If you’re not an expert in money matters, hiring a financial adviser to manage your money life can be a tough decision. It’s almost impossible to know every financial arena well, because they can be so specialized. Estate planning is completely different from picking the right investments, for example. Managing a portfolio is different from crafting a monthly budget.
If you’re looking for the basics – someone to invest your money, make smart decisions, build a financial plan – one good option is a robo-adviser. A robo-adviser will help you do all of these things based on your goals and risk tolerance, and charge you a modest fee, too. You can get started in minutes online with a robo-adviser and it’s excellent for building a portfolio.
However, if you’re looking for more advanced advice, say, for estate planning, you’ll want a human adviser. Here’s what you should look for when choosing a human financial adviser, why you need a fiduciary and the traits you should demand to find the right one for your situation.
What to look for in a financial adviser
Finding the right financial adviser can take a lot of this weight off your shoulders, but giving someone access to one of the most sensitive parts of your life can be emotionally challenging.
As you hunt for a financial adviser, you’re actually hiring someone to work for you. It’s a job interview, so it’s important to pay close attention to all the answers the adviser gives. And watch out for the “adviser” that a financial company provides to you for free. These advisers are usually riddled with conflicts of interest – they’re more salespeople than advisers. That’s why it’s critical that you have an adviser who works in your interest.
If you’re looking for an adviser who can truly provide real value to you, it’s important to research a number of potential options, not simply pick the first name that advertises to you.
“Speak to friends and family to see who they would recommend and why,” says Bill Van Sant, managing director at Girard, a wealth management firm in the Philadelphia area. Van Sant also suggests contacting your bank to set up an interview with their advisers. This can help you learn about their background, the clients they usually work with, and the types of services they can provide.
“Ultimately, you need to feel confident in the adviser’s competency, objectivity, and their responsiveness to your needs,” says Van Sant. “The adviser-client relationship, like many relationships, is built on trust and communication, so doing the proper due diligence in choosing an adviser should provide long-term benefits and peace of mind for all parties.”
Here are six tips to help you choose a trustworthy financial adviser you can rely on.
1. Find a real fiduciary
The legal structure around who is considered a fiduciary is muddy, at best. Currently, advisers have to act in your “best interest,” but what that entails can be almost unenforceable, except in the most egregious cases. You’ll need to find a real fiduciary.
“The first test for a good financial adviser is if they are working for you, as your advocate,” says Ed Slott, CPA and founder of IRAhelp.com. “That’s what a fiduciary is, but everyone says that, so you’ll need other signs than the adviser’s say-so or even their credentials.”
Slott suggests that consumers look to see whether advisers invest in their ongoing education around tax planning for retirement savings such as 401(k) and IRA accounts. These are complex accounts, and the laws change from time to time, such as with the recent SECURE Act.
“They should prove it to you by showing they have taken serious ongoing training in retirement tax and estate planning,” he says. “In my over 40 years of practice, I have seen costly irreversible tax mistakes because of ignorance of the tax rules, and it is unfortunately still a big problem.”
“You should not invest with any adviser who doesn’t invest in their education. It’s got to be about you first,” Slott says.
2. Check those credentials
Consumers looking for financial advisers should also check their professional credentials, looking especially for well-recognized standards such as chartered financial analyst (CFA) or certified financial planner (CFP). These designations require their holders to act as a fiduciary.
“These individuals have mastered a complex body of knowledge, have passed a comprehensive examination (or in the case of a CFA charterholder, a series of examinations), and agree to abide by a code of ethics,” says Robert Johnson, professor of finance at Creighton University.
Johnson cites part of the code for CFA holders that exhorts them to “act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.”
You can verify an adviser’s credentials at the CFA Institute’s site or the CFP Board’s site. While these credentials don’t guarantee that someone is indeed working in your interest, they do indicate a certain level of education and competence, and those are valuable.
3. Watch who pays the adviser
“How is the public truly going to know what they are going to get when they hire a financial adviser or planner,” asks Scott Bishop, CFP, and partner at STA Wealth Management. “The financial industry is not a strong ‘profession’ in that when you see a doctor or lawyer, you kind of know what you will get – even though quality and expertise may be different among firms.”
