I can’t talk about holistic planning, without mentioning how to find the right advisor. Let me start by saying that there are a lot of great advisors that I trust and respect. However, there are also some not-so-good advisors out there, one of which took my mom for a lot of money.
While selecting the right advisor boils down to finding someone you mesh with, you can improve your odds of locating the right person by using the following criteria.
Find a Professional
Currently, anyone can hold him- or herself out as a financial advisor. Therefore, you should look at your potential advisor’s designations to better your chances of finding someone truly qualified to help you manage your money.
The most widely regarded designation in the financial advising industry is the Certified Financial Planner (CFP). Among other things, a CFP has completed an education requirement, passed a rigorous two-day test, had a minimum of two years of planning experience, and met ethics and fitness standards required by the Certified Financial Planner board. Other highly regarded designations include Chartered Financial Analyst (CFA), who focuses on investment and portfolio management, and Chartered Retirement Planning Counselor (CRCP), who focuses on retirement planning.
In addition to finding someone with verifiable credentials, you should make sure that advisor must plan and select products in your best interest (known as a fiduciary standard) rather than just make choices that are suitable for you (suitability standard). The former standard provides much more protection for you and gives you easier recourse, if you feel your advisor has breached that duty.
Keep in mind, though, no matter how many initials an advisor has after his or her name, you will still find a varying degree of knowledge and experience. Research your advisor’s background and knowledge base to verify he or she can meet your needs.
Know the Payment Structure
You will run into a wide variety of pay structures when researching planners. Here are the most common types:
Commission Only – This type of advisor earns money by selling products like stocks, bonds, mutual funds, life insurance or other investments. An obvious potential conflict arises here when an advisor can make more money by steering you into certain investments.
Fee Based – This advisor will charge you a fee for his or her advice and may also earn a commission for selling you products in your plan. Again, you have a potential conflict between the advice given and how much the advisor may make by putting you in one investment over another.
Fee Only – This advisor charges you solely based on fees. This may be a flat fee for a service provided ($2,000 for a comprehensive financial plan), an hourly fee ($200 for an hour of his or her time), or as a percentage of your assets ($1% of your investment portfolio). While these planners don’t have incentive to sell you products, they do have incentive to sell you their time.
The kind of structure you pick will depend in part on what you want out of the relationship. You may want someone you can call every now and then to ask a question. Or you may want a comprehensive financial plan. Even still, you may want someone to handle all of your investment decisions and try to beat the market.
In my opinion, going with a fee-only planner provides you the most transparency in what you will pay for the advisor and reduces the chance of a conflict of interest. No matter which structure you choose, keep in mind the incentives and conflicts that may come into play in your relationship.
Do Your Homework
Many advisors may have a specialty like investing, tax, or insurance. And while having a specialty isn’t a bad thing, you want an advisor that takes a holistic approach to bring together all of your personal finance goals.
You also want to find someone who you can trust. So you should first seek references from trusted family and friends. If you don’t have anyone who can provide a reference for you, ask anyone you interview for client and professional references. Lastly, make sure to interview three or more people. Giving yourself options and experiencing different approaches can help you find just the right fit.
Choosing an advisor can be a daunting task. However, using these three criteria will help you find someone you can depend on.