How To Choose A Financial Advisor – 5 Things You Need To Know

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Originally featured on the Campbell University Blog on August 3, 2022.

Over the course of my career, I’ve observed various inflection points that prompt folks to consider hiring a financial advisor. Today’s headlines and periods of economic and financial market uncertainty are among these inflection points. I am consistently approached by mid to late career individuals (age 40-55) who are considering hiring a financial advisor for the first time and are unsure where to start. It all makes sense, particularly since this demographic finds themselves facing a confluence of financial decisions that often bubble up during that life stage. Most commonly:

  • These are typically some of their highest earning years.
  • If individuals started saving early, their retirement and investment balances are becoming quite large, while the swings of the market seem more pronounced.
  • Some people might begin dealing with aging parents and managing their financial affairs.
  • Some may have received an inheritance.
  • Any children in the home are (hopefully) getting ready to leave the nest.

Folks suddenly realize they are closer to future memories with their grandkids than they are to the memories of their college days. You may find yourself in one of these situations and therefore contemplating whether to hire a professional. But what should you be looking for? More importantly, what should you avoid? I’ve compiled a short list of what I believe are the most important factors you and your family should consider.

1. Do you even need a financial advisor?

This may come as a shock, but I do not believe everyone needs a financial advisor. There are a number of resources, information, and DIY services available today. An individual with the time, aptitude, and discipline can likely navigate the complexities of financial planning on their own with minimal professional help. After all, advisors aren’t cheap, and you can save a ton of money in fees by doing it on your own.

However, there is compelling evidence that the value of a good advisor can well exceed the cost. This was methodically discussed in a recent Vanguard study. In addition, one of the most compelling reasons to hire a professional is to avoid financial blind spots. I can think of countless times over my career that I’ve witnessed individuals make poor financial decisions only because they were unaware of the repercussions, the tax effects, or alternative options. After all, there are no financial do-overs and (as I explained in a separate article) the older we become, the more costly financial mistakes can be. The role of a coach is extremely important. There is a reason the greatest athletes of any generation still relied on their coach for accountability, support, and guidance.

2. Understand the difference between a fiduciary and a salesperson.

One of the most important aspects of selecting a financial advisor is understanding the standards to which they are held. Spoiler alert: not everyone places your best interests first. The financial services industry is peppered with people representing themselves as advisors, but they are actually salespeople, selling products in an attempt to generate commissions. To be clear, there is nothing inherently wrong about someone making commissions on the sale of an investment or insurance product. In fact, there have been many times throughout my career when a client was best served by a financial solution that happened to generate a commission to the salesperson. However, the consumer is best served when they are informed of this potential conflict of interest.

One of my greatest frustrations is the ambiguity around professional titles, compensation structures, and lack of transparency. It is my belief that the consumer is largely unaware of conflicts of interest which should be disclosed. In the future, I plan to write a series of articles to cover this topic in much more detail (follow Counterweight social media for alerts), but it’s incredibly frustrating to me that so many “advisors” are not held to a higher standard of transparency and commonly have undisclosed conflicts of interest. On the contrary, someone who is acting as true fiduciary is required to act in their client’s best interest at all times. Ask your advisor if they are held to a fiduciary standard or a suitability standard. If they give you a roundabout “wordsalad” answer, that probably tells you what you need to know. Anyone who is a fiduciary should be able to state it clearly and even put it in writing.

3. Understand how they are compensated.

Any financial professional should be open and honest about how both the firm and themselves are compensated. If they don’t bring it up, you need to ask. There are three main compensation models in our industry:

  • Commission-Based – This describes someone who is primarily compensated through a commission on a transaction. Examples include annuity sales, insurance sales, stock trades, mutual fund transactions, and even some recurring type of compensation through “trails” or revenue sharing agreements. Nowadays, much of the industry has transitioned away from a commission-only model to a fee-based model, but many of your insurance representatives and some legacy stockbrokers still operate primarily in this setup.
  • Fee-Based – A fee-based model is one that allows compensation to be derived from both commissions and fees. For instance, many advisors within a broker-dealer firm (i.e. Merrill Lynch, Morgan Stanley, UBS, etc.) are operating as a fee-based advisor. Essentially, this means they can wear both hats and can operate either as a fiduciary, or as a commissioned salesperson. Under this model, they should disclose to you when they are receiving a fee or commission, so be sure to ask and get a full understanding of any potential conflicts of interest.
  • Fee-Only – A fee-only advisor does not sell any products, nor do they earn commissions. Their only form of compensation comes directly from you, the client in the form of a fixed fee. This fee could be a flat dollar amount, or a percentage of the assets on which they are advising. These advisors operate under the fiduciary standard at all times and are required to make recommendations or take actions that are in your best interest.

