Those who hawk their services as a financial advisor abound in an increasingly aware and sophisticated marketplace. You're probably wondering how one can distinguish a true financial advisor from the numerous financial service types competing for a finite pool of business. Well, it certainly helps to ask the right questions and have an understanding of what you, the client, wish to accomplish. This article contains a brief overview of essential selection criteria in order to help you with your decision.
Financial Advisor of What?
Clients have different and sometimes competing needs. One client may seek counsel on retirement planning and another may need counsel on planning for education. There may be another client who needs advice on a charitable remainder trust. Therefore, it is important to ask the right questions when meeting with a potential financial advisor.
What is the advisor's specialization and how long has he or she been in practice? Will you we working with the advisor exclusively or with a team? What is his or her investing approach? Is it consistent with what you, the client, wish to accomplish? What is the source of returns? Income? Capital gains? What are the tax implications of the advisor's strategy? Does the advisor understand your objectives and constraints, and any unique circumstances? How does he or she explain risk tolerance? These are all questions that should be answered in accordance with your investment preference, strategy and time horizon.
What Is the Advisor's Professional Background and Education?
Financial advisor is a general heading with many subspecialties. There is a broad range of credentials subsumable beneath the rubric of "financial advisor." Each credential speaks to different areas of competence. The advisor should be able to explain in plain language his or her financial education and how it informs his or her thinking and practice. Here are some examples:
- Series 7 : a general securities representative is paid a commission for trading stocks and bonds. The exam covers basic securities types and market regulations. A broker/dealer must sponsor the candidate. No college degree is required. Annual firm element continuing education is required as is the triennial regulatory element requirement.
- Series 65 : one completes this exam to operate as an investment advisor representative in certain states. Certain credentials exempt the financial advisor from this exam requirement such as the CFP® and CFA described below. The exam addresses retirement planning, portfolio management and the roles of a fiduciary.
Licensed by the state, such individuals may sell life, health and disability insurance and annuities. Agents are paid by commission. Biennial continuing education is required and varies by the state in which he or she is licensed
Chartered Financial Analyst (CFA)
Advisors who are charterholders must be college graduates, have four years of relevant work experience, pass three sequential rigorous exams in financial markets, products, financial accounting, analysis and individual and institutional portfolio management, belong to the conferring body, the CFA Institute and subscribe to its Code of Ethics and Standards of Professional Conduct. CFA charterholders are considered bearers of the gold standard in financial services.
Certified Financial Planner™ (CFP®)
Taking a more holistic approach to advice, CFP® Professionals are college graduates with three years of relevant work experience, complete applicable financial planning coursework and pass a two-day 10-hour exam that covers financial planning topics such as education, insurance, investment, taxes, employee benefit and estate planning. Biennial continuing education (30 hours) is required as is adherence to its Code of Ethics and Professional Responsibility and Rules of Conduct and Financial Planning Practice Standards.
Chartered Life Underwriter (CLU®)
A designation with a focus on individual and business insurance planning, successful designees are college graduates, have three years of qualifying work experience, complete eight courses and corresponding exams in the areas of insurance and financial planning and subscribe to The Code of Ethics and Procedures of The American College, the conferring body. Biennial continuing education of thirty hours is required. Chartered Life Underwriters typically hold an insurance license.
Chartered Financial Consultant (ChFC®)
Also conferred by The American College, this designation requires successful completion of eight examinations with a focus more on financial planning. Work experience, ethics and continuing education requirements are the same as those applicable to Chartered Life Underwriters.
Certified Public Accountant (CPA)
CPAs hold an undergraduate degree or equivalent coursework in accounting, passes all parts of the CPA exam and complies with laws of the state(s) in which he or she is licensed to practice. The CPA typically is more focused on tax planning.
Some Important Questions to Ask
How is the advisor compensated?
Some only proffer advice on a fee-for-service basis (hourly, fixed dollar or percentage of assets under management), whereas others may charge a commission for implementing recommendations (e.g., placing trades). Finally, some advisors charge a fee and commission. Understanding how an advisor is remunerated provides insight into what may motivate him or her.
Does the advisor adhere to a code of ethics or professional standards of conduct?
When asking the advisor about his or her professional and educational background, be certain to ask whether he or she subscribes to a code of ethics. Designees holding any of the licenses and credentials listed earlier are subject to codes of ethics.
How can I learn more about an advisor's background?
The website of the organization or agency conferring the license or designation typically can provide information on the advisor's background including any sanctions for unethical practices.
The Bottom Line
Choosing an advisor is no small task for an investor. Understanding one's own needs and what different advisors do are critical elements in the selection process. Knowing some basic, but important questions to ask helps move the process forward. Financial advice is a profession, just like law or medicine. One would no sooner approach a stockbroker for an elaborate financial plan than one would a real estate attorney for the drawing up of a trust document. Investors who recognize the high degree of specialization in this field will be better served in their search for a competent advisor than those who do not.
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