follow such a standard, there is currently no set one.
It's comforting to know that a lot of financial advisors already follow a fiduciary standard. Fiduciaries already exist among investment advisors who hold registered investment advisor status or who work for companies set up as registered investment advisors. When giving financial advise, certified financial planners are obligated to behave as fiduciaries. (In October 2019, the CFP board increased the fiduciary standards for all certified financial planners in all financial counselling scenarios.) It is your responsibility to ask the obvious question: Are you a fiduciary, and will you act in that capacity in any situation where you will work for me?
By the way, this is not to imply that all non-fiduciary financial experts are always unethical hackers; many of them keep strong ethical standards and provide clients with just as much care as their fiduciary counterparts. However, investors who engage with a fiduciary have more legal safeguards than those who work with advisors who are just held to the weaker "suitability standard." Unlike fiduciaries, who are required by law to suggest the "best" items for you based on your circumstances, the latter category of advisors must be able to defend their recommendations as being acceptable or suitable for you.
03.) How are your services priced?
Compensation for advisors can be confusing. Whether the advisor is fee-only, fee-based, or commission-based should be one of your initial inquiries. A fee-only advisor is one who receives payment only for the services they provide; commissions are never paid to them. Naturally, advisors who are paid on a commission do so when promoting products. Fee-based advisors may receive commissions in addition to the fees they typically charge for their services. (People frequently mix up the terms "fee-only" and "fee-based"; there is a distinction.)
Advisors who accept commissions shouldn't necessarily be flagged with a skull and crossbones, just like in the fiduciary issue from earlier. Receiving commissions for products, however, might create conflicts of interest and encourage advisors to suggest goods that may not be in their clients' best interests. Cleaner is the fee-only model. Furthermore, although though the compensation model is frequently promoted as a means for clients with smaller portfolios to get investing advice, I believe that this is a fallacious justification.
If you've made the decision to work with a fee-only advisor, you should still enquire about their exact business strategy and an estimate of how much you would pay them every year for their services.
04.) What titles or qualifications do you hold?
It's important to be aware about the advisor's compensation arrangement and to enquire about any designations they may have obtained. Don't be misled by the advisor's name having a large number of letters after it; some designations, such the following, have greater weight and have stricter qualifications. (Note: Although there are other respectable designations for advisors, such as chartered life underwriter (CLU), they are not as often used as the ones that follow.)
When searching for a financial advisor, keep the following in mind:
A certified financial planner is an individual who has received accreditation from the Certified Financial Planner Board of Standards. Planners who want to utilise the CFP designation must finish an educational programme, ace a demanding exam, and accumulate a significant amount of job experience in the field.
Chartered Financial Consultant: This is a wide financial planning qualification, similar to the more well-known CFP. Chartered financial consultants are required to finish a training course, pass a number of exams, and have relevant professional experience.
First and foremost, keep an eye out for the following if you're looking for financial advice:
Chartered Financial Analyst: Holders of this title are recognised as CFA Institute-accredited financial specialists. Advisors who want to utilise the CFA credential must complete coursework in economics, financial reporting and analysis, ethical standards, equities and fixed-income investments, and portfolio management in addition to accumulating a significant amount of job experience involving investment decision-making. Additionally, they have to complete a series of difficult tests that take a lot of preparation.
05.) What's your contingency plan?
Asking about backup preparation is always important, even if your advisor is young. If the adviser could not provide support for a while owing to a death, an illness, or even a lengthy vacation, who would step in and do so? There should be people in place to act as backups in case your primary advisor is unavailable, especially if you're engaging an advisor on an AUM or retainer basis—but even if you aren't, this is still a good idea.
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