EXECUTIVE SUMMARY 

Finding a financial advisor can take time, effort and patience. Whether you’ve never used an advisor before or seek fresh, new counsel, you will need a comfortable and straight-forward approach. This guide will help you select among the many advisors out there offering a wide range of products and services. Use our suggestions to assess when it is time to bring an advisor into your financial picture, identify the most qualified professionals and then ask the right questions when you are ready to schedule a meeting. With this guide, you should have a better sense of how to evaluate financial advisors, and find the right one to help manage your particular circumstances.

When do you need a financial advisor?

The role of a financial advisor has evolved tremendously over the past 20 years and you may not even realize how a financial advisor can be invaluable to you today. The financial professional of years ago usually played one of two roles: A commissioned broker who helped you with an investment portfolio by suggesting investments to you or an investment manager that took over your portfolio and managed your investments without regular interaction other than a quarterly report and perhaps an annual in-person meeting. These descriptions may sound a bit extreme, but historically financial professionals helped with investments and offered little advising. Today’s advisors may see your investments as the center of a discussion, but they also offer a range of analysis and advice to help you answer many financial questions in your life. In our experience, you should seek out a financial advisor when you relate to one of these situations:

• You no longer enjoy or feel confident managing your wealth yourself

Many people successfully manage their own finances and prefer the control, privacy and minimal costs that come with a do-it-yourself approach. Often, however, you realize one day that you have accumulated meaningful wealth and you are not sure you are doing the best you could. It takes too much time to follow your investments and make decisions in changing market conditions. Also, maybe you believe you have done well, but are not sure how to address future financial challenges. You are not sure how to determine how much of your wealth you can live on without a regular paycheck. You want to pay for college, weddings or structure your legacy and you realize these goals take broader expertise. If this sounds like you, it is time to find a financial advisor.

 

• You have outgrown your current financial advisor

Maybe you’ve worked with your advisor for years. You meet annually to go over your investments; you review charts and graphs and statements. He’s a nice guy, but there’s a nagging feeling that perhaps it’s no longer enough. Your life is more complex than when you started together. You may be facing college expenses, paying for weddings or considering the retirement you would like. You know your will is outdated or perhaps you never got around to getting one; you wonder if your insurance is still adequate. If your advisor hasn’t been asking about these aspects of your life and offering guidance, perhaps you have outgrown your advisor. He still is a knowledgeable financial advisor, but you have reached a level of wealth in which you need someone with a different range of expertise to help you consider the dynamics of your current life. It’s time to do some research and find the right person to help you with your next steps in your journey.

 

• You have had a recent change in circumstances

Your best-fit advisor is someone who works with clients very similar to you. When your circumstances change, you often need to rethink your whole team. Whether you have sold a company, accepted a large pension payout or received an inheritance, you may find yourself in a very different financial situation. When this happens, it is usually best to move slowly and carefully. You will want to take some time to consider any changes to your lifestyle and what new dreams inspire you. While you may feel very loyal to any advisors that have helped you get to this point, often, they are not the same professionals best suited to advise you for the future. It is time to slowly, but steadily, start meeting new professionals that have experience working with people like you.

 

How do you choose a financial advisor?

The process of selecting the right advisor is a little like dating, as a colleague once put it. Just like you want to find a partner who understands your goals, has integrity, inspires trust, and communicates clearly, you want to find a financial professional who exhibits those same qualities. So, take your time, ask the right questions and make sure you are comfortable that this person has your best interests at heart.

Before you start searching for an advisor, put some thought into what areas of guidance you would like and how you hope to work with this person. Understanding what your goals and needs are will help you narrow the search. For example, if you primarily need investment guidance and retirement planning, you may select a firm that emphasizes financial planning. If you have complex needs in which you would like your tax strategies, estate goals and investments coordinated, you will seek a firm with a broader range of expertise. Select an advisor that understands your set of circumstances and who works regularly with other clients similar to you in terms of complexity and wealth.

Before you talk to potential advisors, it is good to actually write down your questions. This helps you compare their answers consistently and objectively. Be sure to add a comment area for yourself too though, because just like dating, there is an important intangible element to a successful relationship. If you’re set to discuss your financial situation with an advisor, here are five of our suggested questions you may want to ask.

