There are few things more stressful in life than your personal finances. Saving for retirement, college costs, debt payments, and of course, taxes are just a few of the areas that can cause stress. A business has a Chief Financial Officer to manage the balance sheet and help the owner make decisions. So, why not have one for your family? Having someone help you with your financial decisions is not a bad thing. But, with so many choices and advisors out there, how do you choose the right one for you?
Before you start looking for the right advisor, you first need to know what part of your finances you need help with. Besides investment advice, financial planning can focus on many other areas, such as education, retirement, tax planning, risk management, and estate planning. So, if you are solely focused on retirement and investing, a CRFA (Certified Retirement Financial Advisor) might make sense for you. Or, if you want to look at a combination of areas and how they affect each other, a CFP(R) (CERTIFIED FINANCIAL PLANNER™) or PFS (Personal Financial Specialist) would be better. In addition, CFPs are bound by the fiduciary standard of care, meaning that they are required to always place their clients' interests above their own. It is essential to understand what aspect of your finances you are looking to improve, along with a financial planner’s strengths and weaknesses.
You will need to determine what type of advisor would best suit your needs. There are traditional (in-person) financial advisors, online advisors, and robo-advisors. Robo-advisors are an online, easy, low-cost investment management tool. You’ll answer several questions about your goals and risk tolerance, and the computer will set up your portfolio based on algorithms. This service usually offers the lowest fee but no human interaction.
Online advisors are similar to robo-advisors, where you typically set up your investment portfolio the same way. However, they usually have a team of financial planners available via phone or email to help you with questions. Some pair you with a specific advisor; some don’t. There is usually a minimum investment requirement, and the annual fees are higher than a robo-advisor. This is due to having the ability to talk to someone about questions or concerns you may have.
Traditional financial advisors are the most holistic of the three options and the only type that meet in person. A traditional advisor should know the ins and outs of their client’s finances, so they know how to advise them. In addition, they will work with your other advisors (accountant, attorney, etc.) to craft the best plan for you. But, working one-on-one with a financial advisor comes at a cost, which is higher fees.
All three have their pros and cons. A robo-advisor can be an excellent choice to manage your money, especially as you’re just getting started on your investing journey and your needs are relatively straightforward. However, as your needs become more complex, it makes sense to consult a financial advisor who is invested in your own success to receive the best advice possible.
The three primary ways financial planners are compensated include fee-only, commission, and fee-based. Fee-only advisors are paid directly by clients. If they manage your investments, they may charge an annual percentage of your assets. Some fee-only advisors are starting to charge annual retainers that encompass all the services they provide. Fee-only advisors do not earn commissions for placing trades or selling investment products or insurance. If they’re managing your portfolio, they’re required by law to serve in a fiduciary capacity. This means they must always act in your best interests. If a situation arises that may present a conflict of interest, they’re required to disclose this conflict to you. They may charge a fixed fee or an hourly fee for creating a personalized financial plan. However, if they’re not managing investments, they’re not legally required to act in a fiduciary capacity. That’s why you may want to limit your search to a CERTIFIED FINANCIAL PLANNER™ practitioner. These financial planners earn their certifications by being experienced financial professionals who have passed a rigorous financial planning examination and agree to uphold the highest integrity, accountability, and client service standards.
A commission-based advisor’s income is earned solely on the products they sell or the accounts they open. Commission-based advisors can be fiduciaries, but they don’t have to be. They must follow suitability rules, which means they need only to sell products suitable for that client. However, how do you know whether the product you are offered is the best product for you, or the most profitable for the advisor? This is a great question and one of the reasons most advisors are moving to a fee-only or fee-based practice. Fee-based is a combination of fee-only and commission. Advisors typically charge an AUM (Assets Under Management) fee for the investments they manage. In addition, they can earn a commission for other products they feel are appropriate for the client, such as insurance, annuities, brokerage accounts, or financial plans. However, advisors in this role must be careful. As fiduciary, they need to act in their client’s best interests. So, any conflict of interest with commissions received must be disclosed to the client, such as Form CRS (Client Relationship Summary).
I feel the best way is to ask a friend or family member whom they work with for financial planning. Family or friends will not refer their advisors to you if they don’t like or trust them. If they can’t help, or if you want to keep that area of your life private, there are quite a few websites that can point you in the right direction. You can use financial advisor search engines to look for specific criteria about the type of advisor you need. And be sure to check their credentials. Look them up on BrokerCheck by FINRA or SEC Investment Advisor on the Securities and Exchange Commission website. These sites will list how long an advisor has been in the business and if there are any complaints against the advisor. A complaint is not a reason to automatically rule someone out. However, if someone has multiple complaints, you may want to look elsewhere. Sit down with a couple of advisors to see which one suits you best. You want to find someone that listens to what you are looking for and helps you achieve short- and long-term success.
Money and finance are part of everyone’s personal life. When you start working, you think about when you can retire. When a child is born, the parents start to budget differently and begin thinking about college. And nobody wants to give the government more than their fair share in taxes. Ben Franklin once said, “If you fail to plan, you are planning to fail.” Financial advisors are there to help you put a plan in place, financially, so you don’t fail. It is a matter of figuring out whom you want to work with and in what capacity. It’s worth devoting time and effort to finding a financial advisor you can trust and will want to work with for years to come.
Allegheny Financial Group is a Registered Investment Advisor. Security offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
Author: Chris P. Wieder, CFP® Associate Financial Advisor | Allegheny Financial Group | December 2021