How Do I Choose the Right Financial Advisor?

10/11/2018 - By Chris Stennett, CFP®

Last month's article asked the question: “Do I Need A Financial Advisor?” If you said yes and are ready to begin working with an advisor, the next question you should be asking is “How Do I Choose the Right Financial Advisor?” Unfortunately, there isn’t a unified database you can mine to narrow down your advisor list. While there is always going to be a level of subjectivity in this decision, my intent in this article is to provide you with a framework of qualities that you then can use to build your advisor short-list.

The profession of “Financial Advice” has morphed over the decades, and while there’s been a lot of positive steps towards client advocacy, there are still people out there looking to take advantage of the uninformed. Complicating matters further, some firms have taken to the tactic of giving their sales people important titles previously associated with advice-only firms. So how do you find an advisor to trust?

Key Point 1: Trust

When searching for the “right” advisor, the first question to answer is what type of help are you looking for? Are you looking for guidance on a point-in-time decision, like buying a home? Are you looking for help in fully assessing your current situation and creating a plan to make it better? Or are you just looking for a place to invest excess cash? By understanding your primary goals, you can focus your search on advisors that specialize in those areas.

Some people aren’t sure of the type of help they need. These individuals are looking for help to define their goals and need an advisor who can help them clarify their feelings. Unfortunately, this puts the individual in a vulnerable place, leaving them susceptible to sales coercion. That’s why it’s important that these individuals seek out an advisor who acts solely as a Fiduciary to their clients. Just because a person calls themselves a Financial Advisor, or planner, or Wealth Manger, doesn’t mean their underlying motive is to act in your best interest. Finding an advisor who will put your interests above their own is paramount to building a trusting relationship.

In previous posts, we’ve covered what it means to be a fiduciary. For reference, it is a legal obligation to put your clients needs above your own. This obligation can be present at the individual level and at the firm level. At the firm level, a company organized as Registered Investment Advisor (RIA) is legally bound to provide fiduciary advice to its clients. At the individual level, advisors can hold designations such as Certified Financial Planner®, Accredited Investment Fiduciary®, and Certified Financial Fiduciary among others. An online search can yield the designations that require the holder to act as a fiduciary. Holding a designation like this also demonstrates competence in the subject matter, which is another key to building trust with an advisor.

One last item of trust that you absolutely need to understand is the advisor’s “Permanent Record.” Every advisor’s historical information is public record. You can use this information to further narrow your list by searching the individual or firm name through FINRA’s Broker Check. Things you’ll want to know: have they ever been convicted of a crime? Has any regulatory body or investment-industry group ever put them under investigation? The bottom line is, if an advisor can’t give you a satisfactory explanation as to why something shows up on their record, they shouldn’t be entrusted with your money.

Key Point 2: Compensation

Financial Advisors don’t do their job for free so it important that you find an advisor who charges you in a manner that matches up with your needs. Typically, their compensation falls into 3 categories: Fees based on Assets Under Management, Hourly/Fixed- Fee based, Commissions. Assets Under Management refers to an advisor charging you a fee based upon how much money they manage. This way of billing is very common and creates a relationship where the advisor is vested in your account’s success. In fact, it’s the primary way we work with clients. This approach means you need some wealth to begin with. Most advisors have account minimums so, while the AUM model creates reciprocity, it isn’t a best fit for all situations.

Enter the Hourly/Fixed-Fee based model. In this model client and advisor agree to a set rate based on the scope of the engagement. If you’re going through a life event such as divorce, have limited investable assets, or just prefer to be charged a predictable rate, you might favor this approach. Over the years, I’ve worked with business owners to help them create a plan for succession and retirement. Most of these owners had their “Retirement” tied up in the business itself, with any investment assets held inside their company’s retirement plan. This fee model allows me to help clients that may not have otherwise qualified under traditional asset standards.

The third form of advisor compensation is being commission based. Charging a commission means that an advisor is going to make money based upon what you buy. This is very common in the world of insurance and annuities. I’m not going to tell you that commissions are bad, but you should be aware that they create a potential conflict of interest. An ideal situation would be that an advisor makes the same commission regardless of the product you buy. However, if there isn’t equality to the commission scale, the obvious concern is that an advisor steers their client into the product that makes them more money.

Key Point 3: Relationship

You and your advisor are going to have a relationship together. You’re going to talk about subjects that you don’t bring up around your closest friends. They are going to know your “Money Secrets”. As with any successful relationship, good communication is key. If the advisor is using industry terms that you don’t understand, will they take the time to explain it? If you’re a visual learner and your advisor is orating your plan, are you able to follow it? And since you’re going to be spending hours of your time together, make sure you genuinely like the person you’re working with. I can’t think of a worse way to spend my time than sitting in a room with someone I don’t like, disclosing my most personal information.

While choosing the right financial advisor may be subjective, hopefully this article helps you narrow down your search field by considering our key points as three steps to take.

Identify your values of trustworthiness.
Identify your preferred compensation model.
Meet with qualified advisors, and evaluate the interaction as if it’s a relationship.

If you’d like to learn more about us or would like to schedule time to speak with an advisor, go to the “Contact Us” page on our website to let us know.

About the Author | Chris Stennett, CFP®
Chris is a financial advisor and Certified Financial Planner™ practitioner for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He serves individuals and organizations as a comprehensive financial planner and coordinator of investment activities. His areas of expertise include investment management, income planning, tax and estate planning, incapacity protection, and liability management.

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