Selecting a financial advisor requires careful research. Here are five factors to consider when choosing a financial professional.
The process of selecting a financial advisor requires careful research, based on an understanding of individual financial needs, according to experts who recommend investors evaluate five key factors when choosing a financial professional.
Investors are advised to ask prospective advisors tough questions to assess the professional’s background, compensation, potential conflicts of interest, fiduciary duty and types of services provided, according to the National Association of Personal Financial Advisors, or NAPFA, a professional association supporting 2,400 fee-only financial advisors.
To get a good feeling for an advisor’s background, investors can ask about the professional’s education, and financial planning credentials, designations and affiliations, according to an online worksheet provided by NAPFA. For example, is the advisor a certified financial planner (CFP) or certified public accountant (CPA)? Consumers can also ask how long an advisor has been offering financial planning services, and whether they can provide references from clients and other professionals. NAPFA also recommends asking whether the advisor has ever been disciplined by a professional group or regulatory agency.
It’s also important to evaluate how an advisor is compensated, according to NAPFA, which recommends asking prospective advisors whether they charge only fees, only commissions or a combination of fees and commissions. Advisors who earn commissions can be asked to state what percentage of their firm’s compensation comes from insurance products, mutual funds, stocks and other types of investment products.
Conflicts of interests can be discerned by asking professional advisors whether they or any member of their firms participates in or will receive compensation from investments they will be recommending. Advisors can also be asked to disclose whether they receive ongoing income from any mutual funds they might recommend, or whether they receive financial incentives for recommending other products.
Investors must also have a good understanding of their personal financial needs so that they can narrow their focus to financial professionals with the right credentials and experience, according to the Financial Industry Regulatory Authority or FINRA. Then, investors can evaluate whether an advisor is capable of providing these services by asking whether the professional offers advice on such specific subjects as tax planning, estate planning, retirement planning and insurance needs. Consumers can ask whether advisors recommend specific investments, whether they implement their recommendations and whether they provide ongoing advice or a written financial plan.
Perhaps most importantly, investors should assess an advisor’s fiduciary duty to a client. Is the advisor required to put investors’ financial interests first? Is the advisor required to make “suitable investments,” but not bound by a higher fiduciary standard? Millionaire Corner research shows that trustworthiness is the top criteria used by affluent investors when selecting a financial advisor.