How To Choose a Financial Advisor


If you are in the market for financial advice, chances are you are considering working with a financial advisor. Making the right choice when it comes to financial advice and services can be challenging at times. Information about financial services are often conflicting or contradictory, and it can be difficult to separate fact from fiction. Despite the challenges you might encounter, choosing the right financial advisor can make a world of difference. The right financial advisor will understand your current financial position, long-term financial planning, and outline realistic methods of achieving those goals over time. A financial advisor should want you to succeed. Your success is their success, and finding a financial advisor that is invested in your success is important.

Although choosing the right financial advisor doesn’t have a one-size-fits-all answer, there are some tips we can provide to help you along on your journey. Understand that these tips are general, but should prove helpful to find a financial advisor that works well for your specific situation. Also, keep in mind that the right financial advisor for another person may not be the right financial advisor for you. Although we will stress the importance of word-of-mouth referrals or a direct referral from a current client of an advisor, it is also useful to understand from the beginning that the individual referring you to an advisor may be in a significantly different financial situation or have different needs from you. As such, it is always important to keep your unique needs and situation in mind when making the choice of a financial advisor.

Different Types of Advisors

Searching for a financial advisor you can trust can be difficult since you are putting your future in their hands, but understanding the difference between the types of financial advisors is one area where most people just end up scratching their head in confusion. You aren’t alone in this confusion. There are personal financial specialists (PSF), registered investment advisors (RIA), certified public accountants (CPA), certified financial planner (CFP), Chartered Financial Consultants (ChFC). There are also less specific qualifications that many financial advisors tout, such as being a registered representative or money manager.

In order to clear up some confusion about the different types of advisors that are out there, let’s break down the two main categories of financial advisors that you will run into.

Broker

Brokers are financial fee-only advisors that work directly for a brokerage or insurance firm. Brokers are most often paid through a commission. This has the potential to create a conflict of interest for the broker themselves, who may be incentivized by a commission-based pay structure to make a certain recommendation to the client. Also, note that the vast majority of financial advisors are brokers.

Registered Investment Advisors (RIA)

Next to brokers, the second largest group of financial advisors work for an RIA firm. Under the umbrella of registered investment advisors, there are two types of investment advisors: Independent Advisors and Dually Registered Advisors. There are some key differences between these two entities, but they both are fundamentally different from a broker in that they are not paid through a commission, but rather are usually compensated through an asset-based system such as 1% of the client’s invested assets, referred to as Assets Under Management (AUM).

Aside from pay, there are notable differences in the regulatory expectations for both brokers and investment advisors that you should take long-term care to keep in mind when selecting a financial advisor to work with. Brokers are held to a legally enforceable standard referred to as the suitability requirement, which holds that a recommendation from a broker must be considered suitable for the client. In contrast to this, the fiduciary standard that RIA’s are held to requires that they place a client’s interests before their own.

When choosing a financial advisor to work with it is crucial to know if they are a broker or RIA, and if they are an RIA whether they are an Independent Advisor or a Dually Registered Advisor. The difference between these two categories of RIA’s is critical, as a Dually Registered Advisor can function as both an RIA and a broker. Most RIA’s are Dually Registered Advisors, which presents a challenge for individuals looking for a completely independent financial advisor to guide their financial planning and give investment advice.

Take some time to do some thorough research on your prospective financial advisor. Use the Financial Industry Regulatory Authority (FINRA) tool to determine if your financial advisor is registered as a broker. Registered Investment Advisors must register with the Securities and Exchange Commission (SEC), so you can use the Investment Advisor Public Disclosure (IAPD) tool to verify their credentials. Create a list of financial planners, and check the qualifications of each to ensure you know whether they are a broker, RIA, or both.

Fiduciary Advisors

Fiduciary advisors, such as the team at Bull Oak Capital, are required to place the client’s needs above their own. They do not receive any outside monetary incentives for selling financial services to their clients. All recommendations are strictly for the benefit of the client and are designed to help them reach their goals. Bull Oak Capital specializes in evidence-based planning for multiple scenarios. By looking at all options, we’re able to help our clients navigate through large financial decisions with the comfort of a comprehensive financial plan.

Understanding Fees

Depending on the type of financial advisor you choose, and the individual financial advisor themselves, the fee structure will vary. Regardless of the fee structure, your financial advisor should be forthcoming about the fees associated with their service. In other words, you shouldn’t be surprised at the end of the cost of the service. Take some time to really dive into the fees, and be open about any questions you might have about the fees with your financial advisor.

Brokers are the most common type financial advisor, so understanding their fee structure first is helpful. Brokers are paid on a commission basis, meaning they receive a fee for each deal they broker.[1] While this can result in lower ongoing costs than an asset-based fee system, brokers usually have incentives to steer clients towards investments that generate a higher commission while still meeting the suitability standard.

In contrast to brokers, an RIA is most often compensated on an asset-based system. This means that in general, an RIA will receive a flat percentage of the annual assets of an investment account. Typically, this percentage is lower than the commission received by brokers. With this fee structure, the RIA is being compensated for providing ongoing guidance to an investor over a long period of time. This is typically beneficial to clients that want long-term stewardship of an account.[2]

 

At Bull Oak Capital, we do not receive outside commissions, trading expenses, kickbacks, or any other form of compensation. This is all an effort to ensure to our clients are receiving honest advice. The only fee our firms collects from our clients is the Assets Under Management (AUM) fee. We don’t charge financial planning fees, on-boarding fees, or other ancillary costs. View our financial advising fees page for more information.

