Best financial advisors are hard to find in nature. It is one of the most common questions we ask. The financial planning eco-system can be complicated. Almost anyone can speak for themselves as a financial planner, advisor or coach. These people only have the minimum needed qualifications. Hence, you should be careful when choosing an advisor to help you save and grow your savings.
Best Financial Advisors: How Could We Find?
Below are the seven things to keep in mind when selecting a financial advisor:
1. Knowing the Types of Financial Advisors Available
See the hiring of the financial advisor as hiring a CFO for your company. You’ll use a systematic process to find the right person. This may take more time than just going through the yellow pages. But, investing time is worth it when you know you hired the right person. Below are seven steps to find the ideal financial advisor.
Understand the Differences in Their Offerings
Some advisors provide investment management services, but not financial planning. Others do financial planning but don’t manage investments. Some are expert in retirement planning focusing on the distribution stage. This is for people nearing their retirement. Others focus on the accumulation stage. This is for the younger crowd who are at least ten years far from retiring.
To get the ideal financial advisor, understand the different types of services they offer. Know the kind of financial counsel you need. Also, know the services the various advisors provide. Below is a brief account of 3 key service offerings:
- Financial Planning – It focuses on every element of your financial life. This includes the kind of insurance you need, amount to save, etc. It’s not only about investments.
- Investment Advisory – These services focus on managing investments. E.g. which investments to have in which account. In fact, the ideal investments are picked as a part of the financial planning process.
- Retirement Planning – This focuses on bringing together all the elements of retirement. It includes taxes, Social Security, pensions, investments, etc. So, you get a total retirement package for life.
2. Find Reputable Financial Advisors
Every credential is not the same. Some bodies form simple credentials for a fee. This way people can get the credential and look like an expert.
To get reputable financial advisors seek someone who has their PFS or CFP designation. Or you can also look for an advisor having CFA. If your retirement date is near, find a person who has specialized training like a RICP or RMA.
A financial advisor gets credentials by passing an exam that shows skills on the subject. To keep the designation, the advisor should follow ethics policy. He/she must also meet the educational needs.
You may also check to see if the person is a member of NAPFA. This is a membership committee that includes fee-only advisors. It demands continual education which goes above what even the credentials needed.
3. Know the Fee Structure of Financial Advisors
There’re many ways financial advisors can charge. But, the most impartial advisors are fee-only. To get the ideal financial advisor, you should know all the ways a financial advisor gets paid. This includes charging an hourly fee or asset-based fee. They may even charge a share in commissions.
You must know the difference between non-fee and fee-only advisors. The former ones may get extra money form their company if they meet sales goals.
There’s nothing wrong or right about the variety of compensation. E.g., you’re buying an investment to hold for long-run. You’ll not need continuous advice for this. So, paying a commission could be a cost-effective means to buy it. But if you want someone always there to update your fund plan then you may not want a commission-based plan.
4. Use Search Engines to Search for your Criteria
Search Engines are a great way of narrowing down your screening process. They trim down your search to financial advisors who live in your area. You can also screen by credentials you want or their fee structure.
The five search engines included in this list enable you to enter your specific criteria. Hence, you can put filters on standards like fee method or credentials. Then, you can look for advisors in your zip code meeting those needs.
When it comes to location, many companies work remotely. It enables you to choose an advisor via their skills, and not through location. My company’s forte is retirement planning. We are located in Arizona. Our clientele is all over the US. But not all are okay with working remotely. So, you should decide what is more important to you? Are you comfortable with working through virtual meetings? Or you prefer sitting across conference table?
5. Ask Questions Before You Make the Decision of Hiring
The correct questions can help you remove advisors who are not your type.
I’ve made a list that contains five key interview questions. These questions will help you decide how many things about the advisor. This includes how they communicate, their know-how and the ideal match. The key to asking any question is to ensure you understand the answer. Even if you don’t, at least be confident in asking follow-up questions.
One question, many other articles suggest, is to ask for references. Because of privacy concerns, financial advisors may not tell you the names of their clients. Even if they name them, they’ll only refer those people who’ll speak highly of them. Also, do you know regulations forbid advisors from the use of testimonials? Yes, it’s true. Financial advisors can’t share or use any information which their clients provide them. This also includes direct quotes, recommendation letters or thank you notes.
It’s always good to ask questions that have relevance for you. I’ve had many people come and ask questions from a list. It was apparent that they didn’t understand their issues. Don’t make this mistake. Ask your questions.
6. Check Credentials, Verify for Complaints
To make sure an advisor has the credentials and a decent track-record, verify. From their credentials to the complaint history, you must check everything. You can verify their records at the CFP, the SEC, FINRA and other member committees.
Brightscope is an online website that can help you with this checking. Here you can easily see the registration of any advisor with any organization. Plus, you can also see if there is any complaint against them.
