How Do I Choose the Right Financial Advisor?

How Do I Choose the Right Financial Advisor?

Choosing a financial advisor is an important step that will likely have a significant impact on the rest of your life. Congratulations, the fact that you are even taking time to consider hiring an advisor puts you ahead of most Americans. While over 80% of University Endowments employ an investment consultant 1, most surveys indicate that less than one-third of individuals in the US use an investment advisor. 2, Many people have asked me about selecting an advisor over the years, so I put together this checklist. Here are some basic tips for choosing the right financial advisor.

1. Choose someone who is a fiduciary – someone who by law is obligated to put your interests ahead of his/her own.
   1. Trust is a significant factor. If you work with someone you trust, you can survive with that person through the ups and downs of the market. You want to engage with someone who has an ethical and legal relationship with you.
   2. In the brokerage world, this is not always the case. Non-fiduciaries operate under the Suitability Standard, meaning that they can recommend products deemed appropriate for a client even if they are not the best or lowest-cost options available.
2. Understand how the advisor is compensated.
   1. Selecting a fee-only advisor creates a transparent environment, minimizes conflicts of interest, and gives investors peace of mind. These fees may be either fixed or based on a percentage of assets under management, better aligning the advisors interest with the clients.
   2. Brokers earn their living from commissions – meaning they are not necessarily putting your interest first. In some cases, advisors have conflicts in that they or their firm recommend products where they are getting a payment from the product provider.
3. Look for qualifications. While individually vetting an advisor is important, each of the qualifications below indicates that they have completed work in some subject matter.
   1.  The Chartered Financial Analyst (CFA) program focuses on investment expertise, and members must attest to a code of ethics every year.
   2. The Certified Financial Planner (CFP) program covers retirement and education planning in addition to insurance and taxes.
   3. You may be interested in an advisor with the Chartered Alternative Investment Analyst (CAIA) designation if you have or plan to invest in real estate, hedge funds, or private equity.
4. Check for credibility.
   1. You can verify a potential advisor on brokercheck.com or adviserinfo.sec.gov. Both are free tools that provide the background and experience of individual advisors and firms. Most importantly, these sites will tell you about any disciplinary action the advisor has received. The CFP Board also maintains a list of disciplined CFPs by the state on its website
   2. Ask the advisor for a copy of their Code of Ethics
5. Find someone whose philosophy aligns with yours.
   1. In times of stress, you need to be able to stick with your plan. Belief in your advisor’s philosophy is essential to avoid selling at the wrong time. Behavioral finance expertise could come in handy.
   2. If you interested in impact investing, can the advisor accommodate that?
6. Understand the tax impact of hiring the advisor. If you have unrealized capital gains in your current investments, look for an advisor that will incorporate those holdings into your plan versus a single investment solution or rigid model, which would require taking a tax hit.

In the end, you want to choose someone that makes you feel comfortable. Sit down with any potential advisor and have them describe their advisory process. This conversation should include what you expect from them in terms of investment research. Make sure they understand your preferences and how you like to work and then determine whether the person you are talking to is a good match for your style.

Footnotes:

1 2017 NACUBO-Commonfund Study of Endowments, Figure 6.4 Consultant Use
2 https://www.statista.com/statistics/1176393/financial-advisor-usa/#:~:text=In%202020%2C%20only%2029%20percent,often%20for%20retirees%20in%202019