Developing a plan to achieve financial independence may seem complex, but the search for a financial advisor doesn’t have to be.
Determine how the advisor is compensated
There are three basic ways financial advisors are compensated. “Fee-only” advisors are paid solely by their clients and do not receive commissions from the sale of financial products. The fees are typically calculated as a percentage based on assets managed for the client, or as a fixed rate.
Institutions pay “commission-based” advisors based on the sale of financial and insurance products, and as a result of trades placed in client portfolios.
“Fee-based” advisors are like a hybrid of the two structures. They are paid by the client for planning services, as well as by financial institutions in return for selling financial products.
Research the advisor’s financial designations
Know what those letters after an advisor’s name mean. There is a broad spectrum of financial licenses and credentials. Most require the advisor to pass an exam, but not all require financial experience or a specialized education.
One of the most comprehensive credentials for financial advisors is the Certified Financial Planner™ (CFP®) designation. In order to obtain the CFP® designation, a person must have earned a bachelor’s degree and completed a college-level certified program of study. In addition, they must pass a lengthy examination, have at least 4,000 hours of financial planning experience, and meet ongoing education and ethics requirements.
Know the advisor’s legal obligation
Advisors are held to one of two regulatory standards: suitability or fiduciary. A fiduciary standard requires advisors to put a client’s needs ahead of their own and recommend the best strategy for the client. A suitability standard requires advisors to make recommendations considered to be “suitable” to the client’s needs, but are not necessarily in their best interest. It is fair, and advisable, to ask the question, “Are you a fiduciary?”
Decide if the advisor’s process aligns with your objectives
Some advisors provide comprehensive financial planning, some provide solely investment management, and some provide a mix. Ask the advisor to see examples of a financial plan. Are they experts in areas you need guidance with, like estate and tax planning? Ensure the advisor’s focus aligns with your needs.
Samantha J. Anderson, CFP®, Co-Chair, Women’s Initiative, National Association of Personal Financial Advisors, [email protected]