Matt Bacon         Oct 15, 2020

 

It can be difficult to know if you’re on the right path when choosing a financial advisor. A good one can be well worth their cost, but a bad one could spell out disaster. So how do you sort between the two when finance isn’t your strong suit? In this guide, we’ll walk you through the process to choose a financial advisor that fits with your needs and budget.

Identify the areas you need help with

Take some time to think about what you really need before jumping into the deep end. You wouldn’t go to a patent attorney for help with a divorce. Why go to a financial advisor specializing in education funding when what you really want is help preparing for retirement? It’s easy to feel overwhelmed when it comes to money, so take a moment to breathe and be clear in your mind about what you want. After all, you’re going to need to explain it to an advisor at some point anyway.

The Value of Advice

This brings to head a salient question: Do you need an advisor in the first place? Most advisory relationships involve a human being and that person is going to come with a higher price tag than an app. If your needs are simple, like making and sticking to a budget, a piece of software may give you the most bang for your buck.

Conversely, the thorny and complicated issues are probably best addressed with an advisor. Whether or not you feel they’re worth the fee is another issue entirely. Studies by Russell Investments and Vanguard have attempted to quantify the value of financial advice and put it somewhere between 0-3%/year in net returns, depending on the services used. About half of that three percent is attributed to behavioral coaching, which is subjective and a big moving target. Ultimately, only you can decide whether the cost justifies the outcome.

If you feel an advisor would be helpful to your situation, read on. We’ll show you how to find a great one for you.

Know the business model

Many advisors advertise “holistic” or “comprehensive” planning as part of their service offering. You may not need the full suite of services. Don’t be shy about asking an advisor for a slimmed-down service offering if that’s what you need. They may not actively advertise for that business, but it doesn’t mean they don’t want it.

You should also seek out an advisor with a business model suited to your needs. If you’re looking for a tune up once a year, or perhaps once every few years, finding a planner that charges an hourly fee or one-off project fee may make a good fit. The Garrett Planning Network is a national network of fee-only financial advisors with an hourly business model.

Putting a financial advisor on retainer, similar to a law firm, is a relatively new business model but one that’s gaining steam. This model provides a nice bridge between having a full ongoing relationship and paying ad hoc when you need something done. Clients are generally given a bank of hours per annum that can be used at any time. This can be great if you have seasonal needs (tax time perhaps?) but also need a little help sprinkled in at various points throughout the year. Many of the advisors in the XY Planning Network offer a retainer model.

If you are looking for an ongoing advisory relationship with more touch points and access to your advisor, then an advisor with an assets under management (AUM) business model may work best. In this model, an advisor charges an ongoing annual fee based on the total amount of assets they manage on your behalf. Fees are typically deducted directly from the managed assets as opposed to an out of pocket payment from you. Financial planning and any other ad-hoc services are typically covered by the AUM fee.

There’s one category of advisor we haven’t mentioned yet: Robo. Betterment, Wealthfront, Ellevest, and SoFi are some of the big players you may be familiar with. These advisors provide streamlined investment advice via an algorithmic trading platform. They typically charge an AUM fee that’s a fraction of what a human advisor would charge for the modular service. These can be great options if you’re confident in your own planning but don’t have the time to invest in managing your portfolio. It can also be a good fit if you’re a new investor and don’t yet have the skill and confidence to manage your portfolio.

Find the right expertise

Financial planning encompasses a vast expanse. Most advisors tend to specialize in a specific area or two, though all should be competent across the core areas of financial planning:

Cash Flow and Debt Management – Working with you to help stay in the black, stick to a budget, manage and pay down debts and allocate your dollars as efficiently as possible.

Insurance Analysis – Assist you in determining what risk exposures you have, whether it makes sense to insure them, and in some cases help you evaluate the specific insurance policy you are considering purchasing.

Investment Planning – Building and maintaining an investment portfolio to match your comfort level with risk, your goals, and your time horizon.

Tax Planning – Involves strategies to help you minimize the tax burden you may bear, which can include tax loss harvesting, charitable giving strategies, and tax-efficient portfolio construction.

Education Planning – Helping you to save for and navigate the complex higher education funding system.

Retirement Planning – Work with you to build funds for when you finally become financially independent and implement strategies to ensure you don’t outlive your assets.

Estate Planning – Can help you plan with your attorney to leave a legacy for your loved ones following your passing.

Look for an advisor with a fiduciary duty

Financial planning is still a relatively new profession. What started as a group of predominantly salespeople has slowly transitioned to a profession of bonafide advisors, but the salespeople aren’t extinct. The regulations for advisors reflect this with two separate duties of care: best interests and fiduciary.

An advisor operating in a fiduciary capacity must put your interests ahead of their own. It’s not enough to simply solve a problem. They must recommend the best solution for you regardless of their own personal incentives or compensation. Best interests is a lower duty of care. Advisors working in this capacity must solve a problem and do their best to make you better off, but they aren’t under any requirement to recommend the absolute best solution.

For example, say there are three possible solutions to a problem. Solution A is the best one for you, but Solutions B and C pay the advisor twice as much. Under the best interest standard, the advisor can recommend B or C as both solve your problem. The fiduciary advisor would recommend Solution A.

Just to thoroughly muddy the waters, some advisors operate under a best interest standard or a fiduciary standard depending on the situation. Whew! These advisors tend to provide mountains of disclosures to elucidate when and where you may get fiduciary advice vs. best interests advice. But it can still be difficult to keep it straight. Make sure you understand where their fiduciary obligations to you start and stop. Life’s too short to waste time on someone that doesn’t have your best interests at heart.

