Choosing a financial advisor is a critical decision. Arguably your financial advisor will impact your future more than any other advisor you employ because finances impact all areas of your life.
With that perspective, it is not surprising that many individuals choose a family friend or someone they know well to be their financial advisor presumably because that person already occupies a position of trust. What is surprising is that in making that decision most people put more value on their relationship with the person they choose than on that individual’s qualifications or ability to provide sound advice – most likely because it is difficult to assess an individual’s ability to provide sound advice in the first place.
In a profession such as financial advising where conflicts of interest can abound and there are base standards for entry, but not a specific, universally accepted, gold star qualification that authenticates one’s ability to provide advice, understanding the key differentiators between potential advisors and how to assess them is important.
The following are key factors that we believe everyone should consider when hiring a financial advisor or when simply assessing whether their current advisor is still the best advisor for them.
Fiduciary Standard
Most consumers believe and reasonably expect that all investment professionals are held to the same legal standard, but unfortunately this is not the case. Investment professionals that are registered representatives or stockbrokers are not held to a fiduciary standard. This means the advice they give is not subject to the same stringent legal obligations covering fiduciary advisors when providing investment advice.
Fiduciary Standard – The fiduciary standard states that an advisor has a duty to put each client’s interests ahead of their own. Regardless of the situation or what might be in the advisor’s personal interest, the fiduciary standard requires doing what is best for the client at all times.
There are many investment professionals who are dually registered meaning they are held to a fiduciary standard only some of the time. When choosing an investment advisor, it is important to ask whether they are a fiduciary 100% of the time.
When you place your financial future in the hands of someone who will provide guidance that will impact the rest of your life, it is our recommendation that you choose someone who is legally held to a fiduciary standard all of the time.
Key Takeaway:
Is your advisor a Fiduciary 100% of the time?
Fee-Only
Wealth management firms and financial advisors can typically be classified into one of three compensation models, fee-only, fee-based, and commission-based. The type of compensation model used can tell you a significant amount about the firm.
Fee-Only – All compensation comes directly from the client according to a pre-arranged fee. There are no commissions and no behind the scenes agreements incentivizing the advisor to make a recommendation resulting in additional compensation. This eliminates many conflicts of interest present in the other compensation models.
Fee-Based – While “fee-based” sounds similar to fee-only, they are very different. A fee-based advisor is compensated both from the client as well as from outside sources. Most fee-based advisors receive commissions from selling investment products and insurance. These commissions create a conflict which makes it difficult for the client to determine whether the product being sold is really the best option for them or whether it is recommended primarily for the financial benefit that the advisor will receive.
Commission-Based – A commission-based arrangement results in all compensation being generated by commissions on investment and insurance products sold. Similar to a fee-based advisor, the challenge of commission-based compensation is the inherent conflict of interest between the financial professional making the recommendation (wants highest compensation) and the individual purchasing the product (wants best product).
To eliminate the concern around whether the advice received is truly in the client’s best interests or simply being provided because it provides additional compensation to the advisor, we recommend working with a fee-only advisor.
Key Takeaway:
Independent
Many investment professionals are investment brokers or registered representatives of specific investment companies and only provide their company’s products. This means they are restricted to offering only the investment products of their affiliated companies. This reduces the solutions they can offer to their clients. Registered representatives who work for a specific company typically include a disclosure at the bottom of their website or marketing materials that says something like “Securities offered through Investment Company, Inc., Member FINRA, SIPC.”
To ensure you receive the best solutions to reach your financial goals, it is important to work with a firm that is truly independent and is free to make any recommendation that is best for you. To achieve this, you need an advisor who is not restricted to any company, product, portfolio, or strategy.
We also believe that the best advisors should go one step further. Advisors who truly give the best advice should be willing to live by the same advice they give their clients. In other words, they should have skin in the game and eat their own cooking.
Ask your advisor if they invest their own portfolio using the investment solutions they recommend for their clients. There will definitely be some differences if your advisor is in a different life stage than you are or if they have a different risk tolerance, but they should be willing to put their money where their mouth is and utilize the investments and strategies that they offer to clients who are similar to themselves.
Key Takeaway:
An independent advisor gives you freedom to pursue what is best for you.
Highly Qualified
The financial advice industry has an endless supply of designations and titles, and most advisors have a litany of letters after their name, many of which mean very little. Unfortunately, there is not a specific, required, and widely accepted qualification to demonstrate the competence of financial advisors similar to the accounting (CPAs) and legal professions (JDs). As a result, there are advisors with minimal qualifications, but with no common standard, it is difficult to identify them until it is too late.
To avoid this issue, we recommend working only with advisors that have demonstrated financial competence through one of the three most recognizable and credible financial designations, Certified Public Accountant (CPA), Chartered Financial Analyst (CFA), or Certified Financial Planner (CFP).
Each of these designations has extensive requirements including education, testing, and experience requirements. Additionally, they require that the individuals holding these designations submit to ethical and professional standards of conduct to maintain their designations. Choosing to only work with an advisor who has one of these designations significantly reduces the likelihood of working with an unqualified advisor.
Key Takeaway:
Many credentials mean very little. Cut through the clutter by choosing to work with CFPs, CPAs, and CFAs.
Comprehensive Financial & Tax Planning
Many financial advisors focus mainly on investments. While this is a necessary service, an appropriately designed portfolio must be part of an integrated and comprehensive plan. Coordinating your investment portfolio with your personal and financial goals, your estate plan, available tax strategies, risk management, and desired charitable giving is necessary to maximize your overall plan.
To ensure you are receiving advice that is comprehensive, we recommend that you work with an advisor who integrates their services with your estate attorney, your tax accountant, your insurance agent, and any other advisors you are working with. The key is making sure that each advisor sees the bigger picture and understands how their recommendations fit into the overall plan. If your advisor is not helping you coordinate each of these areas, it is likely that no one is, and an uncoordinated plan is one that increases the chances of failure.
Key Takeaway:
A comprehensive financial advisor ensures all advisors are working toward the same goal.
Generational Service
Since many individuals first choose a financial advisor based on a friendship or close relationship, it is not surprising that most advisors are the same age as their clients. While this works for most of a client’s working career, the risk becomes evident when the client is ready to retire. The result can be one of a few possibilities:
- The advisor is planning to retire at the same time leaving the client without an advisor when they need one the most.
- The advisor continues working but reduces the level of service in an attempt to ride out the income stream as long as possible in retirement.
- The advisor continues but does not have a succession plan to protect their clients in the case of an unexpected event such as death or disability.
To avoid these situations, we recommend that you choose an advisor that has demonstrated a commitment to generational service. Generational service is service that lasts beyond any single advisor and ensures that there will be new and qualified talent within the firm to take over the role of advising clients when their primary advisor retires.
Generational service requires that a firm hire and train the next generation to be capable and successful advisors that are ready to step in and provide high-quality service to any client at a moment’s notice. By working with a firm that has demonstrated their commitment to generational service, you reduce the risk of losing your advisor when you need them the most.
Key Takeaway:
Serving clients well requires a clear plan to provide service beyond a single advisor’s career.
Whether you are evaluating your current advisor or a new advisor, considering how they stack up against these six principles will help you determine whether they are the right advisor for you.
If you would like financial advice from a firm committed to each of these six principles, we would love to connect to see if what we do is right for you.