Bishop notes the differences between the advice offered by wirehouses, insurance agents, independent broker-dealers, and independent registered investment advisers.
Some salespeople are posing as advisers, especially those employed in a company where the main business is not advising clients, such as an insurance company or a fund management firm. In such cases, the adviser is often just selling you the company’s products and services.
And while you may be more likely to find unbiased advice from an independent adviser, you’ll still want to be careful. Even independent advisers can end up being salespeople for a company.
A few questions you can ask include the following, says Brian Walsh, CFP, manager of financial planning with SoFi, a personal finance company: “Do they earn commission on insurance sales? Do they earn commission on stock transactions? Are they affiliated with a financial company that offers proprietary products?”
So be very careful around an adviser that you’re not paying for service. As the old saying goes, “He who pays the piper calls the tune.”
4. Look for fee-only advisers
One way around the conflict of interest in the financial industry is perhaps the most obvious: you need to find an adviser who works for you and is paid only by you and other clients like you. Of course, that means money comes out of your own pocket, but you’re likely to come out ahead.
The reason is that various financial “solutions” such as annuities typically contain huge sales commissions built into the price. When you purchase these products, you’re paying a huge cost for the product on the advice of a conflicted salesperson, but the cost is usually obscured. Ultimately, this advice could cost you much more than the cost of a fee-only adviser.
“The adviser should not be incentivized to push his own agenda but by always doing what is best for the client,” says Brooks Campany, market president at Argent Trust Company in Oxford, Miss. “A fee based on a percent of the assets managed is a safe arrangement. When the client’s assets increase, then the adviser’s fee increases.”
Another approach is to charge a per-hour fee for service. This arrangement may work well for higher-net-worth clients, since they pay for advice once and not for how much money they have.
By sticking with a fee-only fiduciary adviser, you’re paying the piper and calling the tunes. With such an adviser, after an initial consultation you might go back in once a year for a check-up and to have the adviser adjust your plan if your life situation or financial goals change.
5. Search for clarity
Any adviser should be able to explain everything clearly and to your complete satisfaction. If an adviser makes you feel incompetent or unintelligent for asking questions, simply walk away. You can’t build a long-term relationship with such an individual.
“An investor may suspect an adviser is not working in their best interest if they offer only proprietary products, charge fees without explaining why, or actively trade your account without your authorization, especially if doing so on a commission basis, where they get paid for each transaction,” says Van Sant.
If your adviser does any of these things and can’t provide a clear answer why, you need to get out. If you haven’t authorized these transactions and the adviser’s explanation is not clear to your full satisfaction, it’s not enough to get the adviser to stop. You need to find a new adviser.
Many financial advisers make money by obscuring what they’re doing. Make sure your adviser is clear about who’s paying her or him.
6. Find an adviser who keeps you on track
“Competency, humility, empathy are the three characteristics that make an adviser good,” says Campany. “Perhaps the most important characteristic is empathy. Being able to understand your client’s feelings and communicate to them that you are able to address those feelings provides a level of comfort that is incredibly important to your role for them.”
Many consumers underestimate the importance of an adviser for listening to their needs, but that’s not the only way the adviser can ultimately address the client’s specific life situation and goals. A good adviser won’t just tell you what to do, but will also keep you motivated, too.
“A perfect financial strategy on paper means absolutely nothing if you do not implement it,” says Walsh. “That is where the adviser’s understanding of human psychology and behavior comes into play. A good adviser should establish trust, ask probing questions, and consider the unique steps that will immediately help you become better with your money and make progress.”
Sometimes the adviser might have to calm you down after a particularly grueling or exciting time in the stock market or even your life. In the end, the adviser must keep you on track to reach your goals, and sometimes that means being a psychologist.
“In times of market volatility, your adviser should be a steady voice of reason, helping you to avoid emotional decisions that could lead to costly mistakes,” says Sue Christoph, partner at RMB Capital in Chicago.
Finding an adviser is not as simple as going with the person a fund company or insurance broker assigns you. You need to actively search out someone who’s going to work in your best interest, and that takes some time. But in the end you’re probably going to get better advice, save money and earn more while achieving your financial goals. That’s worth the extra legwork in helping you find an adviser that you can work with for decades.
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