With the proliferation of investment and personal finance websites, investors have access to a boundless number of resources and tools once only available to financial professionals. And, while an increasing number of investors consider themselves to be at least somewhat self-directed in their investment decisions, the ever expanding world of investments and the increasing complexity of the financial markets require much more than a part-time approach to planning.  With so much at stake, it would be important to seek the guidance of a qualified and trusted investment advisor, if for no other reason than to validate their own plans and decisions. Choosing the right investment advisor can, therefore, be one of the more critical decisions an investor makes.

When looking for any professional advisor, it is important to be able to match their characteristics, temperament, client profile and experience level to your own profile. In the case of an investment advisor, the more you know about your financial situation, your investment objectives and preferences, and your tolerance for risk, the more thoroughly you will be able to evaluate an investment advisor to determine if they are a match.  Before meeting with an investment advisor, conduct a thorough assessment of your current situation and establish clearly defined goals and objectives.

Who Does the Advisor Work For?

Advisor or Salesperson:  With hundreds of thousands individuals calling themselves “financial advisor” or “wealth manager” or “investment specialist”, the challenge for investors is to wade through the marketing and advertising to be able to identify those financial professionals who truly put their client’s interests first. The financial services arena is vast and very fragmented among a number of different types of advisory models. Many advisor-types work for a financial institution, such as a bank or a stockbrokerage firm and sell proprietary products and services or other investment products approved by that institution. Other advisors who are associated with an independent financial firm are free to choose from a wide universe of investments.  The advisor is not required to sell any proprietary products and are generally know as independent, fee-based or fee-only advisors. Investors need to be able to determine which type of advisor is most likely to provide conflict-free investment advice.

Advisors (also known as Registered Representatives) who work for a stock brokerage firm or a bank earn their income primarily through commissions paid by their firm or a third party investment company, such as a mutual fund or insurance company.  While these advisors must adhere to certain standards of “suitability” when recommending investment products, they are not required to place their client’s interests first as the “fiduciary standard” requires.  Although most of these advisors have the best intentions of doing what’s right for their clients, they often come under pressure from their firms to produce a certain amount of revenue. This can be conflicting for advisors and may cause them to recommend products that they otherwise wouldn’t in particular situations.

At the other end of the spectrum are advisors whose sole source of income are fees paid to them directly by their clients. In this way, advisors are not beholden to a particular firm or any particular investment products. They can search the whole universe of investment vehicles and asset managers to find the ones that are most appropriate for their clients. An independent advisor will generally calculate the fee charged as a percentage of the amount of assets or money that is being managed.  The advisor is acting as a fiduciary to their clients which means they must put their client’s interest first.

There are situations when a Financial Advisor may determine that an investor has a financial plan that requires both a fee-only portion and investment products that are commission based.  In this situation, the Financial Adviser has the responsibility to explain all details and any potential conflicts of interest.

Professional Guidance or Sales Process

Both commission-based advisors and fee-only advisors work with their clients through some sort of investment or financial planning. Investors should never consider a recommendation unless their advisor has worked through the process of thoroughly understanding their financial situation, specific objectives, and conducting a thorough risk assessment.  Investors need to be able to discern whether the analysis performed by their advisor is truly a financial map for achieving their objectives or simply a justification for a product recommendation.  One key test would be to ask your advisor after a product has been recommended whether there is an equivalent investment product available that has fewer expenses or smaller fees. If they say no or hesitate, you may be in front of a product salesperson and should ask further questions.

Background and Experience

It is important to treat the selection of an investment advisor much like the hiring of an employee. You should research and interview the potential Financial Advisor which will help in securing a long-term and successful relationship.  Because your financial future is at stake, you need to ensure your advisor possesses a solid background and substantial experience for working with people in your specific situation.  Investors should check the background of the Financial Advisor through FINRA (Financial Industry Regulatory Authority) and the S.E.C. (Securities and Exchange Commission). Investors can go to the Broker-Check section of each entity at www.finra.org and www.sec.gov for complete information on licensing and any disciplinary actions.  Ask the Financial Adviser about their  professional educational and industry accomplishments which can demonstrate their commitment to their profession.  Look for professional designations such as CFP, ChFC, MFS, CFA as indications of their commitment to knowledge and ethical practices.

Advisors who have not experienced at least one complete investment or financial market cycle (generally, about five years) may not be seasoned enough. The more experience the better as long as it has been gathered working with people in situations similar to yours. 

Another good source for questions to ask a Financial Advisor can be found through the Certified Financial Planner Board website at www.letsmakeaplan.org.  The site contains a variety of investing and financial planning topics.