How to Hire a Financial Advisor
A Step By Step Guide
When you hear the term "financial advisor" and you clutch your wallet or purse a little tighter, this guide is for you.
Follow these steps and relax your grip. You will be in good hands.
#1: Find A Certified Financial Planner
You would think it takes a certain level of experience or education to use the title “Financial Advisor.” Shockingly, it takes none at all.
There are no regulations regarding who can use the term Financial Advisor. Literally anyone can use it.
That makes it very hard to distinguish one advisor from another. A foundational place to start is requiring the Certified Financial Planner designation.
The CFP designation indicates a certain level of education and experience has been met. Similar to the designation “MD” for medical professionals, “CFP” for financial advisors indicates a level of commitment and expertise in the industry.
It is not hard to find one. The CFP website has a Find An Advisor to search by your location or by the help you need.
Of course you can always reach out to us.
#2: Require A Fiduciary Oath
A fiduciary financial advisor has the legal obligation to provide advice in your best interest.
Save yourself the feeling of buyer’s remorse and start with an advisor who you can trust.
A fiduciary financial advisor will walk you through the best options available to you, not the other way around (the best options for the advisors compensation).
Finding a CFP who is also a fiduciary is a perfect match.
Sadly, if you work with a non-fiduciary, the opposite is true. They have no obligation to do what is right for you. When it comes down to financial advice, it is not worth the chance.
The National Association of Personal Financial Advisors (NAPFA) is a membership based organization that require all members to be fiduciaries.
Find a Fiduciary Financial Advisor by using their search tool.
#3: Require Fee Only Compensation
How your financial advisor gets paid manners.
A fee only financial advisor does not receive compensation for selling products or working on commissions. Instead, they work often work on a flat fee or percentage basis.
While products may be needed to implement your financial plan, often the true cost to you is hidden or labeled as “free” if you purchase a product. These tactics just blur the real cost to you.
Requiring your fees to be transparent upfront takes the selling out of your relationship. Fee only advisors do just that.
We take it a step further and implement a Flat Fee Pricing schedule.
#4: Prepare Your Questions
Write down what issues you are facing and the help you are looking for.
It does not have to be long. Maybe just one or two bullet points.
A few examples may be:
I just got married and looking for advice on how to merge our finances and prepare for buying a home/starting a family.
I am close to retirement and don't know if I have saved enough. I'm looking to see if retirement is achievable.
I have been saving in my 401k but really don't look at it. I'm not sure if my strategy is sound or if I need to make changes.
All of these can give an advisor a running start to understand the help you need. It also helps prevent getting into a relationship with an advisor who ultimately does not specialize in the help you are looking for.
#5: Schedule An Interview
Your first impression is often the right one. Taking your time to find the right fit is worth the effort.
Also, contrary to traditional logic, there is very little comfort in numbers. There is no need to shop around just to shop around. A quota of “3” advisors is not needed. Once you find someone you feel comfortable with, jump on it.
Your intuition will be right most of the time. Especially if you follow these steps :)
#6: Ask To See Sample Documents
Are you like us and love spreadsheets and charts? Or do you prefer more simplistic reports?
Ask to see sample documents to get a better understanding of what type of financial plan you will receive. If you get a computer generated, 100 page handout filled with financial jargon, it may not be for you.
If you are looking for help with investing, ask to see what the recommendations and reports look like. If you need help buying a home, ask to see what the analysis will look like.
You will thank yourself later when your advisor reviews the reports with you and you can easily follow along.
#7: Get A Proposal
Review the services and fees upfront.
Get in writing the services you can expect and the terms of the relationship.
At the very least this should come in the form of a client agreement. It will probably be full of legal jargon but at least you will have a frame of reference to ask further questions.
At Derive Wealth, we provide a separate proposal outlining each service you can expect, the costs involved, and the timeline of services.
Regardless of what it looks like, don't just take an advisor’s word for it. Get it in writing.
#8: Get The Total Dollar Amount Of Your Fees
You are not being demanding. You deserve to know!
Knowing what you pay is not just about the dollar amount. It is also about if your advisor is willing to be transparent with you.
Most advisors will be happy to tell you how they get paid. They just won't translate it to dollars.
For example, here is what you may get in response:
"I get paid based on a percentage of the amount of money you invest with me. This aligns our interests. If your investments go up, I get paid more. If they go down, so do my fees."
"This product is free to buy. There is no cost to you. I get compensated by the company directly, but you do not pay anything."
All suitable answers but lacking one thing. The actual dollar amount. Why do dollar amounts matter? It gives you perspective on what your advisor stands to gain.
For example, if you have a $1M investment portfolio, and your advisor charges 1.25% of the balance, it is hard to relate to until you hear the numbers. Hearing 1.25% is different than hearing $12,500.
Same with an advisor working on commission.
For the same $1M investment portfolio, if your advisor recommends an annuity, an average commission is in the 7% range. That's a $70k payday for your advisor that is "free" to you.
Understanding what you are actually paying is a must before starting any relationship.
#9: Ask To Pay Your Fees By Credit Card :)
Who doesn't want credit card points?
With the 2018 tax laws, investment and financial planning fees are no longer tax deductible for most. Why not get some extra benefits with your credit card?
Points aside, there is another reason I highly recommend you pay your advisor directly: it helps keep your fees in check.
Paying by credit card, invoice, or some other direct bill allows you to stay on top of the fees you are paying.
If you do not get a grasp of what you are paying up front, you will never know when your fees are going up or the ramifications of the decisions you make.
Follow these guidelines and you may just find your new best friend. Of course, you can save time and check everything off your checklist right now by getting in touch!