How to Choose Your Financial Advisor

Choosing a financial advisor is a big decision. In the beginning, having more questions than answers may actually help guide your search. For example, is location important to you? Do you want someone to manage your assets or only provide advice? What fee structure do you prefer? As you’re looking for a financial advisor, there are a few considerations to help guide your decision.

Credentials 

Although you’ll need more than an ‘on paper’ match to determine whether a financial advisor would be a good fit for you, researching the basic facts on a firm is often a great place to start. There are numerous licenses, credentials, and designations in the financial industry so it is important to know what they mean. The Securities and Exchange Commission offers a helpful guide to designations.

Compensation Structure and Responsibilities 

There is not one single industry standard when it comes to fees. Some advisors charge a flat fee for asset management, while others bill clients an hourly fee. Many advisors charge fees as a percentage of your portfolio. Traditionally referred to as a percentage of assets under management (AUM), this method is often preferable to both clients and advisors, as it aligns interests and does not place a disproportionately high fee on clients with a smaller AUM, as a flat charge might.

Other advisors or brokers are compensated from commissions, or a combination of fees and commissions, by selling you products or making trades on your account. Often, a commission-based advisor will also sell other products, such as insurance, or even offer legal services. This is convenient for some clients who want to manage everything in-house. However, other clients value the independence of a fee-only advisor to manage their assets and make other financial recommendations, as there is not a financial stake in the advice offered.

What’s a Fiduciary?

You also should ask the advisor what their responsibilities are to clients for making investment decisions. Some advisors have a fiduciary standard, which means that they can only make decisions that are in the best interest of the client. Others are only held to a suitability standard, meaning their investment advice just needs to make sense for the client. Often investors will limit their search to fiduciaries once they learn the difference. 

Personality Match 

Financial planning can be a personal and emotional process. If matched well, the advisor relationship can span decades. Aside from personal likability, it is important that they understand you as an individual. As you meet with advisors, ask about their investing philosophy and who you’ll be working with. It is also wise to set and communicate your own expectations and preferences on communication style and uses of technology. With a large generation gap on technology, don’t assume all advisors have widely embraced the digital revolution.  

Area of Expertise

While some financial advisors are generalists, others specialize in certain areas or work with specific client profiles. Some firms may work with a lot of high net worth individuals, and may have more experience with complexities like executive stock options and tax implications. Industry also plays a role. An advisory firm with clients in medicine will likely expect higher levels of debt initially and rapidly growing income while clients in technology may be preparing for sudden wealth after an acquisition or IPO.

Your financial future is too important to leave to chance. Do your homework to determine what type of advisor best suits your needs before starting your search. Hopefully once you’ve outlined your preferences, a short list of firms won’t seem too daunting.

The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting, or tax advice.

To learn more about Thomas McFarland, view his Paladin Registry profile.

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