Official complaints stay on their records for a long time. But, even if an advisor’s record holds a complaint, you mustn’t rule him out. The lengthier his career, the more likely it is to have a few complaints on the record. But, if a person has many complaints, you should try other advisors.
Many search engines do such background check. They’ll show results of financial advisors who’ve been pre-screened to hold the needed credentials. These portals already rule advisors have too many complaints.
7. Learn to Identify Fraud Risks
Fraud is easier to do when a person knows your assets. To avoid custody of client money, many reputed advisors use a 3rd party custodian. Such 3rd party custodians hold your assets. This means the advisor will open your account at a big, famous firm. Fidelity, Charles Schwab is a few examples of such companies. The advisor can place trades and give services on your account. But, it’s the custodian who reports any trade to you and confirms your signature.
Be careful of firms/advisors who have control over your money. For that matter, also be cautious of companies/advisors who own another company which acts as the custodian. This is how Bernie Madoff pulled off his plan successfully.
Plus, be extra cautious while speaking with firms/advisors that co-own other investments. You should also take precautions when your advisor recommends other companies to you. The firm’s disclosure report must list the ownership structure and all other entities it owns. This disclosure document is known as ADV Part Two.
Don’t see these seven steps as too much work. Think how companies do so much background checks before hiring an employee. You’re also hiring a person to help you with a crucial part of your future. Hence, these seven steps will only help you make the right decision.
Trust Financial Advisors or Banks?
We live in times where we value convenience over quality. Credit unions and banks are our one-stop shop for most financial needs. They’ll always influence you to meet their in-house advisor whenever you visit. But, before walking into your bank, think twice.
Banks are pushing their customers to use the in-house fund advisor. They do this to get a more significant share of your pocket
Banks train their employees and tellers to cross-sell. They meet their daily target of ‘hits’ by convincing you about their different plans. This includes doing your checking with them, personal loans, mortgages and investing your savings. But the diversity and quality of these investment products are limited. These products charge higher fees and don’t have the guarantee by FDIC. This is evident by the disclosure on a national bank’s site:
“Investments: Not Insured by FDIC. No Guarantee. Could Lose Value.”
Banks are ideal for savings and checking accounts. You can also secure your home mortgage with banks at a decent rate. But, they’re not designed to give high-quality investment advice at an affordable cost. Hence, before investing your retirement money with the bank, know that you may be at a loss. Other independent sources of financial advice are better than banks. With banks, you do get the ease of having your investments, checking and loans under a single roof. But such comfort may come with a hefty price. This could be in any form: high fees, poor-quality of advice, and conflicting interests.
1. Diversity and Quality of Financial Advice
Banks’ investment advice tends to incline toward only a few different asset groups. These normally include Variable Annuities and ETFs/mutual funds. You’ll be at a loss because bank’s advisor cannot offer a broad variety of investment products. This is like visiting a Ferrari store seeking an affordable, fuel-efficient car. You’re expecting the salesman (fund advisor) to refer you a Toyota store. This is absurd and will not happen. He’ll try to influence you to overpay. You may end up buying something which is unsuitable for you. Such lack of choice is common at all banks. It is obvious from one bank’s disclosure:
“Funds we provide are exclusively confined to Affiliated Funds. There’s a limit to the variety and number of investment choices with us.”
Affiliated funds mean that banks will offer mutual funds only. They have a relationship with these mutual funds and are likely to get more compensation. This creates a significant conflict of interest.
“Affiliates of [bank] get compensation from some MFs…for giving financial advice plus other services.”
This stresses the point that financial advisors at these banks get extra money for suggesting specific funds. These are mutual funds which may have more significant cost and perform worse. But, you should also know that not every bank advisor is an evil advisor. They’re friendly and great people. But they belong to a system where they’ve to sell the product. This results in high fee and more profit for the banks, rather than the customer.
2. High Fees
There’s no doubt that big corporations control the banks. These companies want to create shareholder value. And the shareholders want to get huge profits. So, banks become the most significant sources of costly investment products like Variable Annuities and MFs. These can cost you huge. Many times, banks hide the fees from plain sight. As per their site, a famous bank charges 1.20% for MF portfolio management. But this is not the complete story. An average MF can turn nearly 3% p.a. in fees. So, you’re not paying only 1.20%. Instead, you end up paying total 4.20% p.a. behind the desk. To average a return of 7% after fees, your investments should make 11.20% p.a. This will make your future money goals unattainable. But, this is such an excellent plan for the bank and the advisors.
Why would the banks continuously recommend buying costly MFs and Variable Annuities? Simple. To get more significant profit margins. Customers are increasingly turning to online banking. Interest rates are also lower now. Hence, the in-house financial advisory is the high profit-making center for brick-and-mortar banks. They also build stronger relationships with clients through this.
Best financial advisors are hard to find. If you’re thinking to hand over considerable assets to your bank, read all the mouse print. Ask your tellers tough questions about fees and conflict of interests. Also, question them about the quality and diversity of their investment products.