How to pick a financial adviser

10 smart moves

Many of us are woefully unprepared for retirement.

Indeed, a recent study by the National Institute on Retirement Security found the typical household has only saved $3,000 for retirement.

There's no shame in admitting we need help. This is where a financial adviser comes in.

This professional can help not only with retirement planning but also with investment selection, college planning or even buying a house.

But you have to believe your adviser is looking after your best interests if you’re going to entrust this person with your net worth.

How do you find someone who will manage your money well enough to help you meet your financial goals? How do you find an adviser who won't steal your money, make decisions that only benefit them or charge you excessive fees?

Our 10 smart moves will show you how.

Know where to look

Here's where to start looking:

  • Do an Internet search for "financial adviser" and your city.

  • Use a free service that prescreens advisers for you, like PaladinRegistry.com.

  • Consult BrightScope.com, a database of more than 700,000 registered financial advisers.

  • Use the search tool at a professional association’s website. These include the National Association of Personal Financial Advisors, NAPFA.org; the Financial Planning Association, FPANET.org; the Certified Financial Planner Board, CFP.net; or the American Institute of Certified Public Accountants, AICPA.org, to find a CPA who is a personal financial specialist.

Be careful about referrals. They might have undisclosed relationships with advisers, says Jack Waymire, an advisory services industry veteran and founder of the Paladin Registry website.

He suggests narrowing your list by eliminating advisers who:

  • Use aggressive marketing language or undocumented sales claims on their website like "I am the best."

  • Don’t provide legally required licensing and registration information on their website.

  • Have a thin bio lacking information on experience, education, certifications and licensing.

  • Accept commissions.

Your net worth matters

An adviser who works primarily with people with a financial situation similar to yours will know the best strategies for achieving your goals.

Many advisers require you to have assets of at least $250,000, but there are advisers who work with smaller accounts. Some search tools show investment minimums, but you may have to ask an adviser who interests you.

You’ll also need to decide whether you need a financial plan, investment management or both.

"A full financial plan is a comprehensive look at a client’s complete financial life: cash flow, net worth, insurance, savings, college, retirement, investments and estate," says James A. Daniel, a certified financial planner and a financial adviser with The Advisory Firm in Alpharetta, Ga.

"Investment management is where the client turns over their investment accounts to an adviser and lets that adviser manage the accounts," he says. You’ll typically pay the adviser a fee of 1% annually of assets under management.

The fee to develop a financial plan can range from $150 to $250 an hour. Flat fees can run from $1,500 to $4,500 to develop the plan, Daniel says.

Find a specialist

You might want someone to manage your complete financial picture, but there’s probably one area you’re most concerned with that has prompted you to seek professional advice.

"Many good financial advisers have knowledge and experience in helping clients with a variety of personal finance issues," says Joyce E. Morningstar, a senior wealth manager in Scottsdale, Ariz. "However, the best advisers tend to prefer working with a particular type of client."

Whether you need the most help with retirement planning, maximizing your child’s college fund, investing your extra cash, combining your finances in a new marriage or disentangling your joint accounts after a divorce, you should choose a professional who specializes in this area.

"To maximize the value of your financial adviser, ask questions to confirm the adviser has experience working with someone like you in the areas where you need the most help," she says. "Otherwise, you may be disappointed in hiring a great financial expert for the wrong job."

Hire a fiduciary, not a broker

Brokers make money from commissions, markups and fees on the investments and insurance they sell you. They act in their own best interests.

Only fiduciaries are legally required to act in your best interests. Fiduciaries cannot accept commissions. They are compensated with hourly, fixed or asset-based fees.

Some advisers try to be both (the industry term is "dually registered" or "hybrid adviser"), but someone who earns any part of their income from commissions can’t be unbiased.

"When deciding whether to work with a financial adviser, you absolutely must ask whether they hold a Series 7 license," says Elle Kaplan, a fiduciary and the CEO of Lexion Capital Management in New York City.

A Series 7 license qualifies an individual to earn commissions from soliciting, buying and selling securities like stocks, bonds and mutual funds.

Someone who holds this license is not a fiduciary, Kaplan says, because all fiduciaries are required to turn in their Series 7 licenses.

Also avoid advisers who sell self-branded funds or other products, she says.

Credentials matter

The letters after an adviser’s name can tell you something about their expertise.

