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Do It Right: How to Evaluate a Financial Advisor

Finding the best way to evaluate a financial advisor for your unique situation can prove to be quite the challenge. Getting a friend or colleague’s recommendation can be a good place to start, but just because a financial advisor works well for someone you know doesn’t mean you’ll have the same favorable results. You want to hire the help that will best perform for your needs, so be sure to keep these key points in mind when deciding on someone!

Business woman with headset

How Are They Paid?

Although the actual performance of a financial advisor should be more important than their pay, it’s in your best interest to know the different ways that they’ll be compensated for their work. Advisors get paid by several different means including sales commissions and a number of different fees. There are a few different commissions that your advisor can collect: front-end commissions, sales commissions and ongoing trailing commissions. It goes without saying that the cost of the commissions are in direct response to your behavior and your profits are reduced. There are still other ways to evaluate a financial advisors that is paid hourly, by a percentage of the assets invested or with a flat ongoing fee. There are some that only accept a fee and others still that work off of commissions. Before you evaluate a financial advisor and hire them, their rate should be spelled out clearly for you.

  • Don’t commit to more than you can afford! You’ll only cause more issues for yourself down the road.

Is There Conflict of Interest?

This point ties in closely to your advisor’s payment method. It’s extremely likely that your prospective financial advisor works for a firm that gives them extra compensation for pushing certain products. This could mean that they would push those certain products for you to purchase just to make some extra money. Traditional brokerage firms and wire houses are more known for this behavior than Fidelity Investments or The Vanguard Group. Of course this doesn’t mean that every suggestion a prospective advisor could make is a bad one, but you should be weary of the information they provide just in case they have some ulterior motives.

  • Make sure to ask any questions you might have. You want to hire someone that you can trust with confidence!

Are There Other Clients Like You?

When you evaluate a financial advisor, you should find out if they have experience working with other people in similar situations as you. If that advisor has most of their experience working with older people nearing retirement age and you’re a young person just starting out in this avenue, it might be best for you to find a different advisor elsewhere.

What Can They Do?

What kinds of services does the advisor specialize in? It’s typical of most advisors to offer financial planning, retirement planning and investment advice, but if you require some sort of tax advice, you might want to double check that the financial advisor can address your questions before you go through with hiring them.

  • Even if it takes longer, evaluate a financial advisor with all of the expertise you desire for your unique portfolio. There’s no need to rush into a poor decision.

When Will I Hear From Them?

You’ll want to determine when you plan to meet with your advisor straightaway. This will help you best map your communications so that you have all of your questions addressed and you don’t spend more money than necessary. Find out which ways your financial advisor likes to discuss with clients and decide together what will work best for your business relationship.

Are They A Fiduciary?

Fiduciary financial advisors provide advice and guidance to their clients that are within the client’s best interest without prejudice. Suitability standard financial advisors on the other hand work for broker dealers and firms that sell products. The suitability standard simply requires that the products offered to a client are “suitable”.

  • This topic is highly debated and requires a lot of extensive research on your part. Again, your direct communication when you evaluate a financial advisor should be the main determining factor of your final choice.

Are They Professional?

Certifications from the CFP and CPA are glimpses of an advisor’s commitment to their work that look good on their behalf. These certifications require substantial amounts of continuous education and you certainly want to deal with a person that takes their work and profession most seriously.

  • Even more important than any certificate of excellence is the level of knowledge and expertise one has. You can have all of the schooling in the world and still be incompetent in your field of work. Don’t be swayed simply by certification: ask the right questions and get to know your prospective advisor for what they’ve done.

After reading all of this, it’s clear that the decision to evaluate a financial advisor can be a whirlwind of a process. You want to work with someone that can address your concerns with the skill and know-how it takes!