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• Alphabet Soup How to Choose a Financial Advisor

Alphabet Soup... How to Choose a Financial Advisor

written on June 06, 2011 by Frank Fantozzi

I’m often asked ”Why should I hire you as my financial advisor?”  I normally respond that it depends on what you need. I’ll be the first to tell you that one financial advisor does not fit all.

As the financial markets become increasingly complex, so does the process of choosing an advisor. In 2008, we saw thousands of investors flee Wall Street and bank-affiliated advisors, but more often than not, they were not sure where to go once they left. Selecting the right advisor for you is no easy task, but a little guidance can go a long way in helping you cut through the clutter.

Not long ago the titles “Life Insurance Agent” and “Stockbroker” dotted many a business card in the financial services world. These titles; however, became synonymous with salespersons and, because of that stigma, those titles went the way of the dinosaur in exchange for the relatively non- descript term: financial advisor.

What does the term financial advisor mean to you? Financial Advisors (FAs) come in many shapes and sizes and from many different worlds and backgrounds. There are FAs who work for banks, insurance companies, and investment houses as well as independent FAs.

Numerous designations and degrees are often attached to FAs, including, CPA, Attorney, CFP (Certified Financial Planner), PFS (Personal Financial Specialist), CFA (Chartered Financial Consultant), NAPFA (Fee-only Financial Advisor), CHFC ( Chartered Financial Consultant),  CRPS (Chartered Retirement Plans Specialist), RIA (Registered Investment Advisor), CMFC (Chartered Mutual Fund Counselor), CREC (Certified Retirement Counselor), CDFA (Certified Divorce Financial Analyst), CLU (Chartered Life Underwriter), AEP (Accredited Estate Planner), and AIF (Accredited Investment Fiduciary)—just to name a few!  IF I left out some organization, I do apologize.

You get the drift. There’s a lot to sort through. Degrees such as a CPA or Juris Doctorate require a great deal of schooling, certification, professional practice, and continuing education. Some designations like CFP, CFA, and CLU/CHFC require a lengthy commitment to complete stringent certification requirements as well as ongoing continuing education. Other designations require minimal course work and ongoing education.

Some advisors have multiple designations following their names as well. I’m one of them. I’m a CPA, MT, PFS, CDFA and AIF. Someone once told me, “All that those designations mean is that you are a great test taker. How do I know your advice is worth anything?” Fair enough.

While degrees and designations cannot guarantee your success or happiness as a client, you can take stock that the type and number of designations a financial advisor has obtained goes a long way toward demonstrating the skill level and commitment to their craft. Each involves a considerable commitment of time and often money to obtain. Like most professions, advisors who are committed for the long-term will invest the time and money in an effort to better serve their clients and build a strong, thriving practice.

In addition to varying designations, how advisors establish and operate their practices, and how they are compensated for their services and advice also varies. There are fee based advisors (combining asset based fees, hourly rates, and commissions) and fee only advisors who only charge an hourly or set engagement fee for compensation. Keep in mind that certain products such as Life, Disability and Long Term Care Insurance, along with certain investment products such as REITs, Structured Notes, and other direct participation investments are commission-based due to the product developer. One type of fee structure does not necessarily have an advantage over another; however, as a consumer, you want to ensure that all fees and costs are fully transparent so you can decide which structure is right for you.

So how do you even begin to determine the right advisor and structure for you?

The first thing you want to do is define your needs and your expectations. Do you need someone to help you with investment planning only? Do you need help developing an insurance portfolio? Maybe you have tax issues that need to be factored into your planning? Is planning for retirement, college, or estate planning a concern? Or, do you need a firm with expertise in multiple disciplines that can handle the many facets of your unique family goals? Once you know what you are trying to accomplish, then you can better develop your search criteria to meet your specific needs and identify a specific advisor.

Friends, relatives, and co-workers can often provide insight or possible referrals. Keep in mind though that your referral source’s needs and situation may be very different from yours. Understanding the types of services their advisor provides them is important to know; however,  it is even more important to understand what the advisor has actually helped them accomplish. Ask them how their advisor has helped them to reach tangible goals like saving for a home or their child’s education?

There are also important intangible considerations, including degree of trust, confidence in the advisor, and integrity. Lastly, service is a critical element in the advisor-client relationship. How proactive is the advisor in providing advice and guidance? Updating clients on important changes in the economy and the financial markets? How frequently will the advisor call or meet with clients? 

Today, the internet provides a great resource to research advisors. An advisor’s website can provide insight on the firm and the services they offer. Generally, you can even determine how involved the advisor or firm is in their community; how often they’re sought out by the media and quoted by the press. In addition, you can go to the FINRA website and click on your local state to see if there are any past or current complaints about a particular advisor.

I strongly suggest meeting with a prospective advisor at his or her office to obtain a sense of the environment and team. This will provide a feel for who you are hiring. These are the questions and considerations I would bring to that meeting:

1. Describe a typical client.
2. What are the standard services you provide?  Any special services?
3. Ask to obtain a copy of their Form ADV Part II if they are a Registered Investment Advisor (RIA) as well as if the firm provides a document on how they earn their fees.
4. Will they provide you with an engagement letter describing the services they will provide you and how they will bill for such services?
5. How many clients do they currently manage? Will a single advisor provide all services and oversight or will a team of advisors and specialists interact with the client?
6. Have any complaints ever been filed against the advisor or firm? If so, ask them to describe the situation.
7. How often do they expect to communicate with you and how…through calls, meetings, e-mails?
8. Ask about their investment philosophy.  Are they stock pickers, manager of managers (private funds and mutual funds), buy and hold, active management or frequent traders?
9. Do they use proprietary investments versus an independent investment platform?
10. Do they do their own research or rely on their firm’s research?
11. Can you request to be transferred to another advisor if you are unhappy with their service?
12. Are they independent where insurance procurement is concerned or are they agents for a single or limited number of insurance companies?
13. How and how often will they communicate with you about progress towards your goals?

Knowing which questions to ask can alleviate much of the concern and anxiety people experience when trying to select a financial advisor. It’s a big decision. After all, this is your money and your future we’re talking about.

That brings me to one final, but critical consideration. How does the advisor make you feel? Comfortable? Confident that he or she understands you and your goals? Were you able to establish an easy rapport? The financial advisor-client relationship is one of the most important professional relationships you have. You should be able to enjoy the relationship and feel confident that your advisor is looking out for you. If you don’t get that sense after meeting with the advisor, keep looking.

I wish you much success and happiness as you pursue your financial goals.

Securities offered through LPL Financial.
Member FINRA/SIPC.