Vet Your Financial Advisor in 3 Easy Steps
Financial advice is a field unlike any other. The term, "financial advisor," can have different meanings depending on who you ask. There are also varying degrees of services a financial advisor can offer. Before choosing a financial advisor, do some basic homework by following these easy steps:
1. Find out what your financial advisor's qualifications are. There are many different topics an advisor can choose to focus their business on. Some individuals are specialized, such as a chartered retirement planning counselor, whereas other individuals have a more generic focus, such as a certified financial planner. The alphabet soup behind a person's name is validation for the effort and focus applied to one specific area. Investopedia offers an understanding of each designation and the steps involved to receive them.
It is important to realize there are many designations out there, and some of them don't require a lot of work to attain. For instance, an accredited asset management specialist may sound lofty, but in reality, it requires only 28 hours of curriculum that can be learned through a self-study program.
Once the advisor is ready to move forward, the advisor can complete an exam and use the designation if he or she meets further requirements. I'm not saying there is anything wrong with this designation, but if it were the only one my advisor holds, I would be reluctant to follow advice he or she would offer on estate planning or another topic outside of that designation's curriculum.
Other designations, such as CFP, are more demanding and require greater effort to attain. Not only does the candidate have to have prerequisites of three years of experience and a Bachelor's degree before using the designation, they also must pass a 170-question test administered over two sessions, which each last three hours. The exam covers eight primary domains, ranging from investment management to estate planning. As of 2013, the overall pass rate was 63.3 percent, according to the CFP Board.
The lengthy prerequisites and number of topics the CFP exam covers give assurance the person who holds the designation has done a significant amount of work beforehand and is committed to their industry. They are also better qualified to make recommendations for an overall financial plan. Different designations can be used for advice on specific topics. As a consumer, you should understand what qualifies the person advising you to give such advice, and how much work it took to allow them the ability to do so.
2. Find out which securities licenses your financial advisor holds. The Financial Industry Regulatory Authority is an independent regulatory body authorized by Congress to write and enforce rules applied to securities firms and brokers. Any advisor licensed to deal securities or financial advice is registered with this authority.
As a result, you have access through its website to check which licenses your advisor holds. More importantly, you can check the advisor's background and see if there are any infractions against him or her. This tool does not tell you all you need to know about an advisor, but it can provide insight into an advisor's business background before you choose to work with the individual.
3. Discuss how your financial advisor is paid. Is your advisor fee-based or commission-based? The way someone is paid should not dictate the quality of advice you receive. However, if you have a clear understanding of how someone is paid, you have a better chance at understanding the person's motivations. The biggest difference between fee-based compensation versus commission-based compensation is the advisor's obligation toward his or her client.
Individuals who are paid commissions must ensure any advice meets a suitability obligation. This can be defined as making recommendations that are consistent with the best interests of the customer. Instead of having to place the advisors' interests below that of the client, the suitability standard only requires the advisor must reasonably believe any recommendations made are suitable, in terms of the client's financial needs, objectives and unique circumstances.
Fee-based advisors are bound to a fiduciary standard that requires them to put their client's interests above their own. They must also act with a duty of loyalty and care, meaning the advisor must always act in the best interest of his or her client. This fiduciary standard is a much higher responsibility than the suitability standard. Offering this higher level of care can lead to better advice.
The world of retirement planning can be complicated, yet rewarding. By following the three steps, you will have a better understanding of who you are working with, and what you should expect by engaging their services.
Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment advisor in Alexandria, Va. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.