1.     What is your background and your credentials?

The world of financial advisors is expansive. Maybe you’ve heard of a financial consultant, financial coach, money manager or wealth manager. Do you know what any of these titles mean? Do you know that anyone can call themselves a financial advisor? It is not a term of degree or qualification. So, an advisor’s professional designations and experience really matter. Unfortunately, there are as many designations in the industry as there are titles to confuse you. But certain credentials give you more insight than others into the advisor’s competency and areas of expertise. Here are the most common credentials that assure you an advisor has committed meaningful extra time and ongoing professional development to learning to be a qualified “advisor,” and not a product sales specialist:

 

CFP^® - CERTIFIED FINANCIAL PLANNER^TM

CFP® professionals have completed university level financial planning coursework and passed a six-hour exam covering 72 topics – ranging from risk management to investment, tax and retirement planning. More information: www.cfp.net

 

CFA^® - Chartered Financial Analyst ^®

CFA charterholders must pass three sequential annual exams typically requiring over 300 hours of study to cover eight volumes of curriculum. The curriculum has been assessed as equivalent to a master’s degree level program. The CFA® program covers current practice, investment theory and application, and ethical and professional standards to prepare institutional and private wealth professionals. More information: www.cfainstitute.org

 

CIMA^® - Certified Investment Management Analyst

CIMAs focus on investment consulting – mastering asset allocation, manager review and portfolio construction. The certification covers five core topic areas and applicants must pass an entry exam before taking on the further education, exam and experience requirements. More information: www.imca.org

 

2.     What services and products do you offer?

Different types of advisors offer different services and solutions. Make sure the advisor can help you with what you need. These days, almost all financial advisors will manage your investment portfolio. Some advisors, however, consider portfolio management the core of their business with expertise in a range of investment solutions. These advisors will have access to all different investment products and may consider themselves first and foremost “investment managers.” If you are tired of managing your own portfolio, this type of advisor may be the best fit for you.

If you seek an advisor that will review your current circumstances and help you figure out how your wealth can support you in your retirement, you may consider an advisor that is primarily a financial planner. These advisors usually offer planning for retirement, college and healthcare funding, and sometimes wealth transfer and tax strategies. Their expertise may be limited, however, when it comes to portfolio management. Advisors that emphasize planning often augment their services with insurance products for investment purposes or portfolios built from third-party investment providers. This may mean additional fees on top of the fee you’re paying for your financial planning. If your need for a professional is occasional to assess that you are on track for retirement, or you are not likely to find yourself with a taxable estate, you might prefer the services of a financial planning advisor.

If you need an advisor who can integrate both your financial planning needs and investment needs into one cohesive strategy, consider using a wealth manager. A wealth manager is someone who has the credentials and expertise to provide both comprehensive personalized financial planning and investment portfolio management under one umbrella. They can offer holistic strategies and coordinate with other professionals, such as CPAs and attorneys, to handle the complexity of tax minimization, wealth transfers, trust & estate management, charitable gifting, risk management and various matters pertaining to all your wealth needs. If your wealth has grown to a point that you have complex needs and are likely to have a taxable estate, you might prefer a wealth management advisor.

 

3.     How are you compensated?

Every professional deserves to be paid for their expertise and services. Knowing how your advisor is paid is essential to building a trusting relationship. Don’t be shy about asking this question as any quality advisor should be willing to share their fee structure right up front. There are a few common ways that advisors are compensated. All of these approaches should be transparent and easy to understand. You want to be sure that you pick one that aligns well with your objectives.

Fee only:

Many independent financial advisors charge a fee that is based on the value of the assets they manage for you. A typical fee is 1-2 percent annually. This method rewards your advisor for growing your portfolio, not for individual transactions. If your portfolio grows, the advisor’s fee increases; if the portfolio loses value, the advisor’s fee goes down, thus usually aligning your objectives with theirs. These fees are usually charged quarterly and the calculation is very clear.

Hourly or flat fees are sometimes associated with a specific, one-time service. This fee may vary by account size and scope of service. Financial planners will at times offer fee-for-service arrangements like this. Prior to any work starting, there should be a clear written statement of the services that will be provided for the fee.

