If you were to write down the most important things you’d like in a financial advisor, topping your list would probably be trustworthiness, the right credentials and the ability to meet your specific financial needs. After all, you don’t want to trust just anyone with your money.
But, how do you go about finding a financial advisor who is right for you? You’re in luck. GOBankingRates put together this helpful guide that tells you everything you need to know.
- Types of Financial Advisors and Services
- Financial Advisor Credentials
- How Financial Advisors Are Compensated
- How To Find a Financial Advisor
- Important Questions To Ask a Financial Advisor
- What To Watch Out For and How To Avoid Frauds
Types of Financial Advisors and Services
Robo-advisors are best for people who need assistance with investments but don’t require human interaction. Robo-advisors typically feature online user interfaces and mobile apps and are responsible for providing automated portfolios based on the investor’s preferences and needs. A robo-advisor takes more of a cookie-cutter approach to investing because an actual human isn’t involved. On the plus side, robo-advisors are much cheaper than traditional financial advisors because they don’t include financial planning — only investing help. Take a look at GOBankingRates’ list of the best robo-advisors of 2019-2020 to learn more.
Traditional Financial Advisors
Traditional financial advisors are different from robo-advisors in that they use a personalized approach to provide a full range of financial planning options in addition to investment planning. As your life circumstances and needs change, a traditional financial advisor can guide you in making the best decisions regarding your finances. If you desire face-to-face interaction, a traditional financial advisor is your best choice.
Hybrid Financial Advisors
Hybrid financial advisors offer traditional financial advising services coupled with technology. They are more hands-off than traditional financial advisors, often use technology to come up with your investment plan and conduct a majority of business over the phone or online. These professionals are best for people who need some help with financial planning but don’t want or need to hire a full-service financial advisor.
Financial planning is based on long-term objectives and involves all facets of your financial life. It’s a method of managing your money in a way that will help you realize your financial goals. A financial advisor can help by analyzing and evaluating your overall financial picture throughout the process to make the adjustments needed to keep your finances on the right track.
Investment Advisory Services
Investment advisory services involve an investment advisor providing expert advice to clients related to stocks, bonds and other securities. These services typically grant the advisor discretionary authority to make investment decisions on behalf of clients as long as the decisions are in line with the client’s guidelines and stated goals.
Retirement Income Planning
Financial advisors can help you develop a retirement income plan by understanding your vision for retirement, evaluating and analyzing your projected income and expenses and advising you on how to best reach your retirement income goals. Retirement income planning is a process that requires monitoring your financial needs and making necessary changes when needed. Strategies include adjusting discretionary spending, modifying investment allocations and planning retirement account withdrawals to help you achieve your financial goals in retirement.
Good To Know: Signs You’re Overpaying Your Financial Advisor
Financial Advisor Credentials
Certified Financial Planner (CFP)
A CFP is a professional designation issued by the Certified Financial Planner Board of Standards. Someone who holds this designation is best at offering general planning advice on a wide variety of personal finance issues, including investing, saving, paying for college, purchasing long-term care insurance, choosing a mortgage and estate planning.
To qualify for this designation, you must:
- Have at least a bachelor’s degree
- Have at least three years of full-time personal financial planning experience or 6,000 hours total experience
- Complete a CFP-Board registered program or hold one of the following: CPA, ChFC, CFA, CLU, Ph.D. in economics or business, Attorney’s License, Doctor of Business Administration
- Pass a certifying exam
- Take 30 hours of continuing education courses every two years
- Follow designated conduct standards and an ethics code
Personal Financial Specialist (PFS)
PFS is a professional designation issued by The American Institute of Certified Public Accountants. Those who hold this designation are experts in the following areas of personal financial planning: estate, investment, personal income tax, retirement and risk management.
To qualify for this designation prospective candidates must:
- Belong to the AICPA
- Possess a valid CPA certificate issued by a state authority
- Have a minimum of two years of full-time teaching or business experience — or 3,000 total hours — in personal financial planning within the previous five years
Educational requirements for this designation include:
- At least 75 hours of personal financial planning education within the previous five years of application
- Successful completion of the final certification exam
- 60 hours, or equivalent, of continuing education courses every three years
Investment Advisor With CFA: Chartered Financial Analyst Certificate
CFA is a professional designation issued by the CFA Institute. Although investment advisors holding CFAs often work for corporate clients, they are still regarded as investment management specialists. People looking for help with selecting stocks might find an advisor with a CFA designation to be a good option. To attain this designation, candidates must meet these requirements:
- Be in the final year of a bachelor’s degree program OR
- Possess four years of work experience OR
- Possess a combination of work and university experience totaling at least four years
Other requirements for this designation include:
- Completion of a 750-hour self-study program
- Passing scores on three separate six-hour course exams
- Four years of professional experience in the investment decision-making process, either before, during or after completing the CFA program
Do Financial Advisors Abide By Fiduciary Duty?
