If you've been thinking about putting some of your savings into investment vehicles capable of giving you a better return than your bank's savings account, consulting with a qualified financial adviser can help you implement a sound financial plan with the best investments for your financial situation. How should someone new to investments choose the right financial planner for their needs?
During your search for the right professional, you may come across a number of acronyms after a financial adviser's name, such as certified financial planner (CFP), registered investment adviser (RIA), chartered financial consultant (ChFC) or retirement income certified professional (RICP). Another credential is an IRS enrolled agent, a federally-authorized tax practitioner. Faced with so many credential options, choosing the right financial planner can seem daunting. After all, you want to hire a professional who will be the best fit for your unique financial needs since the quality of the investment advice you receive can have a significant impact on your financial future.
According to Angela Rabatin, a retired professor of finance and an authority on the 50-plus age demographic, "financial adviser" is a catchall term. "Anyone can hang out a shingle as a financial planner," she cautions. "Unlike lawyers, doctors, or engineers, there are no legally mandated education requirements."
Leibel Sternbach, founder of Yields4U, agrees. "'Financial planner' and 'financial adviser' are not regulated terms, so it's important to find out from your financial adviser exactly what services they are providing and why they are qualified to perform those services," he says. One or more regulatory bodies license many financial planners. In some states, such as New York, financial advisers who, for example, carry only an insurance license, are not permitted to hold themselves out as a financial planner unless they have a specific certification like CFP or RIA, Sternbach adds.
What's the difference between the credentials?
With a large number of credentials a financial professional can obtain, how do you narrow down your list of potential advisers before you commit to meeting with them? Rabatin suggests consumers check the professional-designation page on the Financial Industry Regulatory Authority (FINRA) website, FINRA's BrokerCheck, or the Securities and Exchange Commission's Investment Adviser Public Disclosure database. FINRA is a government-authorized nonprofit with oversight of securities brokers and dealers.
FINRA's professional-designation page, for example, lets you search specific credential acronyms to see what they stand for. You can also see if the organization that issues the credentials has continuing-education requirements can take public complaints or provides a way for consumers to confirm whether an individual actually holds a particular credential.
Understanding what a professional-designation acronym means is crucial when selecting a financial advisor. For example, Andy Panko, a CFP and owner of Tenon Financial LLC, notes that CFP, which is issued by the Certified Financial Planner Board of Standards, provides evidence that the professional has a minimum level of experience and education, including passing the board's exam. However, it is a general credential, so he suggests that consumers in need of more targeted financial advice look for a professional with a relevant, targeted designation, such as RICP for retirement planning or IRS enrolled agent for taxation issues.
Questions you should ask
Once you've narrowed your list of potential financial planners, you'll want to meet with them before committing to their services. The following are some questions to help guide you through the selection process:
- Qualifications. Going with an adviser who has a professional designation can make a difference. Sternbach, who holds a number of designations, including ChFC and IRS enrolled agent, notes that asking for qualifications enables you to weed out individuals who are simply salespeople in disguise, since obtaining a professional designation means the individual has demonstrated a serious commitment to the financial-planning profession.
- Fiduciary duty. A professional who is held to a fiduciary standard is required to put the interests of their clients above their own—in other words, they must act in your best interest. It's important to remember that not all individuals who hold themselves out as financial advisers are required to meet a fiduciary standard of care. For example, an insurance agent or securities broker who has no other professional designations functions primarily as a salesperson and is only required to meet a suitability standard of care. According to Panko, "in order to be 'suitable,' a product really only needs to not be egregiously bad for the client, and that's an unfortunately low hurdle to reach."
- Compensation. Financial planners are typically compensated in one of two ways: by commission based on the products they sell or via a direct fee paid to them by their clients. Sternbach suggests asking an adviser directly how they will be compensated, as this will reveal any potential conflicts of interest. If they are making a big commission on a particular investment, this might skew their advice.
Other tips for the initial consultation
Your initial meeting with a financial adviser is important because it will provide you with the information you need to make a reasoned decision. In addition to the questions noted above, here are some guidelines for that initial meeting:
- Ask a few questions you already know the answer to. Rabatin advises going to the meeting prepared to interview the individual. This will enable you to both assess the person's competency and see how open they are to your questions.
- Ask if they will be your primary contact. Additionally, Rabatin notes that accounts can sometimes be handed off to other professionals in the same firm. If this is something you're not comfortable with, you should determine if this is a possibility.
- Ask about their process and investment philosophy. "Your financial adviser should be able to clearly communicate to you what they do and how they do it. If they don't have a process, then how will they ensure you achieve your goals and objectives?" Sternbach says. Their investment philosophy is also important, as investment management is a critical component to any financial plan. Sternbach notes, "If they do not have an investment philosophy, then statistically they will underperform, and you're better off investing your money on your own or using a robo broker and saving on the management fees."
Once you've met with a few advisers, you should have obtained enough information to make an informed choice. Choose an adviser who has experience with people in your specific financial situation and, above all, trust your gut. "If you just aren't feeling it with this adviser, then find another one," Sternbach says. "Your financial adviser is someone who will become your closest professional relationship, and a good adviser can make the difference between living with worry or having peace of mind."
Finding the right adviser for your needs may seem like a challenge, but a bit of research ahead of time and the right set of questions during your first meeting will go a long way toward helping you determine which financial planner will be the best fit for your financial life.