Finding the right financial advisor can be challenging. Just about anyone can call themselves a financial advisor, since there is no regulation of the title and no standard that has to be met in order to use it. This means that your search can leave you sifting through a confusing mess of service models, fee structures, credentials, and unclear motivations.
Luckily, there are criteria you can use to cut through most of the noise and increase your odds of finding a financial advisor who has the expertise to help you reach your goals and that you can trust to give you the best advice for your situation, while reducing concerns over conflicts of interest.Here’s what you should be looking for.
The Baseline Requirement: A Fiduciary Standard
At the very least, your financial advisor should be subject to a fiduciary standard. You may have heard this term before, but what does it actually mean to be a fiduciary?
In short, a financial advisor who is a fiduciary is required to act in the best interest of their clients. This may sound straightforward, but not all financial advisors are bound by this standard. Many are instead subject to a “suitability standard”, which only requires them to make recommendations that are suitable for your situation, even if there are better solutions available. That can lead to you being sold high-priced, inefficient financial products that aren’t aligned with your personal goals.
The public deserves better than to be sold. I believe that anyone seeking advice deserves a financial advisor who understands your goals and situation, evaluates a broad range of the financial opportunities available to you, and makes the best recommendations they can make for your personal needs. That’s the ideal of a fiduciary standard.
How can you find a fiduciary? Looking for a CFP® professional is a good start. Not only do you have to go through rigorous education, exam, and experience requirements in order to earn the CFP® marks — which is a good way to ensure that you’re working with someone with expertise — but all CFP® professionals are bound to a code of ethics that includes a fiduciary standard.
Alignment of Interests: Fee-Only Compensation
Finding a fiduciary is a great start, and you can take it a step further if you want to ensure your financial advisor’s interests are aligned with your own.
How your advisor is paid matters because it can affect the types of financial products they are incentivized to recommend. Most financial advisors are paid in one of three ways:
- Through commissions from selling financial products
- Through fees charged directly to their clients
- Through a combination of commissions and fees
Fee-only financial advisors fall into category #2 on that list. They do not sell financial products and never receive commissions. Instead, 100% of their income comes directly from their clients.
This is important for two big reasons.
First, since you are the one paying them, their financial interests are aligned with you and your goals. There is no big financial company paying commissions and getting in the way of your needs. They only get paid by you for the service they provide.
Second, many great financial products, such as many of the best index funds, are commission-free. If your financial advisor makes money through commissions, the odds are against them recommending those products. But when commissions aren’t in the equation, the entire universe of financial solutions is open to you.
In short, fee-only financial advisors have chosen to align their financial interests with yours, making it more likely that you’ll get advice that’s genuinely in your best interest.
NAPFA provides a comprehensive Financial Advisor Comparison Tool that you can use as you interview financial advisors. That’s a great way to dig even deeper into how each one operates.
Someone Serving You
There’s no surefire way to find the right financial advisor for your needs. There’s a lot that goes into it, from their specific expertise, to their service model and communication style.
But if you start by limiting your search to fee-only fiduciaries, and if you go even further by looking at CFP® professionals, you’ll significantly increase the odds of finding someone with the knowledge, experience, and trustworthiness to get you where you need to go.