4. Understand their education, experience, and professional certifications.

Confused about the alphabet soup of designations and certifications in the financial industry? That makes two of us. At last count, there were over 200 different designations available to financial professionals and the average public isn’t aware of the differences, nor the level of competency required to obtain them. Since some certifications are more easily attainable than others, I suggest you review how stringent are the requirements needed to obtain an advisor’s certification.  For instance, the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation is largely regarded as one of the most respected certifications in the industry. Obtaining it involves an educational coursework requirement, a comprehensive board exam, between 4,000-6,000 hours of professional experience, and an ongoing adherence to the CFP® Board’s fiduciary ethics standard.

While not a complete list, some the most highly regarded designations in the industry are listed below, all of which require high levels of competency, coursework, and knowledge.

  • CERTIFIED FINANCIAL PLANNER™ (CFP®) – details
  • Chartered Financial Consultant (ChFC) – details
  • Chartered Financial Analyst (CFA) – details
  • Certified Public Accountant (CPA) – details
  • Certified Investment Management Analyst (CIMA) – details

It is important realize that just because someone holds a prestigious designation, it does not necessarily mean they will provide you the best advice. Alternatively, it’s also incorrect to assume that if they lack one they give poor advice. Instead, it should simply be part of your due diligence process as you select which advisor may be a good fit.

5. Your relationship is important.

While I’ve listed this last, it is certainly not least important. A true financial advisor is someone who will become a vested partner in you and your family’s success. They should be someone who actively listens to you, seeks to understand your goals and vision, and will appropriately act on your behalf. You should feel comfortable with them. They should seek to explain ideas and concepts openly, without the need for complicated financial jargon and acronyms. They should be someone you trust and give you confidence about your future, while simultaneously holding you accountable and exhibiting discipline to a clearly defined purpose and set of financial goals. One of the most rewarding aspects of my career is that most of our long-term clients have grown into dear friends, all of whose relationships I deeply cherish far beyond our professional engagements. Always remember, the relationship component of selecting a financial advisor should never be discounted.

Candidly, this article could have stretched into many more pages, particularly since this is a topic I am deeply passionate about. This is certainly not an exhaustive list, but at a minimum I hope it answers some of your lingering questions and points you and your family in the right direction. Since my time in Buies Creek over 20 years ago, my career journey has led to a commitment to help others seek and find the right professionals to assist them. There are so many remarkable Campbell alumni who do phenomenal work in the wealth management and financial advisory industry. If you know one, I’m sure they would be happy to expand upon my thoughts and answer whatever additional questions you have. If you don’t know one, I’m happy to be a resource if needed.

Counterweight Private Wealth offers advisory services through TCWP LLC, an investment adviser with its principal office in Tampa, FL. TCWP LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. TCWP LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of TCWP LLC’s current written disclosure brochure filed with the SEC which discusses among other things, TCWP LLC’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. Please note, the information provided in this document is for informational purposes only and investors should determine for themselves whether a particular service or product is suitable for their investment needs. Please refer to the disclosure and offering documents for further Information concerning specific products or services. All investing involves risk, including the possible loss of principal, Statements of future expectations, estimate, projections, and other forward-looking statements are based on available information and author’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Past performance of various investment strategies, sectors, vehicles and indices are not indicative of future results.

Please note, the information provided in this document is for informational purposes only and investors should determine for themselves whether a particular service or product is suitable for their investment needs. Please refer to the disclosure and offering documents for further Information concerning specific products or services. All investing involves risk, including the possible loss of principal, Statements of future expectations, estimate, projections, and other forward-looking statements are based on available information and author’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Past performance of various investment strategies, sectors, vehicles and indices are not indicative of future results.