Find out how your potential advisor is paid

Not all financial advisors are paid directly by their clients. Some accept commissions from third parties. These advisors sometimes advertise themselves as providing “free advice”. This is technically true as they are paid for the sale of a product. Advice is frequently just a tangential requirement to close the sale with this group. These advisors can be fiduciaries but many of them are not. Be careful to ensure that the interests of the salesperson and the organization they represent align with your own values and interests.

Some advisors offer a hybrid model under which they collect fees for certain services in addition to commissions for various product sales. (Think of an advisor that you pay directly for investment advice but who also received a commission from the life insurance policy you bought). These advisors are frequently called “fee-based” and operate in Broker/Dealer frameworks.

The last category of advisor accepts only fees and is paid directly by their clients. This group is called “fee-only” and operates as Registered Investment Advisors (RIAs). In most states, an advisor that collects a fee for advice and/or services must act in a fiduciary capacity. An advisor that is compensated from commissions may also be a fiduciary, but that standard isn’t always legally required. The NAPFA Find and Advisor Tool and Fee Only Network are two helpful resources you can use to identify fee-only advisors.

Check background and credentials

Financial advisor is not a legally protected term, meaning that anybody can use it regardless of what they actually offer. Someone helping young families set and keep budgets can use the same term as a hedge fund manager overseeing billions. Regulations haven’t caught up to a point where they can help consumers discern the kind of advice they might get based on someone’s title. For now, one of the best things to do to assess the quality of advice you may receive is to check the advisor’s credentials and background.

Some advisors have a trail of alphabet soup that follows their name. Industry regulator FINRA has a page called Understanding Investment Professional Designations. You can find a breakdown of the expertise the credential denotes, the examination requirements to obtain it, prerequisites, continuing education requirements, and a host of other info. The list is impressively long with over 214 designations. The widely acknowledged “gold standard” designations are:

  • Certified Financial Planner (CFP®) – for general financial planning
  • Chartered Financial Analyst (CFA) – for investment management exclusively
  • Chartered Life Underwriter (CLU) – for insurance planning and analysis

You need to check an advisor’s background to find the juicier stuff. The FINRA Broker Check Tool is a good place to start. You can also learn more about a potential advisor from the SEC’s Investment Advisor Disclosure page. Both of these sites will display an advisor’s work history and experience, educational background, licensure, credentials (if any), and disciplinary information for any ongoing or past bad actions.

The bad actions are obvious red flags. Client complaints, lawsuits, and disciplinary enforcements are never good. Some things may be more nuanced, such as bankruptcy or credit card settlements. Medical debt can ruin even the savviest planner and the disclosure may not reflect the cause of financial hardship.

Ask about their conflicts of interest

Many advisors go to great lengths to avoid conflicts of interest. However, no business model can ever be completely free of them. Ask your potential advisor what their conflicts of interest are during the initial consultation. Advisors are required to disclose this at the outset of any client engagement anyway and will be happy you brought it up. You can also learn more about an advisor’s business model and conflicts of interest by reviewing their Form ADV and Form CRS, both of which are available on the SEC’s Investment Advisor Disclosure Page (link in previous section above).

Seek out a clearly defined process

The biggest reason clients say they move advisors is poor communication. Ask about your potential advisor’s financial planning process and how frequently you can expect to hear from them! This sets an initial expectation and benchmark for which you can hold them accountable. It should also help inform your decision about whether they’d make a good fit for you.

Ensure they work with a reputable custodian

A custodian is like a bank but for your investment property. You’ve likely heard of the big ones – Schwab, Fidelity, TD Ameritrade, and eTrade – but there are hundreds more licensed to operate in the US. Find out which custodian your advisor typically recommends. The big names tend to offer robust and user-friendly online tools for account management, which is a nice perk. More importantly, they tend to have well-staffed compliance and anti-fraud departments. You may find some comfort to know that if your advisor falls dead of a heart attack tomorrow, your money is still safe and ok sitting at one of the big four.

Trust, Relatability, and Compatibility

Ask yourself whether you truly trust the person you’re using to handle your money. They may be a great advisor that’s come highly recommended and with an impressive track record to boot, but if you’re not comfortable with them it’s ok to walk away. Money is incredibly personal. You need to be comfortable and confident in the person to whom you’re entrusting your life savings.

Helpful questions to ask your advisor

  • Are you a fiduciary?
  • Are you always a fiduciary?
  • How are you paid and how am I charged?
  • What planning services do you offer?
  • What kinds of clients do you usually work with?
  • What are your account minimums?
  • What conflicts of interest do you have in managing my money?
  • How often will we communicate?
  • Will you collaborate with my other advisors (CPA, Attorney, etc)?

The Bottom Line

Choosing the financial advisor that’s right for you is hard. It may take you several interviews before you find a good fit. That said, when you do find the right one, they can help you achieve your goals while saving you untold time and headaches. There’s value in the efficiency you get and peace of mind that comes with trusting a pro. Be cautious and move forward with the advisor who is right for you.

 

REGULATORY DISCLOSURE

Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

  1. Delivery of a disclosure statement by advisor to client.
  2. Execution of our Investment Advisory Agreement between the client and the advisor.
  3. Initial payment of the planning fee or investment advisory fee by the client to the advisor.
  4. Advisor will not solicit or accept business in any state in which she or he is not properly registered or otherwise qualified to conduct business by virtue of a state “de minimis” exemption.
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