Commission only:

If you anticipate very few investment/insurance transactions and do not need planning, you might prefer the traditional commission approach. Under this policy, the advisor’s compensation is based solely on sales commissions from the investments or insurance policies they buy or sell for you. This traditional method of compensation has been waning over the years as it offers the advisor an incentive to recommend that you buy and sell more often, or buy mutual funds with high sales charges in them. Be aware that commissions are sometimes also paid by third parties – such as mutual fund companies –  in which case you may think you are receiving your investments fee-free. If that is the case, you can almost always discover that you paid the commission by way of paying higher prices for the investments.

Fee plus commissions or fee based:

This hybrid approach is most common with financial planning firms in which your planning services cost a fixed fee. Then in addition to the financial planning fee, the advisor also receives a portion of the commissions you pay when you buy or sell financial products they recommend, such as insurance policies, annuities or mutual funds. Make sure you understand the fee structure to help you be more comfortable with the recommendations you are being offered. With this business model, the advisor can easily disguise what part of the advice is advisory and what part is from commissions.

Understanding the fee structure will not only help you uncover any potential conflicts of interest the advisor works under, but it will allow you to determine the best value proposition for your needs. Sometimes we hear people suggesting they are looking for the “cheapest” financial advice available. We caution that every financial professional and service is paid in some way, so be wary of the cheapest options. You probably do not look for the cheapest professional in other parts of your life and – keep that in mind as you seek to understand a fair compensation arrangement for the professional you choose.

4.     How will we work together?

Everyone has their own definition of what “good communication” is. Getting an understanding of how you and your advisor will work together is important. Asking questions about frequency of interactions, content delivery and services offered will help meet your comfort level and expectations. Here are some questions you might ask and why they may be helpful.

Who will I work with?

 Advisory firms have different structures. Some firms offer a single point of client contact and others offer different service experts for different needs along the way. Some firms also may assign you a different primary contact other than the person that first spoke with you and attracted you to the firm. It is important that you are comfortable working with your primary contact and that you know who will be available as a backup for that person. In considering your preferred method of working with an advisor, ask yourself if you prefer to work with one person, who is your go-to person at the firm, or if you prefer to speak with different experts at different times depending on your questions.

How often will we communicate?

At a minimum, you should expect to meet with your advisor once a year to review your circumstances and monitor your progress. The media might lead you to believe that all communication is best achieved today with cutting-edge technology. Make sure you understand how your advisor will communicate and be sure it fits your personal preference. If you have embraced the digital age, ask if your advisor offers online access to your portfolio, a personal web portal or electronic reporting. Will they respond to email from you regularly? If you prefer traditional approaches, ask if they will avoid email, always send you hard copy reports and call you on the phone to speak. You will also want to understand if your advisor provides proactive communication when market conditions change and if your advisor is willing to communicate more often if you desire it.

How often will I get portfolio performance reports?

You should always get regular account statements from the custodian/brokerage that holds your assets. If you have a separate independent advisor, you might additionally get quarterly or annual reports. Ask to see a sample report to see that you understand the information and like how it is presented.

5.     What is your approach for someone like me?

It is very important to determine if the advisor has experience with clients in your circumstances. You should ask the advisor to describe their typical client. You might also ask them to share how they helped a client with a challenge or question that is on your mind. From their answer, you should be able to surmise if the advisor has experience with your situation. If you can’t, they probably do not have truly similar experience or they struggle with communicating clearly. Both of these might cause some concern.

If your needs have become increasingly complex, ask if you will receive a personalized plan specific to your goals and concerns. Also ask if they will coordinate or communicate with your other professionals, such as your CPA and attorney. If they offer a standard plan and model to all clients, have them explain how this approach will fit your unique circumstances.

There are lots of good financial advisors out there for everyone, no matter their wealth. The most important way to find the right fit is to assure that your circumstances are typical of the advisor.

 

 

When it’s time for a new financial advisor, put some time and effort into the search. If you have been referred by friends or found a few potential names on the web, you can do some preliminary screening about their business model, compensation and disciplinary history by looking at their website and their Form ADV on the SEC’s website. You can also check their regulatory history on FINRA’s website. Once you have done your homework and clarified what you are looking for, get ready for some dating. Some advisors will take you to coffee and others will have a personalized “welcome” sign in their office. Use your list of questions to find the qualified advisor that can deliver the expertise you seek and also offers you the comfort and confidence that comes from building a strong relationship with your financial advisor.