How to Find A Financial Advisor?
The ultimate beginner’s guide to picking the right advisor for you.
Going with a financial advisor can be one of the BEST decisions you make for your long-term finances. But there’s a lot of information out there, and it can be confusing to know where to start. So in this article, I’d like to give you the inside look at how to choose a financial advisor.
I’ve been advising clients for over a decade now, and it never ceases to amaze me how important it is to choose the right financial advisor. That’s because you need an advisor who understands both YOU and YOUR SITUATION. A fresh college graduate, for example, would probably need a different advisor from the one working with her retired parents.
There’s a strong temptation to simply go with the first advisor you find. But this approach doesn’t guarantee the best results! It’s like dating: what are the chances you find the right fit in the first person you meet?
So here are my tips to get you started on how to choose a financial advisor.
What is a financial advisor?
Before we begin, let’s examine what a financial advisor actually does.
Essentially, a financial advisor is a registered investment professional who advises clients on personal finances.
These are qualified pros who have passed in-depth examinations to become licensed in giving financial advice. All licensed financial advisors must register with FINRA, (the Financial Industry Regulatory Authority), and maintain their qualifications annually.
How a financial advisor helps you
A great financial advisor will first seek to understand your needs, and then adjust his or her style to match them. For example, a young couple might be interested in budgeting and saving for travel, kids and retirement. An older couple might want help with cashflow management, estate planning, and social security. Even highly experienced investors often seek advice with tax planning and portfolio management.
Whatever the case may be, a financial advisor’s job is to help you IDENTIFY your goals and then MANAGE your finances to help you achieve them.
Why is a financial advisor so important?
There are few things more important than protecting your nest egg. That’s because Social Security often won’t cover all retirement expenses. In 2019, the average person received just $17,700 from Social Security. And what if you retire later? If you retire at age 70, the most you can receive still just comes to just $45,240 per year. And that’s before taxes.
Some older workers still have access to defined benefit pensions, but these have become quite rare. Instead, companies now offer 401(k) or 403(b) plans, which require investing.
A financial advisor can help you stay on the right track
Fortunately for you, help is available: you can seek a qualified financial advisor to make sure you’re on the right track.
These pros can help make sure that you’re saving and investing enough today to reach your future goals. That’s important because it’s far easier to fix problems today than in the future. Adding just 1% to your savings rate can mean the difference of hundreds of thousands of dollars down the road.
Don’t believe me?
Let’s use a real-life example: what happens if someone in their 20’s saves an extra $500 every year? (That’s just $42/month). Thanks to the power of compound interest, they would have an EXTRA $103,000 in savings by the time they retire.
A financial advisor can help you avoid pitfalls
Conversely, it’s easy to run into financial trouble if you haven’t planned for major expenses. These include things such as children, healthcare and retirement.
Many retirees are surprised to find the limitations of Medicare coverage. So if chronic diseases such as Alzheimer’s, diabetes or kidney diseases run in your family or your spouse’s, there’s a good chance you’ll have to save extra to cover additional expenses.
Put another way, you don’t want to risk ever running out of money.
How to choose a financial advisor?
When it comes time to choose a financial advisor, the number of choices can seem bewildering. Should you go with a personal recommendation? An online search? Try doing things yourself?
The good news is that a systematic, step-by-step process can help you narrow the field. That’s because you’re just looking for two simple things:
- The right specialization. There are plenty of generalists out there, but it pays to find a financial advisor who knows your situation. The needs of a fresh college graduate will be far different from those of a retired couple.
- The right personal fit. You’re going to be sharing some personal details about your goals, hopes, and life dreams with your financial advisor. And the more comfortable you are with the person, the better your outcome will be.
So let’s begin with the four simple steps you can take to find a financial advisor that is right for YOU.
1. Know WHY are looking for a financial advisor
Before you start searching for a financial advisor, you must understand WHY you are looking for one.
“WHY” is a very strong word. But it’s one that we often forget to use as we grow older. Five-year-olds constantly ask it. “Mommy, WHY is the sky blue?” “WHY do I sound funny in recordings?” “Daddy, WHY do you buy beer? Do you know how much candy we could get with that money?”
Why, why why….
Know your motivation for seeking financial advice.
Asking WHY shows innate curiosity about the world around you. It shows excitement about life. Never settling for how things first appear. So before you read on, I suggest you do an important exercise. Grab a sheet of paper and write “WHY” on the top of it. And for a full ten minutes (no cheating here), brainstorm every reason WHY you are looking for a financial advisor. Are you fearful of the future? Unsure where to start investing? Or perhaps you’re afraid about having enough money in retirement?
There are no wrong answers. Just keep brainstorming until the ten minutes are up. And don’t stop. Some answers will speak to you more than others, while others could just be plain wrong. But just keep going.
After the end of ten minutes, you should have 30-50 reasons WHY you might be looking for a financial advisor. Now take that list and circle the top 5-8 reasons that speak to you the most. Examine those reasons carefully and see how strongly each speaks to you.
Your final list might look something like this
- I want a good future for me and my family
- Taxes worry me and I think I’m overpaying
- I’m thinking of retirement but worried about running out of money
- I want to buy a home
- I constantly worry about money even though I should have enough
Once you have your list, go ahead onto Step 2.
2. Determine the complexity of your situation
Once you understand WHY you’re looking for a financial advisor, the next step is to see what kind of help you need. Below I’ve listed the three major groups of financial advisors.
i. Least complex
Robo advisors: for those in simple situations, a robo-advisor can be a great way to start financial planning. These are digital services that offer a simplified, low-cost way to invest. You first answer online questions, then computer algorithms build a portfolio according to your goals and risk tolerance.
Robo-advisors are especially great for younger people. Those who might not yet have children, spouses or significantly complicated asset structures.
