If the words "personal finance" give you a headache, you're not alone. But the process of finding an honest person who can help you with your financial planning is even more stressful—especially if you don't know what to look for in a financial advisor. If you don't know what to look for, you could end up with someone who doesn't work in the client's best interests. It happens all the time.
In fact, happened to me just two weeks ago when I realized that my advisor of three years was not looking out for me at all! He charged a hefty commission and advised me to take financial risks that I simply could not afford.
You are probably reading this because, unlike me, you have decided to do your homework before trusting a complete stranger to give you financial advice. (Hey we can't all get financial advice from Suze Orman, right?!)
Good for you! It's crucial to do your due diligence and find out exactly what to look for in a financial advisor. I'll tell you what to seek and what to avoid during your search for a financial planner so that you don't have to learn the hard way. I'll also share some super useful resources that will make your search for a qualified professional a breeze.
License and Qualifications (CFP)
Many financial planners present their clients with fancy-sounding "credentials," such as "Retirement Specialist" that doesn't mean they are a certified pro at managing your money. When you're on the hunt for a financial advisor, look for the acronym "CFP." It means "certified financial planner."
If someone is a certified financial planner, that means that they've passed the Certified Financial Planner Board of Standards test, so they've proven that they know the most important specific details of personal finance. CFPs dedicate themselves to continuing education on insurance and employee benefits along with investment, tax, retirement, and estate planning. A legit financial advisor will have proof of their credentials, and they should offer it to you before you even ask for it.
A Code of Ethics
As I'm sure you know, trust is a crucial component of a client's relationship with their financial advisor. That's why you need to select financial fiduciaries—they are held up to the highest ethical standards in the industry. I realized too late that my financial advisor was not a fiduciary—don't make the same mistake! To work with a financial fiduciary, you'll need to work with either a firm or an individual professional. Keep in mind that broker-dealers are not fiduciaries.
If you want to hire a fiduciary firm to do your financial planning, make sure they are Registered Investment Advisors (RIAs). If you're going to work with a fiduciary freelance or individual professional, look for the term IAR, which means "Investment Advisor Representative."
If you do not hire a registered investment advisor or representative, then your financial advisors are not fiduciaries, and they are therefore not required to act in their client's best interest. If you can't find a financial fiduciary, make sure the financial advisor abides by the same code of ethics, as if they were a fiduciary.
A Clean Compliance Record
Finding a financial fiduciary only means something if the firm or individual advisor abide by their ethics requirements. Make sure they have always stuck to their guns by checking that their compliance record is clean.
After all, who wants financial advice from someone who can't follow the fundamental rules on ethics that they have promised to uphold?
Honesty and Transparency
Trustworthy financial advisors have nothing to hide. While you need to do your due diligence no matter what they tell you, they should be willing to offer you details about their services and history.
If a financial advisor has ever been investigated or audited by authorities—even if they were innocent, your planner should tell you about it up front, without you having to ask. Rather than making beautiful-sounding promises about the millions you will make when you allow a financial planner to set up your mutual fund, your prospective financial advisors should have their clean compliance record already at hand to show you.
Make sure they are honest about their fees and expenses, which brings me to the next issue on what to look for in a financial advisor...
No Unrealistic Promises
If your financial advisor makes a promise that sounds too good to be true, you should probably look elsewhere.
A reliable and trustworthy financial advisor won't promise to turn you into a gazillionaire by the end of the year. They won't offer you the best life insurance policy before they've checked out your assets. That's what a bogus advisor does.
How do they get paid?
Whether you select a certified firm or individual professional, you will have to pay your financial advisor for their skilled work. Make sure you have a solid understanding of how your financial advisor makes their money—certain types of payment plans could take away the incentive for your advisor to do honest work for you.
If your financial planner is fee-based—whether they charge a flat fee, an hourly rate, or an annual rate—a reliable financial planner should never ask for the entire payment up-front.
Do they charge a flat rate? An hourly rate? An annual rate? Some financial experts charge asset-based fees, which mean that they ask for a percentage of your assets. This is also fine.
However, if they get paid via commission, you should probably look for a different agent. Commissions are for salespeople who want to take your money, not for people who are supposed to help you reach your financial goals. Getting paid a commission means that their primary job is to sell their service to you rather than perform it.
Take full advantage of the fact that we're living in the golden age of internet reviews. Even if your financial advisor is completely honest and upfront with you, they will be at least somewhat biased and learning about the experience of their past and present clients is an essential supplement to your research. Don't just look at how many stars the financial advisors have; spend time reading reviews. And do so with a very critical eye. Sometimes, a client won't be happy with their financial advisor's services, even if the firm or agent did in fact act in the client's best interest.
Services such as estate planning can be a highly emotional experience for some people, for example, and they might not like the advice their financial planner gives to them. But that doesn't mean it was bad advice. On the other hand, if there seems to be a pattern of people complaining about receiving poor financial advice, you might want to back away.
When it comes to financial planning, anything can happen. That's why good financial advisors keep you informed on the status of your assets. Your financial advisor should keep in touch with you and send you all reports, emails, transcripts, and news that are relevant to the performance of your assets.
Furthermore, financial advisors need to keep you in the know about their business as well. If, for example, they get investigated while giving you financial advice, they need to inform you of that.
When you find a financial planner, don't sign anything until you talk to them first. Whoever you hire will be managing your money, so it's crucial for you to gauge their reliability in a face-to-face conversation while keeping in mind everything we've already discussed on what you need to look for in a financial advisor.
Do a background check. Ask them if they've ever been convicted of a crime and ask them if they, or their firm, have ever been investigated.
In fact, good financial advisors should be willing to offer this information to you without you asking. They should tell you whether they've ever been investigated, even if they have never done anything wrong.
It is absolutely crucial that you find out if they have a good track record before taking their financial advice. Ask them for references and ask them, specifically, if there is anything you should know about their work history.
If you feel that they dodge any of your questions, ask them again until you get a satisfactory answer.
Automated Financial Planning and Robo Advisors
If you need help with personal finance but don't need help with life insurance or estate planning, you may want to consider using a financial planning app instead of a human financial planner. There are several well-trusted and highly effective apps that help people manage stocks, budget, and save money.
There are also robo-advisors that use algorithms to provide objective financial advice, so you can rest assured that they are looking out for the client's best interests. But you should be aware of these programs' limitations, and each service varies from the next.
You'll also have to pay attention to robo-advisors' fees, just as you would with a human advisor. Some require you to have a minimum account balance, which can be anywhere between two to six figures.
Robo-advisors are becoming increasingly popular, and the programs are growing increasingly robust. It wouldn't be surprising if they start replacing human financial advisors at some point in the future. That may be bad news for human financial planners, but it would certainly make life easier for everyone else who is trying to figure out what to look for in a financial advisor.
Use Search Engines
There are a number of resources out there where you can find a qualified, enrolled agent with a reputation for working in the client's best interests.
These are great resources to use when you already know what to look for in a financial advisor.
Check out the National Association of Personal Financial Advisors (NAPFA). Financial advisors on the NAPFA database are all fee-only financial planners.
The Garrett Planning Network is another useful resource you can use to make nationwide searches for fee-only financial advisors.