Checklist

Top Factors to Consider when Hiring a Financial Advisor

Finding an advisor who has your best interest in mind, clearly communicates without industry jargon, and holds similar values is imperative. But here are some other factors to consider during the selection process:

1. CHOOSE SERVICES THAT MEET YOUR NEEDS

Before signing on with anyone, make sure you know exactly what you're getting. Some financial advisors are experts in investment selection, while others only provide retirement planning, college savings planning, or life insurance assistance. By asking the right questions to determine expertise, you'll be more likely to find an advisor with the specific skills and services needed for a long-term relationship.

2. UNDERSTAND COMPENSATION

When evaluating advisors, one of the first questions you ask should be: How are you compensated? Understanding if the financial advisor expects to be compensated by you directly or by the products they sell is important. As previously mentioned, not all advisors are required by law to place your interests above their own. In such cases, you should be made aware of any potential conflicts of interest. As a customer, you have a right to know exactly how your advisor is being compensated and by whom. Request a breakdown of fees for all products and services offered in writing.

3. EVALUATE FIRM AFFILIATIONS

Again, many financial advisors are closely affiliated with firms who may hold their ultimate loyalty. Some questions to ask include: Are they an employee? Can they only sell or present "approved" products and investments from the firm? Can they act independently? Does the firm expect them to sell certain products? Good advisors can exist in many different business structures, but do find out if someone can act independently when making recommendations on your behalf.

4. UNDERSTAND LEGAL STANDARDS

Financial advisors operate under two standards in the industry—fiduciary and suitability. If you know the standard under which an advisor is operating, then you will know the legal accountability for the recommendations they are providing.

The Fiduciary Standard requires the advisor to put the interests of the client above their own. Fiduciaries act very much like a lawyer or doctor who is acting in your best interest.

The Suitability Standard requires that investments fit the client's investment objectives, time horizon, and experience, but are not legally bound to put the client first.

CFP®, CPA®, JD, and firms registered with the Securities and Exchange Commission as a Registered Investment Advisor (RIA) are all fiduciaries.

5. REVIEW CREDENTIALS

Interestingly, there is an alphabet soup of credentials in the financial industry with a wide range of standards, testing, and skills! Here is a short description of our six preferred credentials. All meet rigorous testing requirements and are well-respected.

  1. CFP®, Certified Financial Planner - Financial planning and investment expertise
  2. CFA®, Chartered Financial Analyst - Individual security, business, and economic analysis
  3. CPA, Certified Public Accountant - Tax specialists; may also hold a PFS, Personal Financial Specialist for planning expertise
  4. CIMA®, Certified Investment Management Analyst - Security analysis for high net-worth individuals and institutions
  5. CLU®, Chartered Life Underwriter - Life Insurance; may also hold a ChFC, Chartered Financial Consultant for planning expertise
  6. JD, Juris Doctor (attorney) - Specialist in Law but many have found their way into the financial services industry

Note: Some financial advisors call themselves an RIA, but that is NOT a credential. It means their firm is registered as a legal entity called a Registered Investment Advisor. While such persons may provide helpful advice, they have not gone through the same rigorous standards as mentioned above.

6. DO A BACKGROUND CHECK

Finally, though it may seem like overkill, it's within your best interest to do a background check on any advisor you are considering. Any Registered Investment Advisor firm with more than $100M in assets is regulated by the Securities and Exchange Commission (SEC), which will have a file on any complaints. Visit www.adviserinfo.sec.gov and type in the advisor's name for details.

If the RIA firm manages less than $100M in assets it will be regulated by the state in which it operates. In that case, you can visit www.nasaa.org and click on "Contact Your Regulator" to locate the state website for information.

Lastly, brokers under the Suitability Standard are regulated by the industry's self-regulatory body called the Financial Industry Regulatory Authority (FINRA). Any complaints against brokers will be found on the online BrokerCheck system.

Keep in mind, even if an advisor does have a complaint filed against them it doesn't necessarily mean you should eliminate working with them. Advisors are allowed to respond to any complaints filed against them, and those responses are posted. However, if you find multiple complaints filed against an advisor, proceed with caution.

7. TRUST YOUR INTUITION

Assuming you've done all your homework, it's time to trust your intuition. As previously mentioned, the advisor-client relationship is an important one. You want to partner with someone you feel comfortable talking with regarding a variety of subjects.

With that said, even if someone comes with a great recommendation, look elsewhere if they don't feel like a good fit. We live in a complex financial world where there are literally thousands of investments to choose from. Not to mention, dozens of seemingly important world events financial pundits claim will affect the market.

Having an advisor who can reduce the informational clutter and let you know exactly what can be ignored can really put your mind at ease. In many cases, peace of mind is just a phone call or email away.

As you can see, partnering with trustworthy advisors who take the time to understand your goals is imperative to achieving your retirement goals.

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