For one reason or another, you’ve decided it’s time to find a financial advisor. Maybe there’s a little one on the way, and you’re worried you don’t have enough life insurance. Or maybe you just find yourself making more and more important financial decisions, and you’re wondering whether they are the right ones.
Whatever your reasons are, there are many things to consider when shopping around for a financial advisor.
I’d like to clear up some of the confusion that comes with looking for an advisor, and give you questions to ask to ensure they’re the right fit.
Start With Your Concerns
Before you jump into a Google search, I recommend taking time to think about what you’re trying to achieve. Ask yourself:
- What are the things that keep me up at night?
- What are the specific things that concern me?
- Am I making financial decisions on a regular basis, and am I unsure they are the right ones?
- What are the things about my finances that I’m confident about?
- What are the things about managing my finances that I enjoy doing myself?
Now that you’ve gathered your thoughts, decide if you need help with specific areas or if you’d benefit from a broad range of advice. An example of something specific would be life insurance. If you are confident in your financial decisions, but you simply aren’t sure if you have the right amount or type of life insurance, then maybe you need to reach out to a life insurance agent.
But, if there is enough doubt with most areas of your finances, then perhaps you should reach out to a financial advisor or planner that specializes in a comprehensive approach.
The Next Steps
Now that you have an idea of what you are looking for, there are some important concepts and differentiations that will help you navigate the world of advisors.
First, consider how they are compensated. If you’re looking for broad advice, compensation can lead to conflicts of interest, which you might want to avoid – or, at least, be aware of. If you’re looking for specific help, then compensation may present less of a possibility for conflict.
How Are Financial Advisors and Planners Compensated?
In the financial world, advisors and planners are compensated in one of two basic ways.
- By earning commissions for the sale or trade of a specific product.
- By earning flat fees, based on a set rate for the services they provide.
Well, actually… there’s a third way. To make things more confusing, some advisors can receive both commission and a fee when working with clients.
In the cases where an advisor is earning a commission, it’s important to understand that the advisor or agent only needs to prove suitability when recommending a product. This means that as long as the product is suitable – based on your financial situation – they can offer it, even if it means it’s not the “best” one for you.
This also means that once they prove a long list of products are suitable for a client, they’re allowed to push a product that will make them the most commission. Because of this, a client or prospective client should ask these professionals how they are compensated for each product. As you can imagine, if an agent is going to make twice as much money pushing one suitable product over another, that creates a conflict of interest if a client is expecting to buy the “best” one.
Knowing compensation helps you navigate through these possible conflicts. Here’s a quick example using life insurance:
Let’s say you and your agent decide you need a term policy with $1M of death benefit for 20 years. There are dozens of reputable companies that offer this product. When you narrow the list down, there may be very little difference between these choices, besides what you will pay for them, and what the agent will make in commission. If all other things are truly equal, then it seems the product that costs less would be the right choice. The agent may make twice as much commission for a product that is much more expensive. Without knowing that, you might only be offered the product with the higher commission. And, to make matters worse, the agent doesn’t even have to mention the less expensive options.
The same scenario applies to working with commissioned advisors to purchase investment products.
If you’re not comfortable navigating through these possible conflicts, I’d recommend getting advice from a Fiduciary advisor, who is obligated by law to act in your best interest. More on the Fiduciary standard coming up.
What Is a Fiduciary?
On the other hand, let’s say you decide you’re looking for a broad range of advice. In this case, you should search for a comprehensive financial advisor or financial planner. These advisors will consider all areas of your financial landscape when making suggestions. Because they offer a broad scope of advice, they’re required to avoid all conflicts of interest and are held to the Fiduciary standard, which requires them to put the clients best interest first (even ahead of their own).
When looking for this type of advisor, I recommend simply asking them, “Are you a Fiduciary?” I’d also ask them about all of the possible fees involved in their engagement with clients.
Keep in mind that some advisors are considered Fiduciaries, but still have the ability to charge commission for products. Although, in these cases, sales are incidental to their business, it’s important to understand how this might play into your relationship. These hybrid cases are usually present with larger financial institutions like Morgan Stanley and Merril Lynch.
Now that you have an idea of the key differences between advisors, and the direction you might want to take, here are some other questions you should ask the candidates.
- Ask how often you should expect to meet, and whether or not they are accessible to you whenever needed.
- Ask who they use as a custodian, or where your money will be held.
In some cases, you will transfer large amounts of money to the advisor, so it’s important to know the financial institution where it’ll be held. For instance, most independent advisors, like Bautis Financial, work with a custodian where the advisor helps them open their own account and the advisor is attached to the account to make trades only. This way, the advisor can help the client manage their portfolio without having any access to the funds.
As you can imagine, these questions just scratch the surface. But this is a good start.
This process can be daunting at times, and it’s my belief that too many people get discouraged or intimidated and either give up or wait too long to find the right fit.
With that said, you may still have concerns or questions about finding the right advisor. Feel free to schedule a hassle free consultation with our advisors. Good luck with your journey and let us know if we can help.