Fiduciary duty means advisors must act in their client’s best interest at all times by putting their personal interests aside, refusing to take actions that would allow them to profit from their positions — unless the client agrees — and disclosing potential or current conflicts of interest.
Although any financial planner or advisor can choose to abide by fiduciary duty, most financial planners or advisors are not held to a fiduciary standard. One exception is a certified financial planner. Those who hold this designation are held to a fiduciary standard by the Certified Financial Planner Board of Standards.
Learn More: What Is a Fiduciary Financial Advisor?
How Financial Advisors Are Compensated
Financial advisors who only receive commissions as payment will require you to pay a commission upfront for any investments you choose to make. For example, if you want to invest $3,000 and the advisor recommends a mutual fund that charges a 3% commission, you’ll pay $90 for the commission and $2,910 will be invested in the fund.
Fees and Commissions
Financial advisors who receive both fees and commissions will charge you a flat, hourly or retainer fee for financial planning services. They will also collect a commission from any eligible investments you make that they recommend.
Learn From Others: I Met With a Financial Planner the First Time at 50
How To Find a Financial Advisor
Before you start searching for a financial advisor, it’s important to know what your financial goals are. Once you know what you need from a financial advisor, it will be much easier to find the one that’s right for you.
Word of Mouth
Asking for the names of trusted financial advisors from your network of family and friends can be a helpful strategy. But don’t simply take someone’s word that their financial advisor is the right choice for you. You still need to do your own research.
Professional networking organizations such as the Garrett Planning Network, Financial Planning Association and National Association of Professional Financial Advisors (NAPFA) are good places to look for advisors who might match your needs. You can use the search engines on these networks to find advisors by location and specialty. Once that’s done, you can contact the ones you’re interested in by sending your contact information and a message directly from the platform.
Important Questions To Ask a Financial Advisor
According to the NAPFA, here are some important questions to ask a financial advisor you’re considering hiring. Depending on your needs, you might not need to ask all of the questions. They’re merely suggestions.
- How are you compensated?
- Do you itemize commissions, if applicable?
- Do you accept referral fees?
- Are you held to a fiduciary standard at all times?
- Are you willing to sign a fiduciary oath that states you’ll always put my interests first?
- Have you ever been disciplined by the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA)?
- Do you provide full-service financial planning or just investment management?
- Do many of the clients you work with fit my profile?
- Are you confident you can help me reach my financial goals?
- What will happen if you’re no longer able to work with me?
What To Watch Out For and How To Avoid Frauds
Unfortunately, fraud is not uncommon in the financial planning and advice industry. According to the Federal Trade Commission, consumers reported losing $1.48 billion to fraud in 2018 — an increase of 38% from the previous year. The first step in avoiding fraud is to verify the credentials of any financial advisor you’re planning to work with via the FINRA BrokerCheck website or the SEC website.
Here’s what else you need to know.
What To Watch Out For
Be on the lookout for financial advisors — or those claiming to be — who are involved in any these potentially fraudulent activities:
- Works to gain trust in certain religious, military or ethnic communities and convinces people to invest as part of a Ponzi scheme
- Requests payment upfront for an investment, citing a finder’s fee or incidental fee
- Approaches you online and asks you to invest in a high-risk, high-yield investment that’s unregistered, claiming phenomenal returns
- Unsolicited offerings via newsletters, blog posts or social media
- Unsolicited heavy stock promotions that might be part of a “pump-and-dump” scheme
- An invitation to buy initial public offering shares before a company goes public
- Pyramid schemes
- Any investment termed “Prime Bank” or “Prime World Bank,” which are scams
- Promissory note scams, especially related to the elderly
What To Do if You Feel You Are Caught in the Middle of a Fraud
Reporting the alleged fraud immediately and documenting it as thoroughly as possible are the two key steps if you suspect fraudulent behavior. You can report the alleged fraud to local, state and national law enforcement agencies as well as financial regulators such as the FINRA and the SEC. Documentation should include any contact and registration numbers you have for the person in question, a detailed timeline of events, your account statements, logs of phone conversations or emails and copies of your most recent credit reports.
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