Finding the Right Financial Advisor: Are You Asking the Right Questions?

Many Americans spend their lifetimes building a nest egg for retirement. Unfortunately, many fall short on income during retirement due to poor planning. Many savers can benefit from the help and guidance of a talented financial advisor, regardless of whether they invest in the stock market. When planning out your financial future many different considerations should be taken into account to properly achieve financial freedom; these include debt, inflation, future income needs, etc. However, many people overlook this very important question: “Is my financial advisor right for me?”

Many investors get paired up with their financial advisor because the advisor is a family member, a neighbor claims he/she has the best stock picks or maybe this is just the first business card you’ve come across with the words “Financial Advisor” in the title. Though one advisor might be a perfect fit for many, the same advisor could potentially be a horrible fit for you. When seeking out or interviewing financial advisors or investment firms, here are a few things you should consider.

Does the Advisor “Walk the Walk”, or Just “Talk the Talk”?

The first step you should take in finding a new financial advisor is to check his/her background, knowledge and regulatory record. Fortunately this once daunting task is now easy thanks to FINRA’s BrokerCheck and the U.S. Securities and Exchange Commission’s Investor.gov sites. By accessing these tools an investor is able to confirm the financial advisor is licensed, see previous work experience, and find any regulatory actions against the advisor. It is encouraged that all investors check both FINRA’s BrokerCheck and the SEC’s Investor.gov for the screening of their new advisor because depending on whether the advisor is affiliated with a Broker/Dealer or is a Registered Investment Advisor (RIA), each regulatory authority will provide different information.

If you had to choose between a Financial Advisor working for a Broker/Dealer or an RIA, it might be in your best interest to go the RIA route. The reason for this is that RIAs differ greatly from your normal stock trader; they are held to a higher fiduciary standard and are registered directly with the SEC. Also, each client has access to an RIAs Form ADV II which discloses every bit of information about the advisor’s firm, all fees related to doing business with them, work experience, education and personal financial history.

Fiduciary Responsibility – Will the Advisor Really Act in Your Best Interest?

With every company or person you do business with, you generally want to seek out ones who have high professional standards for themselves. Similarly, in the financial advising world you will want to find an advisor who is held to the highest fiduciary standards. As an investor, ask yourself if your advisor will always act in a prudent manner when it comes to managing and investing your money. Will he/she always serve in a position of special trust and confidence? Who is even required to uphold this fiduciary standard?

Unfortunately, the typical stock broker and large wire-house firms are currently exempt from the fiduciary standards of the Investment Advisors Act of 1940, which requires advisors to always act in the best interest of their clients. Be cautious with stock brokers of large wire-houses as they can sometimes be hired to be a salesperson in a nice suit hired to push their firm’s proprietary funds, which happen to be loaded with fees and commissions.

Registered investment Advisors (RIA) on the other hand are registered directly with the Securities and Exchange Commission (SEC) and are required by law to act in the highest fiduciary standards as outlined in the Investment Advisors Act of 1940. Because of this, while working with an RIA you can expect all relevant and hidden fees will be disclosed. You can have the peace of mind knowing that an RIA advisor is doing what’s best for your portfolio and your financial future, instead of lining his/her pockets with high commissions paid off of proprietary fund products.

Found a Potential Advisor – So What Now?

Once your potential advisors have passed your preliminary checks, it is time to get below the surface and see if the advisor and his/her firm are a true fit for your financial objectives. One of the first things you will need to find out is how your advisor gets paid and what services you receive in return. Traditionally advisors can be paid through commissions, fee-based or flat-fee agreements. The investment world as a whole is transitioning from commission based investment management to more of a fee-based system. However, flat-fee solutions are being offered as a great alternative. Once you’ve worked the fee out to where both you and your advisor are happy, finish the conversation by identifying your payment schedule and finding out how fees will be paid. Lastly, based on the type of services offered by the advisor, find out the frequency of your financial portfolio review to confirm everything is aligned with your specific needs and discover what other services are available to you at no additional cost.

So Where Are My Assets Going Anyway?

One of the last and most important things you should identify is who your advisor’s custodian is and where your assets will be held. A custodian is generally responsible for holding client assets and placing the security trades for their accounts. When reviewing the custodian’s qualifications you will want to inquire about how many assets they have under their control and how long they have been in business. You will also want to see what services they will provide you as a client, such as online access, cost basis management, and tax management.

Professional Investment Management

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