But because investing is so important, I still recommend everyone reach out to an investment pro before implementing the final decision.
ii. Regular complexity
Hourly-based Financial Consultants: for people in normal situations, a financial consultant can be an excellent lower-cost alternative to traditional asset management. You might want to know things like:
- Saving for children’s education in special tax-advantaged vehicles
- Managing assets, such as rental properties or inheritances
- Planning for retirement, children and other life-stage changes
- Reducing taxes through mortgages or sheltered retirement plans
Hourly advisors are a relatively recent development. But the business model has become popular among consumers because of its fee transparency. You only pay for the time you use.
iii. More complex
Wealth Managers: for people with complex financial situations, a wealth manager might be your best option. That’s because families with significant assets will need good tax advice and estate planning to make sure their assets are protected.
Specialized Financial Advisors: in other cases, a specialist might be the best route. These might include:
- Divorce or widowhood. Advisors with CDFA (Certified Divorce Financial Analyst) designations can help make sure you’re financially protected during divorce or widowhood.
- Women investing. Financial advisors often work with men, so working with an investment pro who specializes in women and families can make a huge difference.
- LGBT planning. Even though gay marriage is now legal in all 50 states, LGBT families can still benefit from hiring a specialist to help with special tax, probate and adoption laws.
3. Talk to at least three financial advisors
Some people ask me “Tom… wouldn’t you prefer people just go with you?”
The answer is NOT NECESSARILY! Surprised? As an advisor who specializes in women, LGBT people and families, I will only work with people who I know are the right fit. That’s just the person I am. And YOU should settle for no less.
Don’t be lazy in finding the right advisor
When it comes to making choices, humans are sometimes incredibly unmotivated creatures. Many people spend hours searching for the perfect beach vacation. (I’ve known someone who spent 20 hours searching for a 12-hour flight!)
But in other situations, humans are lazy. 40% of car buyers visit only 1 car dealership before buying a car. 65% of homebuyers only talk to one real estate agent before choosing. And the worst? In my experience, almost 80% of people talk to just one financial advisor before making their choice.
Why do you need to talk to three?
When you’re shopping for a service, three is the magic number.
- First option = no context. It’s just like going on a first date or visiting your first car dealership. You have no idea how a financial advisor compares if you’ve only ever known one.
- Second option = some context. Once you talk to a second advisor, you have something to compare to! Was one more engaging or more competent than the other?
- Third option = more context. By the time you’ve interviewed the third advisor, you’re starting to get a pretty good idea of the different strategies and personalities you can find in financial advisors
4. Run each advisor through a checklist
Next on how to choose a financial advisor: ask them the right questions.
Here’s a list of five questions you HAVE to ask. And don’t take “no” for an answer.
i. Credentials
- Is the advisor registered? Advisors registered with FINRA have passed certain exams that demonstrate investment knowledge.
- What designations does the advisor have? The CFP (Certified Financial Planner) is considered the gold standard in the financial planning industry and the CFA (Chartered Financial Analyst) is the gold standard in asset management. More specific designations such as the CDFA (Divorce) and the CHSNC (Special Needs) can help with special situations.
ii. Ethics
- Any outstanding FINRA complaints? You can easily use FINRA’s BrokerCheck to see if an advisor has ethical or legal issues against them, such as criminal charges, investigations and unpaid liens.
- Disciplinary actions from the SEC? Advisors are required to disclose any disciplinary actions or conflicts of interest to the SEC. You can run an SEC Investment Adviser search here.
iii. Payment Terms
- Is the advisor upfront about fees? Reputable financial advisors are generally upfront about what they charge. Advisors who avoid talking about their fees a red flag to their business.
- Are they fee-based? (i.e. NOT commission-based) Fee-only advisors (like us!) are generally a better choice since commission-based advisors are paid based on the products they sell. That means they have a strong incentive to sell you the highest-commission products regardless of fit.
iv. Experience
- Do they have experience with clients like you? Does the financial advisor have experience in your field? For example, if you’re going through a divorce, does the advisor have specialized knowledge about the one-time tax breaks that separating couples can take? If you are planning a non-traditional unmarried relationship, does the financial advisor have experience in this?
v. Personal Fit
- Does the financial advisor connect with YOU? This is the final, most important stage of choosing a financial advisor. When you engage the advisor, does he or she GET you and your situation? Even the most experienced financial advisors might not be the best fit on a personal level. It’s like dating. There’s no right or wrong.
Conclusion: how to choose a financial advisor is almost like dating.
You need to find one you can trust. Because talking about money is hard. A survey by Wells Fargo found that 44% of Americas see personal finance as the most challenging topic to discuss with others. Similarly, SunTrust Bank found that money is also the leading cause of stress in relationships.
And with a financial advisor, you need to find someone you are comfortable sharing your financial life with. Someone who you aren’t afraid of telling your fears, your goals, your worries. Choosing the right financial advisor can make an enormous difference.
Brainstorming the WHY of financial advisory
Remember that brainstorm you put together in Step 1? That final shortlist of 5-8 reasons WHY you’re looking for a financial advisor? That’s a very important list. Why? Because you can use it as a final check to choosing a financial advisor. Whoever you end up choosing, you should be comfortable sharing that shortlist in its entirety.
Only when a financial advisor understands your goals can he or she truly help you reach them. And isn’t that the most important thing?
Where to find more resources
If you’re looking for even more investment tips, you’ve come to the right place.
That’s because I’ve helped invest client money for over a decade in the same old-fashioned way: seek out great companies in great industries that can be purchased at a discount to their fair value. Sounds too simple to be true? Give me a call today and I’ll show you that it’s still possible after all these years.
About Jurnex
We are an independent registered investment advisor and asset manager. We have the securities backing of Charles Schwab, yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.
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