Picking the right financial advisor isn’t an easy task - and it shouldn’t be taken lightly. After all, you are entrusting this individual with all aspects of your financial life and your peace of mind. The financial products they suggest to you - from ETFs and stocks to bonds and tax strategies - can make or break your retirement income plans.
So before anything else, you need a trustworthy advisor.
The good news is that you can find a transparent and open advisor if you know what to look for.
Before we get to the nuances between financial advisors, you should ask yourself why you want to hire a financial advisor. This question is crucial since your answer will determine what kind of advisor you may need.
Do you need help sorting your cash flow or planning your child’s education financing?
Or do you need something more extensive, such as wealth preservation and management services?
Even if you are planning to invest, you have to ask yourself whether or not you have the background knowledge and modeling equipment to make sound investments. No matter how well you know the markets, advisors tend to have access to funds that aren't available to individual investors. This is especially true for registered investment advisors (RIAs), which we'll cover later on.
But before we into the legalities and essential qualifications, let's look at the key differences between general advisors, wealth managers, planners, and robo-advisors.
A financial advisor can be a wealth manager and vice versa. But it depends on their skill set. You may want to ask about:
Preserving and growing wealth often requires different strategies and expertise than general financial planning. You’ll also want someone who can help with tax mitigation as well as legacy and estate planning.
A financial advisor is a broad term for anyone who helps you manage your finances, while a planner usually sticks to assisting clients to save or invest for specific milestones.
However, a financial advisor can be a planner and vice versa. Keep in mind that while a Certified Financial Planner (CFP) can be beneficial, the CFP designation alone does not hold an individual to a fiduciary standard. Certificates are earned based on an exam that they paid to take - it is tied to legal obligations.
Robo-advisors are AI or automated investing platforms. These are great if you are just starting out but generally come with higher fees and little customization. Commonly advertised as an automated, non-emotional alternative to the traditional advisory firms, robo-advisors are probably more popular because they are convenient. After all, you just answer a few questions about your risk tolerance and investment preferences, and then the algorithm takes over.
However, the more complex your financial situation becomes, the more likely you’ll want a professional and human advisor. In addition to the lack of customization, you may also discover that your robo-advisor has a fee on par with fee-only advisors. As your savings grow, you might consider moving to a financial advisor for this reason alone.
Once you know exactly what you need from your financial professional, you’ll be able to pick a financial advisor that has the skills and resources you require.
In reality, there are three types of advisors: Registered Investment Advisors, brokers, and dual-license brokers.
A registered investment advisor (RIA) is a fiduciary, which means they are legally bound to serve their client's best interest. Period.
A financial advisor or broker gets paid by a third party in commissions. They may have your best interest at heart, but they aren’t legally bound to provide you with the best options. They also don’t have access to the same funds and tools as an RIA. You can never really be sure if they are selling you the best product for your goals.
A dual-licensed advisor is both a broker and an RIA - which gets confusing. Basically, this advisor works for a subsidiary RIA firm, so they are technically a licensed RIA. But they can also sell commissions - sometimes. The problem is, you’ll never know when they are on commission and when they are an RIA. As you can imagine, the wiggle room for potential conflicts of interest here is considerable.
Let's go over an example of how this plays out. Recently, a dual-license firm, Teachers Insurance and Annuity Association, was found to have pushed clients to a specific retirement plan to boost their own profits. While they are technically an RIA, they are also brokers and could switch roles as they pleased - to the clients' detriment.
Ideally, you’ll want to work with an RIA who is not a broker. This type of advisor is under strict regulations to protect you and your best interests. And they simply are able to offer financial products with lower rates and higher returns that are unavailable to regular brokers.
Suppose you want to easily figure out whether your potential advisor is an RIA or a general broker. In that case, you can ask what their qualifications are and what regulation they are licensed under. An RIA will always be registered under the Investment Advisers Act of 1940, but a general financial advisor will be registered under the Securities Act of 1933.
If someone is claiming to be licensed under both acts, they are dual-license brokers.
An easy way to find out where your potential advisor stands is to simply search them through the SEC portal. The SEC allows you to look up financial services professionals with just their name. BrokerCheck, a free platform provided by the Financial Industry Regulatory Authority (FINRA), provides more in-depth information about brokers and RIAs alike.
If you have a financial planner or broker, they are paid via commissions. Some may have a specific payment structure, such as a retainer fee, flat fee, or an hourly rate. Keep in mind that if their advice is “free,” you’re likely paying them on the back-end with commission fees.
A registered investment advisor is usually paid an annual management fee, typically 1% of all assets under management. So if you bring $1 million to the table, they get paid $10,000 annually.
But again, these kinds of advisors are more likely to be trustworthy and may provide you with higher-quality advice and products. This includes commission-free insurance and access to institutional funds with extremely low fees. Such products allow you to earn more from your investments.
Before you sign up with a potential financial advisor, it’s critical to know if they are a good fit for you. A financial advisor should bring you peace of mind, and you shouldn’t be butting heads with them on every topic or potential investment. Otherwise, you’ll be stressed about your finances all the time.
To get started, you'll want to ask them a series of questions about their firm, portfolio management style, and personality:
One important fact to keep in mind is that most RIAs couldn’t display testimonials or reviews until recently. So just because an advisor doesn’t have a review or testimonial doesn’t mean they have no experience or are untrustworthy.
We've talked about the different kinds of advisors, critical designations, and fees. You also now have a list of 11 questions to ask your potential personal financial professional.
At the end of the way, you should be entrusting your investment portfolio to someone you feel is honest and transparent. Whether they are a part of organizations like the National Association of Personal Financial Advisors (NAPFA) or have decades of experience is only part of the picture.
No matter who you decide to go with for investment management or your retirement plans, you should be confident about your choice and feel at ease.
If have any questions about financial advisors, your portfolio, the market, or anything finance-related, call us or shoot us an email today. We'd be happy to help point you in the right direction.
At Encompass Advisors, our fiduciary advisors can work with you to determine a savings or investment strategy built for long-term stability. As an RIA firm, your best interests come first, no matter what.
Book a discovery call with us today to see if we’re a good fit.
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or call me at +1 (828) 884-8840.
