How To Choose The Right Financial Advisor Without Getting Fleeced

by: Neal Frankle, CFP

Summary

Do you even need a financial advisor?

Understand how different advisors work.

The advisor's licenses and designations tell you a lot about what you can expect.

The most important questions to ask when interviewing advisor candidates.

Not everyone needs a financial advisor. Some people spend time trying to find a good fit and never find the right person because in reality, they didn't need one in the first place. On the other hand, some people who think they don't need one, very much do. They waste time, energy and money walking around in the dark because they don't have the guidance they need.

Regardless of where you are on this spectrum, the following post can help you determine whether or not you need an advisor and if so, how to find that person.

What problem are you trying to solve?

Before embarking on your journey to identify the best advisor for you, it's best to be crystal clear on what it is you are trying to achieve. There are many different types of advisors. Each has their own preferences and biases and those preferences and biases very much color the advice they give.

If you are looking for someone to help you pick stocks, a stockbroker or money manager might be the way to go.

If you are looking for an overall financial plan and to have someone hold you accountable to make sure you implement the plan, stockbrokers, money managers and insurance agents are not the best people to ask. You need a financial planner. Also, planners may be able to help you manage your assets in a way that lines up with your ultimate goals. But they are typically not stock pickers.

If you want someone to help you get your spending under control, you don't need a financial advisor; a debt or credit counselor would be the person to meet with.

Having shared this with you I need to provide one important caveat; some people don't know what they don't know until they know it. What I mean is, you may think you need help in one area but in reality you may need the most assistance on something else. For example, you might think your problem is a low return on your portfolio (and that could be the case) but you might be unaware of an even greater problem, which is not having a financial plan. The only way you can find out is if you speak to a number of experts, collect feedback and be open to new ideas.

Designations and Licenses

Once you are clear on your objective, your next step is to understand how advisors really work. And in order to understand that you have to know a little about designations and licenses. The thing is, anyone can call themselves a financial planner or advisor. My sister's cat Archie can even call himself a financial planner. That title means absolutely nothing.

What matters are the designations (sometimes) and the licensing each advisor has. The licenses a person has defines what they can and can't do for you. For example, if you are speaking to someone who is only a stockbroker, they can only sell you commissionable products and they work for their brokerage firm - not you.

That means there is a natural bias for them to maximize their revenue rather than solve your problem. I am not saying stockbrokers are crooks or evil. I'm saying there is a natural and indisputable conflict of interest.

The same goes for insurance agents. In the vast majority of cases, these people work 100% on commissions. Again, this does not mean they are all bad apples. It simply means their main responsibility is to the insurance company they work for or represent - not you.

You could also speak with an independent Registered Investment Advisor. This doesn't guarantee you'll get good advice but it does mean the person you are speaking with has a fiduciary responsibility to put your interests above their own. And since these people are usually not compensated by commissions, there is generally no built-in conflict of interest.

The Complication

As clear-cut as the information above sounds in theory, it gets tangled up pretty quickly in the real world. That's because most advisors have more than one designation. In other words, you could easily meet with an advisor who is a stockbroker, insurance agent and a Registered Investment Advisor. These people wear many hats.

That being the case, how do you know if you are meeting with the right person?

The Solution

You can easily solve this problem by asking a few questions. First, no matter who you sit down with, ask what licenses and designations they have. Are they a stockbroker? Life insurance agent? Registered Investment Advisor? If they hold more than one position, ask them on a percentage basis how much they make from each role annually.

For example, you might meet with a person who is both an insurance agent and an RIA. But if they tell you they earn 85% of their income by selling life insurance, you know that this person's probably going to get you into a policy. If their revenue is reversed and 85% comes from financial planning fees or money management, this also clarifies how this person works.

Other questions to ask

When you first talk on the phone or meet with a prospective advisor, ask them which areas and what kind of clients they specialize in. Next, ask them why.

This is a question that almost never gets asked. But it can tell you what makes this advisor tick and help you understand what kind of person they are.

Your goal is to get a sense of what movitivates this advisor. Are they in it for the money only or do they identify with a certain kind of client and if so,why?

Ask the advisor what potential conflicts of interest they have. Now that you understand the inherent conflicts of interest stockbrokers and insurance agents face, pay attention to how easily this person addresses these matters.

Let me be clear. Every advisor - even fee-only advisors - have conflicts of interest because one way or the other, you are paying them. When you meet with someone who is hesitant to talk about these conflicts, it speaks to character and it may be someone to avoid.

Obviously it's important to understand how much it will cost you to work with this advisor and how the advisor gets paid (two different questions), so ask.

There are a number of other questions you might consider asking and these will naturally occur to you as follow-ups to the questions I've suggested above. Just remember that you are interviewing them and not the other way around. No matter how slick their office or approach is, they need to work hard for a place on your team. If you get a sense that they are not willing to put in that work, move on.

How To Obtain a List of Advisors

Keeping in mind what your main objective is and start talking to people. If you decide you want an overall planner, consider hiring a Certified Financial Planner (as long as they earn most or all of their income on fees rather than commissions). You can use this link to identify CFP's ® nearby.

Having said that, I would not restrict my search to advisors who only live nearby. More and more people are using the internet to do business and there is no reason why you can't use this tool to find the right financial advisor. If you expand your search, it opens up a vast pool of candidates and can help you find a better fit for your specific needs; it can also drive down the cost.

Summary

Financial advisors may have more knowledge about investments and markets than you, but you are still in the driver's seat. Make sure you know what you want from an advisor, be open to other suggestions as you meet with candidates, understand how advisors work, create a list of potential advisors to interview and ask probing questions.

When you walk out of that meeting or hang up the phone, you should feel that the advisor cares about you. They should ask as many questions about you as you do of them. They should try their best to understand your situation and goals rather than spend the entire time trying to convince you how wonderful they are.

Not everyone needs an advisor. But the right advisor for the right investor can make the difference between night and day based on my 30 years experience.

Do you have an advisor? Are they the right one? How do you know? What are other ways to find the right advisor?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Per Gil, please forward to Gil at your earliest convenience. Thank you.