Financial consultants assist clients in budgeting and achieving their financial objectives. They can offer a variety of financial planning services, including investment management, advice on setting up a budget, and money management. In order to assist with sophisticated financial issues like estate planning, insurance requirements, or tax preparation, some financial advisors have additional credentials or areas of specialization.
It’s important to choose the correct financial advisor for your position so that you don’t pay for unnecessary services or deal with a person who isn’t a good fit for your financial objectives. The following five steps will assist you in selecting the best financial counselor for you.
1. Find a real fiduciary
The legal guidelines around who is considered a fiduciary are muddy, at best. Currently, many advisors have to act in your “best interest,” but what that entails can be almost unenforceable, except in the most egregious cases. You’ll need to find a real fiduciary.
“The first test for a good financial advisor is if they are working for you, as your advocate,” says Ed Slott, CPA and founder of IRAhelp.com. “That’s what a fiduciary is, but everyone says that, so you’ll need other signs than the advisor’s say-so or even their credentials.”
Slott suggests that consumers look to see whether advisors invest in their ongoing education around tax planning for retirement savings such as 401(k) and IRA accounts. These are complex accounts, and the laws change from time to time, such as with the SECURE Act 2.0, which was passed at the end of 2022.
“They should prove it to you by showing they have taken serious ongoing training in retirement tax and estate planning,” he says. “In my over 40 years of practice, I have seen costly irreversible tax mistakes because of ignorance of the tax rules, and it is unfortunately still a big problem.”
“You should not invest with any advisor who doesn’t invest in their education. It’s got to be about you first,” Slott says.
2. Check those credentials
Consumers looking for financial advisors should also check their professional credentials, seeking out well-recognized standards such as chartered financial analyst (CFA) or certified financial planner (CFP). These designations require their holders to act as a fiduciary.
“These individuals have mastered a complex body of knowledge, have passed a comprehensive examination (or in the case of a CFA charterholder, a series of examinations), and agree to abide by a code of ethics,” says Robert Johnson, professor of finance at Creighton University.
Johnson cites part of the code for CFA holders that exhorts them to “act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.”
You can verify an advisor’s credentials at the CFA Institute’s site or the CFP Board’s site. While these credentials don’t guarantee that someone is indeed working in your interest, they do indicate a certain level of education and competence, and those are valuable.
3. Understand how the advisor gets paid
“How is the public truly going to know what they are going to get when they hire a financial advisor or planner,” asks Scott Bishop, CFP, and executive director of wealth solutions at Avidian Wealth Solutions. “The financial industry is not a strong ‘profession’ in that when you see a doctor or lawyer, you kind of know what you will get – even though quality and expertise may be different among firms.”
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Bishop notes the differences between the advice offered by wirehouses, insurance agents, independent broker-dealers, and independent registered investment advisors.
Some salespeople are posing as advisors, especially those employed in a company where the main business is not advising clients, such as an insurance company or a fund management firm. In such cases, the advisor is often just selling you the company’s products and services.
While you may be more likely to find unbiased advice from an independent advisor, you’ll still want to be careful. Even independent advisors can end up being salespeople for a company.
A few questions you can ask include the following, says Brian Walsh, CFP, senior manager of financial planning with SoFi, a personal finance company: “Do they earn commission on insurance sales? Do they earn a commission on stock transactions? Are they affiliated with a financial company that offers proprietary products?”
So be very careful around an advisor that you’re not paying for service. As the old saying goes, “He who pays the piper calls the tune.”
4. Look for fee-only advisors
One way around the conflict of interest in the financial industry is perhaps the most obvious: you need to find an advisor who works for you and is paid only by you and other clients like you. Of course, that means money comes out of your own pocket, but you’re likely to come out ahead.
The reason is that various financial “solutions” such as annuities typically contain huge sales commissions built into the price. When you purchase these products, you’re paying a huge cost for the product on the advice of a conflicted salesperson, but the cost is usually obscured. Ultimately, this advice could cost you tens of thousands more than the cost of a fee-only advisor.
“The advisor should not be incentivized to push his own agenda but by always doing what is best for the client,” says Brooks Campany, regional manager at Argent Trust Company in Oxford, Mississippi. “A fee based on a percent of the assets managed is a safe arrangement. When the client’s assets increase, then the advisor’s fee increases.”
Another approach is to charge a per-hour fee for service. This arrangement may work well for higher-net-worth clients since they pay for advice once and not for how much money they have.
By sticking with a fee-only fiduciary advisor, you’re paying the piper and calling the tunes. With such an advisor, after an initial consultation, you might go back in once a year for a check-up and have the advisor adjust your plan if your life situation or financial goals change.
5. Search for clarity
Any advisor should be able to explain everything clearly and to your complete satisfaction. If an advisor makes you feel incompetent or unintelligent for asking questions, simply walk away. You can’t build a long-term relationship with such an individual.
“An investor may suspect an advisor is not working in their best interest if they offer only proprietary products, charge fees without explaining why, or actively trade your account without your authorization, especially if doing so on a commission basis, where they get paid for each transaction,” says Van Sant.
If your advisor does any of these things and can’t provide a clear answer why, then you need to get out. If you haven’t authorized these transactions and the advisor’s explanation is not clear to your full satisfaction, it’s not enough to get the advisor to stop. You need to find a new advisor.
Many financial advisors make money by obscuring what they’re doing. Make sure your advisor is clear about who’s paying them.