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How to Choose a Financial Advisor

Selecting a financial advisor is an important process, but a process that can feel overwhelming to many individuals. You may have questions like: What is a fiduciary? What services am I looking for? What credentials are important? How is the advisor being paid? Is the advisor independent or part of a larger organization?

 

 

To help you break down your options, let’s look at each of these considerations.

Fiduciary Versus Suitability?

Advisors who work as fiduciaries have a legal obligation to put their clients’ interests ahead of their own interests. If you work with a fiduciary financial advisor, they are required to make recommendations they believe to be in your best interest.

Conversely, the suitability standard means that the product merely must be suitable for you, not the best option available. When choosing a financial advisor, make sure to ask if they are a full-time fiduciary.

Fees

It is important for you to understand the fees you are paying as well as how the advisor is receiving compensation. There are quite a few fee structures that can have different impacts on the advice you may receive.

  • Fee-only: The National Association of Personal Financial Advisors (NAPFA) defines a fee-only financial advisor as “one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.” The advisor may not “receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.” A fee-only model allows investment decisions to be based on performance and individual risk tolerance, avoiding the built-in conflict of interest of commission-based advisors.
  • Fee-based: While often confused with the term fee-only, there is an important distinction. Fee-based is often used to describe a hybrid fee structure. Fee-based advisors can charge fees to clients and earn commissions by selling products to clients.
  • Commission: Advisors who earn commissions derive income from selling investment products (such as annuities and mutual funds) and insurance products. Because their income is based on sales, the products they recommend may not be the best option available even if they are considered “suitable” for the client. This can create a large conflict of interest for the advisor.

Services

Are you looking for investment advice and financial planning? Would you prefer an ongoing relationship or one-time advice? There are different service offerings available, and it is important to find one that fits your needs.

  • One-time advice: Some advisors provide financial advice at an hourly rate, and this can be a good fit for those seeking advice on specific short-term questions.
  • Investment advice: For individuals looking for only investment management, there are services available that focus on investments without delving into larger planning areas.
  • Comprehensive financial planning and investment management: This service offering is for individuals who are looking for an all-in-one relationship that will focus on investments, retirement and cash flow planning, estate planning, tax planning, education planning, and other areas the client may need.

Credentials

Many credentials are available in the financial services industry, and it can be difficult to know which designations require the highest level of knowledge and experience. We recommend you look for financial advisors who hold one of the following credentials:

  • CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals: Advisors with this designation have completed extensive experience and training requirements as well as a comprehensive examination.
  • Chartered Financial Analyst® (CFA®): An advisor with this designation is an expert in investments and securities. This designation requires mastery of 10 investment topics and the passage of three levels of examination.

Firm Structure

Advisory firm structure will vary, and you should know how the different structures can impact the advice you receive. It is important to understand if your advisory firm does their own research and forms their own opinions. Do they incorporate your financial planning into the overall investment strategy?

  • Independent Registered Investment Advisor (RIA): These advisory firms are regulated by the Securities and Exchange Commission (SEC) and have a fiduciary duty to clients. They have a wide selection of investments to choose from because they are not beholden to any fund family or dictated to by a larger parent company.
  • Independent broker-dealer: These firms are commissioned or fee-based and offer a wide variety of products. They are not beholden to a fiduciary duty to their clients.
  • Wirehouse broker: These offices often have a select list of preferred investments and are told how to conduct business from the larger corporate office.

Summary

There are many paths you can take when working with a financial professional to create a plan for your financial future. Our Topeka-based RIA firm is committed to the fee-only, fiduciary model. We recommend that whoever you choose to work with should commit to being a full-time fiduciary advisor. To find this commitment, focus your search on independent RIAs who subscribe to the fee-only model.

Contact us for a complimentary needs assessment phone call.

Barbara Duncan, CFP®

As Partner and Senior Wealth Advisor, Barbara Duncan's favorite moments come when a client reaches a long-sought milestone and shares their appreciation for her help in reaching it.
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