Finding a good financial adviser can feel intimidating.
Maybe you doubt whether your net worth is high enough to merit one, or whether you can afford one. After all, you’re trying to make money, not spend it. Maybe it makes you uncomfortable to hand over the reins of your life savings to a stranger.
Yet, at some point in your life, it might be necessary to seek out the expertise of a financial adviser. If the process seems daunting, simplify it by educating yourself on the basics and breaking the search down into a few actionable steps. You’ll feel more confident in the adviser you choose when you know you’ve done your research.
The Fiduciary Standard
Before you begin your search for a financial adviser, there is one very important word you must understand: fiduciary. This is a person who has a legal obligation to act in your best interests.
Not all financial advisers are fiduciaries. It depends on their licenses or credentialing. Many financial advisers are dually registered as both brokers and advisers, which means sometimes they need to act as fiduciaries and sometimes they don’t.
When interviewing potential financial advisers, ask them if they are legally obligated to put your best interests ahead of their own. Ask them if they will serve as your fiduciary. Additionally, one very important question to ask potential advisers is “Do you adhere to the fiduciary standard, at all times?” The “at all times” part will help you determine if you have found a dually registered agent and not a true fiduciary.
Types of Financial Advisers
In the world of personal finance, not all financial advisers are created equal. There are three main types of financial advisers and more than a handful of credentials that you’ll see behind an adviser’s name.
Fee-Only: Fee-only advisers are the gold standard in the financial planning world. They are compensated by a flat fee, an hourly fee, or by a percentage of the funds they manage for you. They do not work on commission and they almost always have a fiduciary responsibility to you. This means they have to keep your interests first, ahead of their own.
Commission-Based: Brokers and insurance agents are examples of just some of the commission-based advisers that are out there. They sell financial products and receive a commission on their sales. There is a major conflict of interest with using a commission-based adviser. They do not have to put your interests first as they do not have to act as fiduciaries. Just because a financial planner makes a commission on a product they sell, doesn’t make it a bad investment. It might actually be a really great investment. However, the problem is you won’t know if it was the best investment for you.
Fee-Based: Not to be confused with a fee-only adviser, fee-based advisers usually also hold a broker’s license in addition to providing comprehensive financial advising. Fee-based advisers might provide you with fee-only financial planning, but they also might sell you products where they receive commissions.
How Much Help Do You Need?
Financial planning advice comes in all shapes and sizes. Do you want someone to create a one-time financial plan for you? An adviser could charge you an hourly rate or a flat fee to develop a comprehensive financial plan.
Or maybe you’re looking for an hourly consultation. You might have a specific question on a particular topic, such as estate planning or the best way to save for a college education. Or you might want expert advice if you’re interested in working with a new type of investment. Maybe you’ve invested with stocks before but are new to bonds. An hourly financial adviser guides you through these types of scenarios.
Lastly, you could hand all of your financial matters over to an adviser who specializes in total asset management. This type of financial adviser will develop a comprehensive financial plan for you as well as invest and manage your money. Your adviser will continuously manage your funds through changes in the market, your life, and even as you age. These types of advisers usually charge you a percentage of the assets they actively manage for you.
Find a Qualified Adviser
When searching for a new financial adviser, it’s great if you have a solid referral from a trusted family member or friend. Likewise, a trusted lawyer or CPA might be able to give you a few good recommendations to help you identify some potential advisers. However, if you have to start from scratch, a trusted database to start with is the National Associations of Personal Finance Advisers. You can search for advisers in your area or find advisers who work virtually with their clients as well.
Do Your Due Diligence
Before you sign-up with a potential bad apple, do your own due diligence. Maybe you’ve selected a few candidates with the credentials you are looking for, but do they have any ethical or legal blemishes that you can’t see at first glance?
One way to easily check their standing with the SEC or any disciplinary actions against them is to check out their ADV form. You can look up professional investment advisors who are registered with the SEC and hold (or held) a license by navigating to SEC’s Investment Adviser Public Disclosure (IAPD) website. In addition, use the SEC Action Lookup Tool to check for any legal action against individuals brought on by the SEC, even if they aren’t brokers. Alternatively, if you are working with a financial adviser or broker who is registered with FINRA, you can use BrokerCheck to research their background, experience, or even criminal charges.
Try It Before You Buy It
Once you find a few advisers that you think have potential, schedule an introductory call or meeting with them. Most financial advisers offer a complimentary one-hour session so that you can get to know each other. The adviser will get an idea of your needs and general financial picture. You will get a taste of their style and planning process. If your adviser doesn’t offer this to you, ask for it.
These sessions are an opportunity for you to see if you feel comfortable with an adviser and try out their style and process before you buy into it. The client-adviser relationship is a very important one, built on trust and compatibility. Even if they are well qualified, if you don’t jibe as a team, it just won’t work. Don’t be afraid to ask for examples of what their quarterly reports, newsletters, or investment plans for you would look like.
Read the Fine Print
As a smart consumer, you know to always read the fine print. You might have met with several advisers and checked out their credentials and backgrounds. Everything looks great on paper. The interview went well, and you feel like you really get along with them. Great! Read the fine print anyway.
Before you sign your name and hand over your money to a new adviser, think about the “Three Cs”: custody, contract, and cost.
Custody: If you’re going to work with an adviser who will invest your assets for you, find out who they use as a third-party custodian. Your funds will be held at a third-party institution, not with your adviser. These institutions will provide your quarterly statements as well. It might sound a little scary to find out that your money is going to be held at another institution, not with the adviser that you just vetted. However, it protects you from scheming advisers who could drain your accounts or fudge financial statements. Do the names Charles Ponzi or Bernie Madoff ring a bell?
Contract: Before you sign up as a client with your new adviser, read the contract. If you don’t understand how it reads, ask your adviser to walk you through each section until you understand. Important concepts to understand are what services your adviser will provide. Can you end your relationship at any time, or are there early termination fees? Lastly, will your current adviser stay your adviser, or is it possible you'll be passed down to a junior employee later?
Cost: You should have already covered the cost of advisory services during your interview, but a good rule of thumb is to always see it in black and white on a contract as well. Although you already know that there are three major types of financial adviser compensation, you’ll still want to understand if you’ll incur additional fees over and above your adviser’s base compensation.
Will there be additional flat fees to update annual investment plans? Transaction fees or fees to close out accounts? These are just possible examples of additional fees. Talk to your adviser about what you should expect before you sign.
Keep More of Your Money
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This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation.
