How to identify the right fit

Perhaps one of the most responsible jobs one individual can entrust to another person is that of managing their financial future. Hiring a financial advisor is one of those pivotal life decisions – the proverbial “fork in the road” that can dictate the path of your financial future for decades to come. Choosing the wrong individual may cause significant financial harm and most often these mistakes are not realized until the harm has been done.

Many people chose an advisor based on a referral from a friend or colleague, but little conversation goes into the selection process. Many just take for granted that the referral source has vetted the advisor, without an understanding of the criteria used. We generally hear “I like them” or” they’re good” But why do we like them or think that they’re good? Do we define a criterion?

Step 1

DEFINE YOUR NEED

You cannot hire the right person if you do not know what you expect them do. Much like buying an automobile you can buy a small car, one that gets you to and from work but if you need something to transport bigger items that requires more space the small auto will not work.

Similarly finding the right financial advisor is easier once you identify your need(s). You may have multiple needs so you might need someone with a broader scope of knowledge and services.

The services can vary form Debt Management, Retirement Planning, Investment Management, Tax Planning, Estate Planning, Insurance or just basic Financial Planning to include budgeting and savings. Some financial advisors may resemble coaches. They can help you make basic financial decisions and teach you solid spending, saving and borrowing habits. They can also perform high-level investment management for individuals and businesses.

Identify why you need a financial plan. You may need more than one kind, and that’s OK. Then make sure the financial professionals you’re considering have the skills, knowledge and experience to help you.

Step 2

UNDERSTAND TYPES OF ADVISORS

Step 3

KNOW HOW FINANCIAL PROFESSIONALS GET PAID

Traditional advisors

There are various ways an advisor makes money — like a commission for selling products, an annual percentage of an investors’ assets, or an hourly or flat rate — so you shouldn’t be afraid to ask for the details. Different compensation structures might create different incentives for the advisor, be careful. If somebody is paid only to sell something, it means if they don’t sell you anything, they do not make any money.

Here are some ways financial advisors may get compensated for their time and expertise:

• Flat or annual fee: Financial advisors could collect 1 to 2% annual percentage of your assets under management. So, for instance, if your assets total $100,000 you would have to pay between $1,000 and $2,000.
• Commissions: Advisors collect commissions on the financial transaction they complete.
• Fixed rate: Advisors could charge a fixed fee of between $1,000 and $3,000 for a service such as creating a full financial plan
• Retainer: If you have a complex financial situation, sometimes a financial advisor will work on a retainer model, and charge you either monthly, quarterly or annually. Since this is not asset-based, it can help minimize conflicts of interest and keep the focus on advice.

Some financial advisor fee structures combine two of these methods. An advisor could charge a flat fee while also collecting commissions on sales of new products. If you need advice for a specific problem and don’t plan to build a long-term relationship that includes investment management, you should choose someone with a flat rate.

Step 4

DETERMINE IF YOU NEED A FIDUCIARY ADVISOR

You might think all financial advisors would put their clients’ needs first and avoid conflicts of interest — but that’s not always the case.

Many different financial professionals fall under the term “financial advisor,” but only some of them must adhere to the fiduciary standard.

The fiduciary standard of care — also known as fiduciary duty — is a rule that requires the financial professional, put their clients’ best interests ahead of their own, even if that means recommending strategies that could reduce their own compensation. Typically, a CFP and an IAR adhere to the fiduciary standard. Some advisors are accredited investment fiduciaries “AIF”.

Meeting the fiduciary standard matters most when you’re hiring a financial advisor to invest and choose financial products on your behalf. If you’re simply seeking help building a monthly budget, this issue is likely not as crucial.

Regardless don’t be shy about asking potential financial advisors whether they are fiduciaries and any other questions about how they’re compensated. It’s your net worth at stake, after all.

Step 5

TAKE TIME TO SEE THE RIGHT PROFESSIONAL

Have you ever had to shop for a big-ticket item? A car or house or even just an apartment to rent. How much time did you put into finding exactly what you wanted? Some people will travel to faraway gas stations or stores to find the cheapest gas, dishwashers, or dryers. They’ll spend hours at car dealerships before buying a car. But they’ll rely on a quick Google search to find a financial advisor.

We should spend time and do some homework before we give anyone our hard-earned money. While you could always use the internet to start the process, you have more precise search tools available:

• BrokerChecks: BrokerCheck is provided by Financial Industry Regulatory Authority’s (FINRA). You can do some digging into someone’s experience and see whether prospective advisors have faced any disciplinary actions or complaints.
  
• Investment Adviser Public Disclosure (IADP): The SEC’s IADP website is a database that can help confirm that a Registered Investment Advisor (RIA), be it a firm or an individual, has the certifications they say they do.