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How Do I Choose a Financial Advisor?

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How Do I Choose a Financial Advisor?
May 2, 2021

You started on this journey of looking for a financial advisor – you know, to help make sure you’re on track, get your finances in order, and help you choose the right investments in your 401(k). Only to find out some advisors require to have at least half a million in investable assets (outside of your 401(k)) to even work with them. Others work for a broker, some work for Registered Investment Advisors (RIAs), some called themselves “fee-based,” others call themselves a “fee-only,” some are fiduciaries, and others just abide by the suitability standard. Confused yet? And how in the world are you supposed to find the right advisor that will suit your needs? This industry that I have been involved with over the past 15 years is not always transparent, however, there are things to consider when choosing who would be the best fit for you.

Things to Consider

1.) How is your financial advisor compensated?

This is one area that is not the same throughout the financial advisor world, and different compensation models can have an impact on your overall return. There are two primary ways advisors are compensated and that is either through commissions or directly from their clients. Then there is a third way in which these two models are combined in what is called “fee-based.” Keep in mind “fee-only” is not the same as “fee-based.” When you interview advisors, it’s important that you ask this question as to how they are compensated. It can be through commissions, it can be directly from their clients (fee-only), or it can be a combination of the two (fee-based).

One way isn’t necessarily better than the other, however, Beyond Balanced Financial Planning chooses to be “fee-only” because I believe in transparency. My clients can see exactly what they are paying for my services and can rest easy that I’m working in their best interests instead of questioning my recommendations because it may be paid out a higher commission. As a fee-only advisor, I don’t receive compensation by recommending certain investments over others – no commissions, kickbacks, referral fees, or sales loads. It’s important to make sure what method you are most comfortable with and have clarity with how you are being charged.

2.) Fiduciary versus suitability standard

Another question that should be asked is “Are you a fiduciary or do you follow the suitability standard?” This can be a little trickier to evaluate because most financial advisors are truly good people. But because there are a few bad apples out there, this is something that needs to be addressed. A fiduciary simply means a person who puts your interests ahead of their own and is legally and ethically bound to do so. This is clearly outlined in our signed agreements with clients, and serving as a fiduciary is something I am very proud to offer.

Ask your potential advisor whether they are a fiduciary and if they are willing to sign an agreement to abide by the fiduciary standard. Broker-dealers, who are often compensated by commissions, generally only work under the suitability standard. Instead of having to place their interests below that of the client, the suitability standard only details that the broker-dealer has to reasonably believe that any recommendations made are suitable for the client, in terms of the client’s financial needs, objectives, and unique circumstances. A key distinction in terms of loyalty is also important: A broker’s primary duty is to their employer, the broker-dealer for whom they work, not to their clients

3.) Broker-dealer versus independent?

Broker-dealers are commonly those larger firms that seem to do it all. They invest your money, sell insurance products, and seem to be a one-stop-shop for all of your needs. This is where you really need to have that clarity of compensation models, fiduciary vs suitability standards, and be mindful about conflicts of interest. For example, many brokers (and their agents) just care about the number of assets you have. This allows them to earn commissions from investing in mutual funds or selling you another product that you really did not need in the first place. With this model, I feel you really need to be well-versed in financial products so you know whether it’s a product that is actually going to benefit you.

An independent firm does not have to push preferred products or fund companies. Beyond Balanced Financial, an independent firm actually invests in a variety of low-cost funds that we evaluate on a regular basis and freedom to invest in anything out there! I also do not sell insurance products, as those are typically commission-based.  However, I firmly believe insurance is part of a comprehensive plan.  I have relationships with a handful of insurance firms that work exclusively with fee-only advisors to recommend suitable insurance products, provide you a quote, and ultimately write the policy. It’s important to note that I do not get compensated for engaging in this process.

When you have financial advisors that are also insurance licensed it’s somewhat nice to have everything done in one place, however, I see a potential conflict of interest when an advisor is recommending an expensive permanent life insurance policy or an annuity (which pays lucrative commissions) when another option would have been better for the client. I’ve just seen it too many times, unfortunately.

4.) What are your qualifications?

In the advisory world, there are licenses and credentials. The Series 65 is a securities license required for individuals to act as investment advisers (those who work for independent registered investment advisors) in the US. The Series 7 is a securities license to sell financial products under a broker. Both of these licenses can be acquired by simply studying and taking an exam. No other educational or work experience is required.

Credentials hold so much more weight when you are evaluating who to work with. For example, I am a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) meaning at a minimum that I have a Bachelor’s degree, at least 3 years of experience (I have 15), and passed an extensive exam that has a 60% pass rate. Then of course there are Chartered Financial Analysts (CFA®), and finally, Personal Financial Specialists (PFS™) which are CPAs who have additional expertise in financial and wealth management.  These three – the CFP®, CFA®, and PFS™ are considered the top-three credentials in this industry.

So Now What?

When I said this industry lacks transparency, you can see what I mean … right? It’s all certainly outlined in the fine print but honestly who actually takes their time to read everything and researches all the differences? This hopefully provides you with a quick overview so you can be prepared when entering any advisory relationship. I know when I go to any professional, I just want objective and honest advice. For example, can you imagine going to your doctor and they recommend a surgery you don’t actually need because it paid them a large incentive? Yeah … no thanks!

In order to help in your search for an advisor, I’m linking this questionnaire from the National Association of Personal Financial Advisors (NAPFA). You can print several copies and interview the potential advisors you’ve already narrowed down. Anyone worth working worth should be more than willing to answer your questions. If you are already working with someone where you’re just not 100% clear on how they operate, don’t be shy about going back and asking them the same questions. Let your search begin!

Interested in learning more about Beyond Balanced Financial Planning?  

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Beyond Balanced Financial Planning LLC (referred to as “BBFP”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. BBFP does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or nonsecurities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall BBFP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if BBFP or a BBFP authorized representative has been advised of the possibility of such damages. In no event shall Beyond Balanced Financial Planning LLC have any liability to you for damages, losses, and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

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