The financial services industry is not always consumer-friendly. It is very challenging for the average person to navigate the sea of advisor credentials and different service models and it can become overwhelming to choose the right advisor. In an effort to narrow down the field of potential advisors, you should determine if you have any preferences regarding fee structure, the size of a financial advisor's firm, and what services the advisor and his or her firm are able to provide.
Typically advisors fall into two basic groups. The first group is paid on commission. These advisors generally work for a brokerage firm and earn their income based on the transactions in your investment account. The most common conflict arising from this model is an incentive to recommend products with the highest commission and/or trading in an account unnecessarily to create greater transaction volume.
The second group is paid directly by the client. Often these advisors are considered to be “fee-only” in that they do not take commissions on the sale of financial products. Fees can be charged by the hour, on a fixed fee basis, by a percentage of assets being managed or a combination. The most common conflict arising from this model is an incentive to keep assets under management instead of using the assets for other purposes such as paying off a mortgage or making gifts.
One model is no better or worse than the other – both are legitimate and can serve a client well depending on the situation. The most important thing is that the advisor’s fees are clear and transparent. You should know exactly how much your advisor is earning and how it is calculated.
Size of Firm & Demographics
Firms range from sole practitioners working out of a home office to the largest brokerage houses running ads during the Super Bowl and everything in between. The advantage of a smaller firm is that clients tend to get more attention from senior advisors. With that said, it is important to understand who provides client service when that senior advisor is inevitably ill or on vacation. With the larger firms, and the oftentimes larger service teams, determining the access to senior advisors and any limitations in that access is key. In terms of client resources and available products, most firms have comparable offerings.
From a demographics perspective, you want an advisor that has clients in similar situations with similar net worth. In addition to assuring an advisor has experience with your specific issues, it also ensures that you are not the “little fish in a big ocean”.
Some advisors provide only investment management while others focus on comprehensive financial planning. There is great value to taking a holistic approach to your overall financial situation because investment, tax, insurance and estate planning strategies have overlapping issues and considerations. It is important that they all work together in a complimentary manner. And for people who do not have the time or interest to manage their financial lives, an advisor can be a great resource as the “quarterback” of your team of professionals which will often include estate planning attorneys, accountants and insurance advisors.
Once you have decided if you want a large or small firm, whether you want comprehensive financial planning, and if you have a preference on fee structure, it is time to ask your friends, your attorney and your accountant for recommendations.
The most common credential for advisors that offer comprehensive financial planning is the Certified Financial Planner ® designation. This designation ensures that the advisor has a baseline level of education and experience and has agreed to maintain a high ethical standard. In addition to the CFP® certificate, you should inquire about graduate degrees or specialized training, association memberships, publications and community engagement.
Perhaps the most important aspect of choosing an advisor, though, is following your intuition. It is imperative that you connect with your advisor on a personal level and always feel comfortable asking questions. Your financial advisor should take an interest in your life, be a great listener and take client education very seriously.
Finding a great match is achievable if you focus on these considerations and follow your instincts.
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