How to Evaluate a Financial Advisor

Choosing the right financial advisor is a significant decision that can impact your financial well-being for years to come.

Everybody’s financial situation is different and nuanced. The right advisor can make a world of difference and impact how you feel on a day to day basis. The right advisor can be the difference between tranquility and anxiety. Here’s a guide on how to choose a financial advisor that fits your needs, along with some additional resources for vetting advisors.

Understand the Different Fee Structures

Transparency in fees is essential, avoid any Advisor who is not clear about their fees. Here are the common fee structures:

• Fee-Only: These advisors charge a flat fee or an hourly rate for their services and do not earn commissions from the products they recommend. This often minimizes conflicts of interest. For more on the benefits of fee-only advisors, check out The National Association of Personal Financial Advisors (NAPFA)
• Fee-Based: These advisors charge a combination of fees and commissions.
• Commission Based: These advisors are compensated through commissions on products their clients buy through them. Tip: Ask advisors if they make commissions on what they sell you.
• Always ask for a clear breakdown of all fees and read the fine print. The U.S. Securities and Exchange Commission (SEC) offers resources to understand different compensation models and potential conflicts of interest.

Check the advisors Credentials and Experience

Look for financial advisors with relevant certifications that indicate expertise and adherence to ethical standards. Common designations include:

• Certified Financial Planner (CFP®): CFPs have undergone rigorous training and are held to high ethical standards. You can verify an advisor’s CFP status at the CFP Board’s website.
• Chartered Financial Analyst (CFA): CFAs specialize in investment management and have passed several exams focused on advanced investment analysis. More information can be found on the CFA Institute’s website.
• Chartered Financial Consultant (ChFC®)– The ChFC® designation is a comprehensive financial planning credential issued by The American College of Financial Services. It covers all the topics in the CFP® curriculum and adds specialized areas like small business planning, behavioral finance, and modern retirement income strategies. It’s generally for Advisors who work with a broad range of financial planning clients, including business owners and high-net-worth individuals, and want advanced education beyond the CFP®.
• Certified Private Wealth Advisor (CPWA®) – The CPWA® is a credential designed for advisors working with high-net-worth clients. It focuses on sophisticated planning techniques including tax mitigation, wealth transfer, asset protection, and behavioral finance.
• Certified Investment Management Analyst – (CIMA®) – The CIMA® designation is focused on advanced portfolio construction and investment management. It combines knowledge in asset allocation, risk measurement, manager due diligence, and performance reporting.

Conduct Background Checks

It’s crucial to verify an advisor’s background and regulatory compliance. Use the following resources:

BrokerCheck by FINRA: This tool helps you research the professional history of brokers and advisors. Visit FINRA’s BrokerCheck to see if the advisor has any disciplinary actions.

The SEC’s Investment Adviser Public Disclosure (IAPD) Database: This resource allows you to check if a financial advisor is registered with the SEC and view their Form ADV, which provides insights into their business practices.

Additionally, each advisors Valinor profile will indicate if the advisor has had disciplinary action as well as reviews from clients if any have been left.

Ask the Right Questions

When meeting with potential advisors, dig deep and ask the uncomfortable questions. Here’s a list of questions to ask your financial advisor before hiring them:

What are your qualifications and areas of expertise?
How do you get paid, and are there any potential conflicts of interest?
How will we work together to achieve my financial goals? How often will we meet?
What is your investment philosophy, and how do you select investment products?
Can you provide references, reviews or testimonials from clients with similar financial needs?
Are You a Fiduciary?
Will you be my main point of contact? How often will we meet? Will anybody else be involved in managing my money?

If you’re curious about something, don’t be afraid to ask or come off naive, it’s better to know answers upfront, especially when this person will be managing your financial future.

Assess Their Communication Style

A good financial advisor should be someone you’re comfortable communicating with. Discuss how often they will review your financial situation and how they will keep you informed. Whether it’s monthly check-ins or quarterly reports, make sure their communication style aligns with your expectations. You should feel comfortable asking your advisor questions, probing their answers and challenging them if something doesn’t make sense.

Consider the Fiduciary Standard

Advisors who adhere to the fiduciary standard are legally obligated to act in your best interest. Always ask if your advisor is a fiduciary. The Consumer Financial Protection Bureau (CFPB) provides additional information on the fiduciary standard and what it means for you as a consumer.

Choosing the right financial advisor is a process that requires careful consideration and research. By understanding the different types of advisors, checking credentials, asking the right questions, and using trusted resources, you can find a financial partner who will guide you toward your financial goals. Remember- ideally you’ll be working with this person for a really long time.
By following these steps, you’ll be well on your way to making an informed decision that sets you up for financial success.