Adebola Alabi
Financial advisors help people with their financial planning, by working with you to set financial goals, and they guide you in deciding, when to save, how much to save, how to handle debt, and when/how to invest to reach your financial goals.
Choosing a financial advisor is a significant decision, yet some don’t consider doing it, while others give it less thought. If you choose the right financial advisor, he or she will protect
Here are some important points to consider when choosing a financial advisor.
1. Is he a Fiduciary?: By definition, a fiduciary is an individual or organization who manages assets on behalf of another person or entity. Fiduciary financial advisors hold a relationship of trust with their clients and abide by their fiduciary duty. The fiduciary duty is an ethical obligation to act solely in someone else’s best interest. When someone acts as your fiduciary, they are required to act in your best interest. They put your interest and well-being above profit. Unfortunately, some financial advisors are salesmen, and they will use several tactics to convince their clients to act in a way that will favor them so that they can make money off the clients. Salespeople/Stockbrokers are not fiduciaries. So, you have to make sure that your financial advisor is a fiduciary.
2. How does he make money: Financial advisors are rendering you a service, and they will get paid one way or the other for the services rendered. You want to know how they get paid because it can influence how they guide you to make decisions. Stockbrokers sell products (mutual funds, stocks, annuities). Financial advisors provide investment advice and other related financial services. There are three basic types of advisors based on how they are paid: commission-based, commission & fee-based, and fee-only.
– Commission-based: Commission-based advisors (brokers, insurance agents, registered representatives) sell financial products such as mutual funds, annuities, and insurance and receive commissions on those products. They are often employed by large financial institutions, and their sales figures influence their pay. As the name suggests, they make money through commission they get from selling financial products… so they may be influenced to sell bad advice to you, just to make their sales figures. You don’t want that because of the obvious conflict of interest. As a result, there is a tendency that the need to make their figures may influence their recommendations for you.
– Hybrid of Commission & Fee-based: These advisors are typically affiliated with a brokerage company, and they are licensed to sell investment products and receive commissions as a result. However, they also provide financial planning for a fee. They also have conflicts of interest because they may be tempted to recommend financial products to you so that they can get commissions in return.
– Fee-only: This is the best type of financial advisor that I recommend for financial planning and/or asset management. Fee-only advisors have a fiduciary duty to act in the best interest of their clients. They only make money through flat fees, either by hourly rates or a percentage of the assets that they manage for you. They are not paid based on commission on product sales, so they are not influenced to sell bad products so that they can make more money.
3. Verify advisor integrity & credentials: This is like performing a background
– Credentials: There are several licenses and certifications an advisor can have: CFP (Certified Financial Planner) CPA (Certified Public Accountant), and ChFC (Chartered Financial Consultant). The CFP (Certified Financial Planner) is generally considered the gold standardin the industry. Advisors must have several years of experience, take an extensive course, and pass a six-hour exam to become a CFP. Once certified, they must complete continuing educationand are held to strict ethical standards. A good credential to look for is the CFP or certified financial planner. CFPs are advisors who have met extra education and experience requirements to better serve their clients’ holistic financial planning needs
– Experience: How long have they been in practice? What was their previous experience? Education is important, but advisors also need to have experience in dealing with real-life financial situations.
– Ethics: Honesty, integrity, no criminal records, etc. CFP Website: Disciplinary action, bankruptcy history.
4. Verify their service offering: What do they bring to the table. How will their service benefit you? What financial planning services do they offer? They have arrays of services – Tax planning, Estate management, Investment planning, Debt management, and so on. You need to verify the service that they offer and ensure it will be beneficial to you and also find out how specifically they will work to deliver those services to you. How will they communicate with you? Is it verbal, face to face, telephone, and Skype? There is non-verbal communication in the form of email and reports. What information will they give to you? The most important report documents your performance on a monthly or quarterly basis. Other reports document holdings, transactions, and receipt of income.
5. Interview multiple advisors. You are going to pay for the service, so please shop around and interview multiple advisors before you choose one. (At least FIVE) From talking to different advisors, you will have more ideas about what you are looking for and who you are comfortable working with. Use the following as a guide when hiring a financial advisor:
– How will they help you?
– What is their investment strategies?
– How will they communicate with you?
– What type of returns do they typically make?
– How do they measure success in a client relationship?
– What resources are they going to make available to you?
– What is their background and expertise?
Conclusion
Getting a financial advisor is a very important decision that can make or mar your financial future. Your financial advisor should watch out for your interest, he should provide advice that will be beneficial to you and help guide you through savings, investing, debt and wealth management decisions. If you hire the right person, they will help save you money; if you got a wrong one, they will cost you money and hurt your finances. There are plenty of financial advisors out there; there are honest ones as well as deceitful ones. It is your responsibility to verify and vet any financial advisor before you hire them.
