Protecting yourself and your financial future
Learn how to choose the right financial advisor
Choosing the right financial advisor for your needs is an important decision. Protect yourself by taking the following steps to select the advisor that can best meet your needs.
Get referrals. Ask your other advisory professionals (CPA, Attorney, etc.) to refer an advisor. When asking for referrals, ask your referral source if he or she will receive any compensation for the referral. This will ensure you understand the level of objectivity given to the recommendation.
Ask the advisor for references. Your potential advisors should have clients who are willing to talk with you about their experience. These people should not be compensated or incentivized for recommending the advisor. When you call the advisor’s clients, be sure to ask how long they have been working with the advisor. Ideally, you want to speak with clients that have been investing through various market cycles and have experienced the advisor’s approach in both good times and difficult situations.
Check the advisor’s years of experience. If your advisor has been around for 20 years or more, they will have weathered many market cycles and can speak to their long-term investment philosophy (and back it up with the references they provide, above). An experienced advisor is less likely to make rookie mistakes and more likely to focus on your long-term happiness.
Ask about the advisor’s compensation model. There are three ways a financial advisor can be compensated.
- Commissions. Financial advisors who work for a specific brokerage firm, insurance company, or bank are likely paid commissions based on the types and number of investment products sold. While most commission-based agents are sincere people trying to do good work, a commission-based advisor is limited in the scope of advice and investment options they are able to present to clients.
- Fee-only. A fee-only financial advisor, like Financial Strategies, does not accept any fees or compensation based on product sales. Fee-only firms are regulated as fiduciaries and provide personal advice without pressure to sell anything other than the best possible option for the individual client.
- Fee-based. Although this model sounds a lot like fee-only, fee-based advisors receive both commissions from product sales AND charge fees for their services.
Work with a Certified Financial Planner (CFP) who is a NAPFA Registered Financial Advisor. CFP is a minimum requirement. It is a series of courses in basic well-rounded financial planning. It assures you that your advisor has had a basic education in most areas of financial planning or wealth management, and that they have had at least some real-life experience.
NAPFA registration requires more education and continuing education; it requires that the advisor practices comprehensive financial planning, and a peer review of the advisor's work is required to gain membership. NAPFA also requires its advisors to be strictly fee-only to remove the conflicts of interest that exist when the advisor receives commissions for recommending products.