The best credentials to look for are these:

  • CFP: Certified Financial Planner

  • CFA: Chartered Financial Analyst

  • CPA/PFS: Certified Public Accountant/Personal Financial Specialist

  • CIMA: Certified Investment Management Analyst

Advisers with these credentials have met some of the highest standards in the field.

They have passed rigorous exams and acquired several years of relevant work experience.

They complete continuing education requirements every year to stay on top of new developments in the field, like law and tax changes.

They also must adhere to a strict code of ethics to maintain their credentials.

Experience is also important. An adviser with none of these credentials and 10-plus years of experience may provide better advice than a young certified financial planner.

Look for proper registration

A government registration form — Form ADV — will tell you more about an investment adviser, including whether he or she is properly registered.

"Investment advisers, brokers and their firms are required to be licensed and/or registered, and the information is easily accessible," says Braden Perry, who practices financial services and regulatory law with Kennyhertz Perry in Prairie Village, Kansas.

The easiest way to determine whether an adviser is registered with the U.S. Securities and Exchange Commission (required for advisers with $100 million or more in assets under management) or with the state (required for smaller advisers) is to ask, he says. But it should be disclosed in the person's marketing materials and website as well.

For SEC-registered firms, you can view an adviser's most recent Form ADV online by visiting the Investment Adviser Public Disclosure website (adviserinfo.sec.gov).

For state-regulated advisers, you can find contact information for your state securities regulator on the website of the North American Securities Administrators Association (http://www.nasaa.org/about-us/contact-us/contact-your-regulator).

Check their background

When you’re reading over an adviser’s Form ADV, make sure to read item 11, which requires advisers to disclose any disciplinary history.

You should also do an Internet search for the adviser’s name plus keywords like "fraud," "scam," "fine," "suspension," "complaint" and "lawsuit."

Keep in mind that an adviser who is a fiduciary now might have a past as a broker. That means you should see what comes up when you search for the person in two additional places:

No background check is foolproof, but at least you’ll make sure you don’t miss any red flags you could have caught up front.

Ask the right questions

Once you've narrowed down a list of potential advisers, you'll need to interview your top choices.

Thomas Balcom, a CFP and founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla., recommends you ask these questions:

  • How are you going to invest my money? Do you provide me with an allocation before investing my money? (Answer: You want to know how much of your money will be invested in stocks and bonds or in mutual funds, exchange-traded funds or some other investment vehicle.)

  • How do you invest your own money? Do you invest alongside your clients and have skin in the game, or do you invest your own money completely differently? (Answer: You’re better off if an adviser invests alongside his or her clients — they will be keeping a closer eye on your investments that way. If they invest completely differently, ask why.)

The Certified Financial Planner Board of Standards and the Financial Industry Regulatory Authority also offer questionnaires to help you select an adviser.

Choose someone you understand

Using financial jargon that’s over your head isn’t a sign of a good adviser.

"You will be making some of the most important decisions in your life and most likely the lives of your family," says Gary M. Shor, a CFP and vice president of financial and estate planning for AEPG Wealth Strategies in Warren, N.J. "If you do not understand what you are reviewing, discussing or getting advised on, you have the wrong adviser."

You shouldn’t feel intimidated or feel afraid to ask questions.

"Some areas can be very complex, but a good adviser will be able to frame the discussion in words and context that the client can comprehend," Shor says.

If you understand your adviser, you will make better decisions together, especially during turbulent times like major life events or significant market shifts.

Also, make sure you're comfortable discussing every aspect of your life that affects your financial situation. That includes your personal history, medical history and family matters. Furthermore, you have to be able to share your fears and your desires without feeling judged.

Get a plan in writing

You’ll want to get the plan you’ve developed with your prospective financial adviser in writing.

This document is a service agreement, not a legally binding contract, says James A. Daniel, a CFP and a financial adviser with The Advisory Firm in Alpharetta, Ga.

Clients are generally free to leave at any time, as long as they don’t owe the adviser any fees for services provided up to the point of cancellation.

Before managing your money, an investment adviser is required to disclose the firm's compensation.

"Make sure that the agreement is clear and understandable. Clients should also know how much they are being charged, when the fees are due and what recourse they have if unhappy with the service," he says.

If the financial plan doesn’t meet your expectations, you may be able to get a refund.

No adviser can guarantee investment performance, however, so you have no recourse there unless the adviser does something illegal.

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