Look at Their Clientele

You want to find a financial advisor who understands your financial situation and long-term goals and can continue to work with you over time. One thing that many individuals overlook when assessing potential financial advisors is their client base. If you want to find a financial advisor that understands your needs, look for one that serves similar clients to you. Financial advisors that cater to a specific clientele, such as high-income individuals, will most likely have a better understanding of the financial needs of a new high-income client. At the very least, they will have a demonstrated track record of working with high-income individuals. This can be a helpful strategy to use when narrowing down potential financial advisors for an introductory meeting.

Consider Local

You may think that the location of your financial advisor would have little impact on your final choice of a firm to work with, but this isn’t necessarily true. If your ultimate goal is to find a financial advisor to work with long-term, who understands your situation and can give insight into strategies for maximizing your portfolio, it makes sense to choose an advisor that understands everything about your financial situation. This includes the economic climate you live in.

By choosing a financial advisor that is local to your area, you know they will be keenly aware of local economic variations that might necessitate different long-term investment strategies. While a financial advisor in another location may be able to broadly assess how local economic conditions may affect you, they will probably not have the experience that comes with actually living, working, and dealing with other clients in that same area.

Talk to People In Your Same Situation

Speaking to people in your same situation about who they use as a financial advisor can be immensely valuable. Finding a financial advisor that can understand your unique needs, or has a proven track record for providing financial advice for others at a similar point in their lives, can be a large step forward towards finding the right advisor for you.

In line with this, friends, family, coworkers, and business partners that have dealt with that financial advisor can provide you with intimate knowledge of their experiences. Word-of-mouth referrals tend to be a great resource when combined with the other due-diligence efforts. Some advisors may utilize a referral incentive program, but this shouldn’t necessarily discourage you if the referral comes from someone you trust. Direct referrals carry weight, but should always be tempered with thorough research prior to making a commitment.[3]

Find Someone You Trust

Trust is an integral part of our most valued relationships. Your relationship with your financial advisor must also be built on a foundation of trust, transparency, and open communication. Trust is the single most important asset that a financial advisor can provide. The most obvious reason you should find a financial advisor you can trust is that they will be making decisions with your investments that can have an enormous impact over the long-term. But, a second and equally important reason, is that if you don’t trust your financial advisor you may be less inclined to take their investment advice. This ultimately defeats the point of finding a financial advisor in the first place. As a steward for your financial future, you must be able to trust that they will put your best interests first, even in situations where they may have little or nothing to gain from doing so. You are looking for a financial planner that will function as your finance advocate and help you achieve your long-term financial goals. Doing so requires a certain level of understanding about you, about your financial situation, and about the things that are most important to you.

One of the reasons that it is important to take your time and assess your potential financial advisor qualifications is because there are certain factors that may influence whether you can truly trust your financial advisor. One of these is whether or not your advisor is forthcoming about how they are paid. Whether they are a broker or RIA, their pay structure and their openness about it will be a good indicator of whether they will be forthcoming about other issues. On top of this, the difference in legal standards that these two groups of financial advisors are held to can play a pivotal role in creating a strong relationship built on trust. If you have any doubts about whether a broker has your best interests in mind when advising you, it is probably time to find a fiduciary advisor.

As with each of the considerations we have outlined in this article, finding a financial advisor you can trust will largely come down to your own work. You must put in the time and effort to vet a potential advisor, to verify their qualifications, and to meet with them in person to find out if they will be a good fit for you. Building trust also takes time, so be aware if your needs aren’t being met as your relationship continues over time.[4]

Closing Thoughts

Choosing the right financial investment advisor for you will require work, but ultimately finding the right advisor can make a significant difference for your future financial success. There are important considerations you must weigh when choosing between potential financial advisors. What type of advisor they are, such as whether they are a broker or RIA, should be a central concern due to the impact it can have on impartiality. Finding a financial advisor you can trust that is intimately aware of your investment profile and can guide you towards planning the best options available for your situation is the ultimate goal. Working towards this takes time. You must conduct research on your potential financial advisor to determine if their qualifications match what they say. This is true even for word-of-mouth recommendations, which tend to be a great resource for finding a financial advisor.

Although finding the right financial advisor can take time and some work on your part, it will be immensely beneficial for you in the long-term. Your financial advisor can help you achieve your long-term financial goals, and adjust your goals over time as your situation or your needs change. With this in mind, schedule an introductory meeting with Bull Oak Capital to see if we will be a good fit for you.

 


* While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.

 

[1] https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1269/RAND_RR1269.pdf

[2] https://www.investopedia.com/articles/personal-finance/080715/understanding-fees-charged-financial-advisors.asp

[3] http://guides.wsj.com/personal-finance/managing-your-money/how-to-choose-a-financial-planner/

[4] https://www.kiplinger.com/article/investing/T023-C032-S014-how-to-find-a-financial-adviser-you-can-trust.html