Selecting a Financial Advisor: Insights on Choosing the Right One

how to choose a financial advisor

Once you’ve made the decision you need help managing your financial life, the real work begins.

How do you choose a financial advisor who’s right for you?

What qualifications should you require?

How are fees structured?

Confusing Titles and Designations

The Securities and Exchange Commission regulates the activities of those who provide financial advice for compensation.  They are required to register with the SEC or with a state regulatory authority, depending on their assets under management. 

While the SEC uses the term “investment advisers” (commonly spelled “advisors”), investment professionals use a variety of titles and designations. It can be difficult for investors to determine what these designations mean, and what expertise they indicate.

Among the titles you may see are:

  • Investment advisors
  • Certified financial planners
  • Broker dealers
  • Financial consultants
  • Wealth advisors
  • Robo-advisors

Which one is right for you?

  1. “Fiduciary” Advisors

If you require investment management or need comprehensive financial planning, consider working with an investment advisor who is a registered investment advisor (RIA).  

RIAs are legally obligated to place your interests above theirs, to minimize conflicts of interest and to disclose any they may have. They owe their clients a duty of undivided loyalty and utmost good faith. This high standard of care is typically referred to as a “fiduciary duty.”

If you are entrusting your life savings to a financial professional, you deserve this high standard of care.

Certified financial planners who hold the CFP® designation also agree to be held to a fiduciary standard. These professionals have extensive experience in financial planning and have passed the CFP examination. They agree to abide by a strict set of ethical standards.

Here’s where it gets confusing.

In order to register as an RIA, it’s not a requirement that you hold a CFP designation. Many RIA are also CFPs. Others are not.

If your requirements transcend managing your investments and involve financial planning issues, you should consider retaining an RIA who is also a CFP. You could also consider retaining a CFP who is not an RIA.

While situations vary, there’s a difference in how RIAs (with or without a CFP designation) and CFPs charge.

RIAs typically charge an asset based fee, which is a percentage of your assets under management.

CFPs often charge a flat fee for a financial plan or bill on an hourly basis.

You can find a CFP by checking this directory.

You can check to see if an RIA is registered with the SEC by checking the website of the SEC.

  1. Brokers

Brokers may or may not be fiduciaries.  It’s important that you nail this issue down.

Often they use titles like “financial advisor” or “wealth manager” that imply they are held to the same fiduciary standard as RIAs and CFPs.  This is not always true.

Brokers who are dual licensed as both a broker and an advisor can act as fiduciaries.  But here’s the catch. With respect to any given transaction, the broker could be acting as a fiduciary advisor or not. It can be difficult to tell which hat they are wearing.

If you work with a broker, and want the comfort of knowing they are fiduciaries, ask them to sign a document (which must be in writing) that states that they will always act as a fiduciary in all their dealings with you.

It’s unlikely they will agree to do so.

  1. Financial consultants/Wealth advisors

The terms “financial consultants” and “wealth advisors” can mean a lot or little.

Some financial consultants hold the chartered financial consultant designation (ChFC), which requires them to adhere to a fiduciary standard.  Others have no obligation to do so.

Wealth advisors often serve very wealthy families, but any advisor can call themselves a “wealth advisor.”

You can protect yourself by insisting that those using these terms are RIAs, CFPs or both.

  1. Robo-advisors

Robo-advisors are automated, inexpensive platforms that primarily manage your investments.

Robo-advisors are registered investment advisors and have a fiduciary duty to their clients.

  1. Other qualifications

Few investors understand that retaining an investment advisor with advanced credentials often costs no more than an investment advisor with minimal qualifications.

There are a relatively few RIAs who are also certified public accountants. These advisors may be particularly suitable if you have tax planning and related requirements.

An even more limited group of RIAs hold a Ph.D. in Finance.  These advisors have an extensive background in the structure of financial markets, the formation and behavior of asset prices, banking and monetary systems, capital structure, international financial markets and other areas of finance.

Holders of the CFA® designation are required  to pass a rigorous three-part examination covering ethics and professional standards, investment tools, asset classes, portfolio management and wealth planning.

Holders of an MBA typically earned that degree after two years of full-time study at an accredited university.  They have a background in accounting, finance and marketing. 

These qualifications may add value to you, depending on your requirements.