Retirement planning, college savings, and other major financial decisions can be stressful and uncertain – especially for those without a lot of investment- or tax-specific knowledge. Fortunately, financial advisors can help you navigate these decisions to achieve your goals – the challenge is finding an advisor you can understand and trust.
In this article, we’ll look at whether you need a financial advisor, different advisor credentials, their varying responsibilities to clients, fee and commission structures, and much more to help you find the best fit for your requirements and avoid common pitfalls.
Do You Need a Financial Advisor?
Financial advisors can help manage your money and plan for the future. According to Statista, just over a third of Americans said they worked with a financial advisor in 2022, which was a slight decrease from the prior year. But a separate survey from intelliflo found that nearly three-in-five Americans want financial advice but don’t know how to access it.
Financial advisors can help with a broad range of things, including:
- Saving enough money for retirement.
- Building an emergency fund.
- Saving for a house or other large purchase.
- Saving for a child’s education.
- Research and recommend investment opportunities.
- Manage your investment portfolios.
Determining whether you need a financial advisor involves evaluating your financial situation, goals, and comfort level with managing your finances. For example, an unmarried person with a simple employment situation might be comfortable with their employer’s retirement plan, whereas someone with a high net worth and a large family may have different needs.
Credentials & Designations
First, you should only work with regulated advisors and companies. People can call themselves financial advisors and not be registered with the SEC or their state’s investment division. Unregulated “advisors” is a big red flag.
Real financial advisors must pass an exam and register with regulators before providing any investment advice or managing portfolios. While there are no specific educational requirements beyond this exam and registration, advisors may hold various credentials from third-party industry groups signaling their expertise or qualifications.
The two most popular designations are:
- Certified Financial Planner (CFP) – Requires passing an exam covering financial, tax, estate, and retirement planning, as well as insurance. CFPs must also adhere to a code of ethics and complete continuing education requirements.
- Chartered Financial Consultant (ChFC) – Similar to the CFP, the ChFC focuses on core financial advisor subjects but with additional coursework on financial planning. Unlike the CFP, there’s no comprehensive court exam for the designation.
In addition to these credentials, financial advisors may hold other financial designations like Chartered Financial Analyst (CFA) or even a Certified Public Accountant (CPA). These designations don’t necessarily imply expertise in financial planning, but they do suggest proficiency in financial analysis, investment management, accounting, taxes, and other related areas.
Fiduciary vs. Suitability Standards
Financial advisors have different responsibilities to their clients depending on their registration, credentials, and employer. When choosing an advisor, it’s essential to understand these differences and identify potential conflicts of interest. These conflicts could end up costing you thousands or tens of thousands of dollars in fees and opportunity costs over a lifetime.
Financial advisors typically follow one of two standards:
- Fiduciary Standard – Fiduciaries are legally and ethically required to act in their client’s best interests. If you are working with a Registered Investment Advisor (RIA) or Certified Financial Planner (CFP), there’s likely a fiduciary standard in place. The advisor must act in your best interest, even if it means earning less.
- Suitability Standard – Brokers and other non-fiduciary advisors are held to a less stringent standard known as the “suitability standard.” These advisors must ensure that any recommendations are suitable for a client’s financial situation, objectives, and risk tolerance, but they don’t have to put client interests above their own.
Fees & Commissions
Financial advisors also operate under many different business models.
Many financial advisors earn money through commissions, where they receive compensation from the sales of a product. For instance, a mutual fund with a front-end load might provide a 1% kickback to advisors who purchase the fund on behalf of their clients. Insurance products and annuities also work under the commission payment structure. The advisors working under this structure typically adhere to the Suitability Standard.
On the other hand, fee-only financial advisors have the most straightforward compensation arrangements. In exchange for a one-time or regular fee, they provide unbiased financial advice and/or manage your portfolio. Perhaps the most common type of fee is assets under management. This is where your advisor charges you a small percentage fee on the value of the assets they manage annually. These are typically advisors following the Fiduciary Standard, acting in their client’s best interests without worrying about fund-specific fees.
Questions to Ask an Advisor
Are you a fiduciary?
Financial advisors adhering to the Fiduciary Standard can help avoid the conflicts of interest associated with broker-dealers and insurance sales that only adhere to the Suitability Standard.
How do you make money and what are your fees?
Financial advisors who charge a commission aren’t inherently worse than fee-only advisors, but knowing how advisors make their money can help you watch out for potential issues.
What is your experience and credentials?
As with fee structures, credentialed financial advisors aren’t always better than those without credentials. But they can help ensure advisors follow certain best practices.
An advisor’s experience – broadly or in certain areas – may also be an important consideration. For instance, you might want an advisor with experience in college savings or estate planning if you have children or a strong investment manager if you have a large portfolio.
What services do you provide?
Financial advisors may specialize in specific areas or only offer a few services – especially smaller independent financial advisors. If you need a certain service, it’s a good idea to make sure that the advisor you’re considering can provide them.
How do you help clients with taxes?
Taxes play an important role in both investment returns and other areas like estate planning. Advisors with tax experience can help ensure that you’re not overpaying and even help execute savvy strategies like tax-loss harvesting.
Red Flags to Watch For
Financial advisors must adhere to strict rules and regulations, as well as disclose any conflicts of interest and previous disciplinary actions. You can usually find all this information on Form ADV, which is accessible via the SEC’s BrokerCheck platform.
When reading Form ADV, it’s a good idea to check Item 7 to identify any affiliations that could create a conflict of interest, Item 8 to spot potential conflicts of interest with internal trading policies, and Item 11 to find any previous disciplinary actions.
The Bottom Line
Financial advisors can help manage your investments and plan for the future, but selecting the right partner can be a confusing and intimidating process. By following the tips we’ve covered above, you can ask the right questions, better understand what type of financial advisor is right for you, and avoid common pitfalls by knowing the red flags.
If you are looking for an advisor specializing in retirement income, Snider Advisors can help you establish a covered call strategy capable of generating more income than dividends alone while avoiding the interest rate risks associated with bonds. Learn more today!