A relationship with a financial advisory firm can be one of the most important professional relationships in our lives. The world of finances is confusing and perilous. Assistance navigating the many decisions to be made can be invaluable.
The start of a new year is a good time to evaluate many financial metrics in life, a good time to refocus on goals, evaluate progress and to evaluate performance and potential financial risks.
So it is also a natural time to consider engaging a financial advisory firm, so I’ve come up with some advice for the process of finding an adviser.
In my experience the most important factors to evaluate when selecting financial advisers are how do they get paid, what financial vehicles are they licensed to assist with, what is their process for on-going planning and management, and does their personality click with your communication needs?
In most circumstances, advisers are paid by either account management fees or by commissions from financial products used building client strategies. There are benefits and drawbacks to both methods. To me the important thing is that you know how the adviser is paid and how that compensation is charged to you.
No financial product is cost free; be wary of anyone who tells you otherwise. Costs come in the form of sales loads, internal fees, spreads (the difference between the financial services company’s return and yours) surrender fees or a combination of these things. You should have an understanding of product cost and how your adviser is incented to use various investments.
Licensing is an important factor when evaluating an adviser relationship. If the adviser is licensed only for insurance products, then all of his or her solutions are going to involve insurance. A well-rounded financial adviser will maintain a FINRA Series 7 brokers registration, will be registered as an Investment Advisor and maintain an insurance license. This will enable the adviser to build solutions using all types of investments, and will enable the adviser to be compensated by fees as well as commissions.
Professional designations like CFP, CLU and ChFC can demonstrate additional professional commitment, but are not a substitute for licensing. Not all designations are created equal so avoid assumptions in this regard.
The financial world is complex and an adviser must wear a number of hats. It is important to understand the process an adviser uses to maintain client relationships and accounts. I prefer a team approach, but other models can work as well. Qualified advisers will have no issue clearly explaining the client management process they use.
Finally there is the personality thing. While this may sound touchy-feely, personality compatibility is actually of the utmost importance. Eventually you and your adviser will be making vital and sometimes difficult decisions together. The importance of personal understanding and comfort level cannot be underestimated.
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