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Choosing a financial advisor is a big decision, especially if you’re new to investing. You have to trust an individual or firm to help you manage your money. So, how do you know if you’re working with the right person?
Figuring out your financial goals is an excellent first step. Are you investing for retirement? Do you have a short-term savings goal? Are you setting up a college fund? Or do you need help creating a solid financial plan?
Once you know what you want to accomplish, ask these questions before you hire a financial advisor.
What kind of financial advisor are you, and what are your qualifications?
Several different kinds of financial advisors use various titles. Ask a potential candidate what kind of advisor they are and their qualifications (i.e., education, years of experience, professional licenses, and certifications).
You can verify an advisor’s professional credentials, get a work history, and see complaints on BrokerCheck, the Financial Industry Regulatory Authority (FINRA) website.
Here are a few types of financial advisors, according to Nerdwallet.
- Investment advisor – Investment advisors must register with the SEC. They provide investment advice and can manage your assets directly.
- Broker-dealers – Broker-dealers must also register with the SEC and are typically FINRA members. They buy and sell securities like stocks, bonds, and mutual funds. Brokers need different licenses to sell various products. So, many brokers have multiple licenses.
- Portfolio, investment, and asset managers – Your investment portfolio might contain a mix of stocks, bonds, mutual funds, CDs, etc. A portfolio manager manages these and might also provide financial advice.
- Certified financial planner – You should clarify if someone using the title “financial planner” is certified. A CFP must pass a certification exam, hold strict ethical standards, and have a fiduciary duty to their clients.
- Financial consultant – If an advisor uses this title, find out if they are a “chartered financial consultant (ChFC).” A ChFC must uphold a fiduciary responsibility and follow the American College’s code of ethics. You can verify a certification on the American College of Financial Services website.
- Robo-advisor – Robo-advisors are low-fee, automated investment services. According to Investopedia, they can provide financial advice and build and manage an online investment portfolio with little-to-no human contact.
Are you a fiduciary?
A fiduciary financial advisor must work in the client’s best interest under the Investment Advisers Act of 1940. They are known as investment advisors (IA), Investment Adviser Representatives (IAR), and Registered Investment Advisers (RIA), according to Kiplinger. The SEC governs them.
A broker-dealer can offer “suitable” investments that might not be in a client’s best interest but earn them commissions. This means a broker can choose a product that benefits them more than their client. FINRA governs brokers.
How are you compensated?
A financial advisor earns money to manage your investments, either by a flat fee or commission, according to Investopedia.
A fee-only advisor might earn a percentage of “assets under management,” or charge a flat fee or an hourly rate. This kind of advisor is usually a fiduciary and is legally bound to act in your best interest.
If a broker earns a commission on the financial products they sell you, you might wonder if they are choosing the right investment for you or are trying to pad their income.
Ultimately, a potential advisor should always be transparent about their compensation.
Do you charge any additional service fees?
As you discuss how much you plan to invest, ask for the total annual management cost. Are there any other charges beyond the flat management fee or commission? Is there a separate fee to create a financial plan, for example?
How will you pick investments for my portfolio?
A good financial advisor will take time to understand your current financial situation and future goals and make investment choices to achieve your long-term wants and needs.
Market volatility carries investment risk. So, it’s essential for an advisor to understand your risk profile, according to U.S. News. Their investment choices should balance your goals while accounting for your unique risk factors.
Most advisors and firms believe in diversifying a portfolio so that you “don’t put all your eggs in one basket,” according to Investopedia. Diversifying can maximize return and minimize risk. Ask what investments an advisor will pick for you, why, and how they will allocate your assets.
How often will we meet, and how do you prefer to communicate?
Communication is vital in any relationship—especially when you’re putting your money in someone else’s hands. Ask your advisor how often you need to meet and if they are willing to answer questions in phone calls or emails without an appointment.
What do you value most in life?
This might seem like a personal question. But if you’re trusting an advisor with your money, their values should align with yours.
Choosing an advisor to manage your finances is one of your most important decisions. Asking these questions will help ensure you hire the right person to help meet your goals.