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How to Choose a Financial Advisor: The 5 Most Important Questions
23 January 2023 - 10:28, by , in Blog, No comments

When you choose to work with a financial advisor you make a HUGE decision about the direction of your life.  You must be careful and thoughtful when you make this decision.  There are endless lists of questions you could ask, but this would take a considerable amount of time.  Fortunately, you can quickly weed out substandard advisors by asking these 5 questions first.

1. How are you paid?

Most people do not know how their financial advisor gets paid, and they really should. Knowing how your financial advisor is compensated will help you determine if both of your interests are aligned.  Financial advisors are almost always paid a commission, a fixed percentage of your account, or an hourly/flat fee.  Some advisors earn a combination of more than one of these.

The type you should be most wary about is commission.  Commissions are typically paid with the sale of a financial product, and different products produce different fees for your advisor. If your advisor earns commissions take extra care in vetting the reasons why a particular product was recommended. You should also ask what other competing products your advisor considered, why they ultimately weren’t recommended, and what your advisor’s commissions are for those products.  While there is nothing inherently wrong with financial products that use a commission structure, fixed percentages and hourly/flat fees tend to align advisor’s interests with their clients much more.  A dissatisfactory answer may lead you to finding a new advisor to whom you will ask these 5 questions.

2. What licenses and credentials do you have?

Depending on what types of services and products your financial advisor offers they will have different licenses. These licenses permit your advisor to transact business and they are publicly available. Some of these licenses are very easy to earn and don’t necessarily demonstrate a commitment or a vast knowledge of the financial industry. Please remember, a financial advisor is not a bestowed title; there is nothing stopping anyone from telling anyone else that they are a financial advisor.

Credentials are different than licenses. While they do not permit any specific type of advice or product they can demonstrate an advisor’s dedication to their profession. Two of the most widely respected credentials are the CFP® and CFA®. Both of these credentials demonstrate a commitment to the investment profession and require a significant amount of time and effort to earn. For example, a CFA® Charterholder must have at least 4 years of experience in the investment profession and pass 3 rigorous exams, 2 of which are only administered once per year (i.e., if you fail the exam, you have to wait a really long time for another chance).

These licenses and credentials can be verified online. A comprehensive overview of your financial advisor’s history can be found at https://brokercheck.finra.org/. At this site you enter your advisor’s name or their firm’s name and discover their license history and, perhaps more importantly, their disciplinary history.  Choose your financial advisor with this search early on and you will reduce wasted time.

3. What types of clients do you specialize in?

Financial advisors are not “one size fits all.” Advisors tend to specialize to a certain niche because they can add value to a client base to whom they have a special understanding. Some examples are advisors who specialize toward teachers, or business owners, or families who have children with special needs. Before you ask your potential advisor who they specialize in, ask yourself what you require. If you know other people in your circumstance ask them if they have a referral to a financial advisor.

4. How much contact do you have with your clients?

Having a financial advisor is not unlike a romantic relationship. You need to be able to communicate effectively in order to have a successful relationship. You should absolutely have a financial advisor that matches your communication style. If you require a lot of back-and-forth then you need to have an advisor that will give that to you. Likewise, if you have a very “hands-off” approach, your advisor needs to be comfortable with that. Even after your potential advisor answers this question, ask for references. Call a couple of the references to verify that they have received the level of service and communication that you expect.

5. Will I be working with you or a team?

You may prefer to have a dedicated person to manage your financial affairs, or you may be comfortable being referred to different members of a team. Either is fine, but you need to make sure that your financial advisor’s service model fits your expectation. The benefit of working with a dedicated person is that he or she will know your situation much more intimately than any member of a team. Conversely, the benefit of a team is that you can use a panel of people, each of whom will have an area of expertise. Remember, it’s up to you what you want your experience to be.

 

Now, you are armed with the basics you start your search.  How you choose your financial advisor beyond these 5 questions is up to you.

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