Even if you're an expert at something, getting a second opinion is always a good thing. When it comes to money matters, getting help is very important. A financial advisor can help you budget, plan for retirement, save for a goal like buying a home, or ensure you're on the right track.
However, choosing the right financial advisor for you can be incredibly difficult. You need to consider your needs and how a consultant can help you meet them, so make sure you choose the advisor that matches your personality.
Who is a financial professional?
Financial professionals offer a wide range of financial services and advise and educate clients on various financial topics, from life insurance and retirement to the stock market. They recommend products and services and can help you open or manage accounts.
How to choose a financial adviser
Your relationship with your advisor should last a long time. At the very least, you should start with the hope that it will.
Your adviser should be able to help you plan for big life events like buying a house, having kids, and retiring on your terms. Ideally, you will work together for years or decades to achieve their goals.
This makes choosing a financial advisor very important. Follow these steps to find out how to choose the best financial professional for your needs.
1. Identify the financial advice you need
When choosing a financial advisor, the first thing to do is to determine the type of financial planning and advice you need. Different consultants have different skills and services.
Think about your goals and why you are seeking advice. If you're thinking primarily of retirement, we recommend working with someone with experience planning for retirement. If your financial goals are short-term, like buying a house, you'll need more advice. You may also seek immediate personal financial advice, such as budgeting, rather than investment management services.
Or you can have multiple goals, some short term, some long term, some in between. Whatever your goals and timeline for achieving, identifying the financial advice you need and your goals help start the process off on the right foot.
2. Choose the right financial advisor
Once you know what kind of advice you need, you're ready to start thinking about what kind of financial advisor to work with. There are many types of consultants and professional designations.
For instance, Certified Financial Planners (CFPs) have received a professional designation demonstrating their ability to provide long-term financial planning to their clients. They must abide by the rules and regulations established by the CFP Board of Directors.
On the other hand, Registered Investment Advisors (RIA) offers a variety of financial advice but generally focuses more on investment and wealth management services.
Many financial advisors have several professional designations, which means they can help you with many aspects of your financial life. If you work with a large financial firm, you will likely have access to different types of advisors.
If you just want someone to manage your investment portfolio for you, you'll need a different type of financial advisor than one that offers tax and estate planning services.
3. Learn the difference between fiduciary and non-fiduciary advisors
One of the important things to know about financial advisors is whether they are fiduciary or not.
If a financial advisor is held to a fiduciary standard, they must act explicitly and exclusively in your best interests. They cannot make any recommendation based on factors other than your profit; for example, whether a recommendation will earn them a commission.
Alternatively, non-fiduciary advisors are held to a lower standard known as the fair and equitable standard. They should make recommendations tailored to your needs, but they may consider other factors and act in their best interests by recommending products that earn them commissions on sales.
It's not difficult to see how the suitability standard creates conflicts of interest. If a non-fiduciary advisor suggests a financial product that earns them a commission over a superior product that doesn't, are they really doing it right by you?
Some professional designations, such as CFP and RIA, require holders to always act as fiduciaries for their clients.
All other things being equal, choose a fiduciary advisor over a non-fiduciary advisor. You can be sure that their advice will be in your interest.
4. Decide how much you can afford to pay
Nothing in life is free and financial advice is the same. You will need to consider how much you can afford to pay financial professionals for their help.
Different consultants use different fee structures. Some operate on commission only and earn money by selling financial products such as life insurance or annuities. Some advisors charge annual fees, either percentage based on invested assets or flat.
Others charge hourly, especially if you're looking for help reviewing specific investment products or financial decisions you want to make.
Ask any consultant you plan to work with for a copy of the pricing plan. Also, find out about the different income streams they receive to ensure they're not selling products that earn them commissions or kickbacks, even if they're technically fiduciary.
Before choosing who to work with, think about your budget and make sure you can afford the consulting fees you will need to pay. Keep in mind that even seemingly small commissions can have a big impact on your overall earnings.
5. Research Financial Advisors
Finding financial advisors is important because you will entrust them with your money and ensure it is properly managed.
Many people find an advisor through the recommendation of a friend or colleague. A reference can give you an idea of how the consultant works and a good reference on the quality of their work.
However, you still need to do your due diligence on every potential consultant, no matter how much others talk about them. You should check for their professional designations, employment history, financial licenses, and any regulatory or disciplinary action taken against them.
You might also consider working with a robo-consultant. These are programs that help you manage your investments. They base their investment strategy on your risk tolerance and goals, often creating a portfolio for you using low-cost mutual funds and ETFs.
However, many robo-advisors do not have a human component and do not offer personalized financial planning services. If you prefer that human touch or have complex financial needs, stick with an independent human advisor.
6. Interview Potential Financial Advisors
Before committing to working with a financial advisor, interview several potential candidates.
You want to ensure you find a good financial advisor who matches your personality and understands your goals. The last thing you want is to work with someone who prioritizes other aspects of their financial life than you do or who has a fundamentally different investment philosophy than yours.
You should ask potential financial advisors about their philosophy of helping people achieve their goals, whether they offer comprehensive financial planning or more focused services, and any other questions you may have about how they work.
Bottom Line
Choosing the perfect financial advisor for your needs is extremely important. Consider your needs, think about the type of professional who can help you, find one that meets the fiduciary standard, think about their compensation structure, and talk to them to make sure they're right for you.
By following this process, you have a good chance of finding an advisor you can work with for the long term. And once you've found that advisor, you're ready to achieve your long-term financial goals, like saving for retirement or increasing the college fund for your kids.
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