5 Things to Consider While Vetting a New Financial Advisor

Embarking on the journey to secure your financial future is a commendable decision, and hiring a financial advisor is a pivotal step in this journey. Your chosen advisor is not just a financial professional. They become your guide, mentor, and teacher throughout your financial journey. With their invaluable knowledge and expertise, they can steer you clear of costly mistakes and help you make informed decisions. However, the key lies in finding a suitable financial advisor, someone with whom you can establish a good working connection to ensure a seamless partnership. This can help you fully reap the benefits of their guidance. To make this crucial decision, vetting your potential financial advisor becomes essential. Selecting a suitable professional is more than just a checkbox. It is about aligning yourself with someone who possesses the necessary skills and resonates with your financial goals and values.

An experienced and vetted financial advisor can be your ally in achieving financial freedom. This article will help you explore five things you should consider on how to choose a financial advisor to ensure that your financial partnership is built on trust and understanding.

What is a vetted financial advisor, and what should you consider while vetting one?

A vetted financial advisor is a professional whom you have thoroughly examined and verified before entrusting them with the crucial task of managing your finances. Recognizing the significance of the role a financial advisor plays in guiding you through savings, investments, and preparations for both present and future financial needs, it becomes imperative to choose an advisor whom you can rely on. The vetting process involves a comprehensive assessment of the financial advisor's professional background. This includes scrutinizing their qualifications, experience, and expertise in the financial domain. A thorough vetting process ensures that the financial advisor you choose not only possesses the necessary credentials but also aligns with your financial goals and priorities. Having a vetted financial advisor instills a sense of confidence and trust, as you have taken the necessary steps to verify their competence and reliability in steering your financial journey.

Here are five vetting tips for finding a suitable financial advisor:

Tip 1: Check their registration on FINRA BrokerCheck

A fundamental step in vetting a potential financial advisor is to verify their registration with the Financial Industry Regulatory Authority (FINRA). Confirming the registration status is a non-negotiable aspect of your vetting process and serves as a foundational step to establish the legitimacy and credibility of the financial advisor. FINRA is an independent, non-governmental regulator overseeing securities firms conducting business with the public in the United States. FINRA keeps a check on financial advising firms and ensures fair and honest operations within the industry. Checking the registration of a financial advisor through FINRA is essential as it provides a solid foundation for further exploration of the advisor's qualifications, expertise, and overall suitability for your financial goals.

To initiate this crucial step, you can visit FINRA's website where you can enter the name of the firm you are considering in FINRA's search tool. The website will give you confirmation of the firm's existence. It will also mention whether the firm has been properly registered as a securities-licensed entity. Checking FINRA ensures that the financial advisor operates within the bounds of regulatory compliance and lays the groundwork for a transparent, professional relationship. The information collected from FINRA's database empowers you with the knowledge to make an informed decision and sets the stage for a more secure and confident financial journey. If you do not find the name of the firm on FINRA's site, you must beware. A non-registered financial advisory firm implies that there is no supervision by the Securities and Exchange Commission (SEC) or state securities regulator. Such a firm can pose significant risks, as you have little recourse if something goes awry. The SEC also provides tools to look up individuals involved in federal court actions or administrative proceedings, offering a more comprehensive view of their professional background and conduct.

Thoroughly examining certifications and licenses and conducting background checks through reputable tools like FINRA BrokerCheck and the SEC's resources empower you to make an informed decision. It helps you select a financial advisor who is trustworthy and well-equipped to guide you on your financial journey. Remember, a registered financial advisor not only complies with regulatory standards but also demonstrates a commitment to transparency and accountability in managing your financial well-being. So, remember to stay vigilant, conduct due diligence, and use FINRA and SEC tools to find a suitable financial advisor who will guide you toward a prosperous financial future.

Tip 2: Check their credentials 

Checking a financial advisor's credentials and performing a thorough background check are integral steps in the vetting process. It ensures that the financial advisor possesses the necessary qualifications and aligns with your specific financial needs. Even if a friend or family member has recommended a financial advisor, conducting your due diligence is a crucial step in ensuring that your financial well-being is in capable hands. It is imperative to look into the credentials of financial advisors to ascertain their qualifications, certifications, expertise, ethical standards, and overall suitability for your unique financial goals.

A pivotal consideration when evaluating financial advisors is their designation as a Certified Financial Planner (CFP). This certification signifies that an advisor has completed coursework entailing a list of specific courses in financial planning and demonstrated professional standards in delivering their services. While many may claim to be Certified Financial Planners, not all have attained the CFP credential, making it crucial to verify this qualification independently. Additionally, considering a Certified Public Accountant (CPA) could be advantageous if your financial needs encompass tax-related matters. You must ensure that the financial advisor's credentials align with the specialized services you seek to ensure that they possess the necessary qualifications to address your specific financial concerns. Licenses such as the Series 7 can also be indicative of a financial advisor's professionalism. The Series 7 license, administered by FINRA, authorizes a financial advisor to sell a diverse range of investment products. This showcases the professional’s comprehensive understanding of the securities industry. Examining the licenses that a financial advisor holds also offers insights into their expertise and the breadth of financial products they are qualified to handle.

To further fortify your vetting process, you can also check if the financial advisor has cleared the Securities Industry Essentials (SIE) exam. This is an introductory-level test designed to gauge basic knowledge of securities industry information. This exam covers essential concepts such as types of products and their risks, the structure of securities industry markets, regulatory agencies, and prohibited practices. While not a specific licensing requirement for financial advisors, the SIE exam, when coupled with licenses for specific financial products, serves as a testament to an advisor's foundational knowledge in the industry.

Here are some other licenses and certifications you can look out for:

• Chartered Financial Analyst (CFA)
• Chartered Financial Consultant (ChFC)
• Certified Investment Management Analyst (CIMA)
• Chartered Life Underwriter (CLU)
• Certified Fund Specialist (CFS)
• Chartered Investment Manager (CIM)
• Certified Financial Therapist (CFT)
• Financial Risk Manager (FRM)
• Certified Management Accountant (CMA)
• Accredited Investment Fiduciary (AIF)
• Certified International Wealth Manager (CIWM)
• Retirement Income Certified Professional (RICP)
• Financial Coach (FC)
• Investment Advisor (IA)
• Series 3 - National Commodities Futures Examination (license)

 

Tip 3: Evaluate your financial needs and see if the financial advisor suits them

One of the most essential yet overlooked tips for finding a suitable financial advisor is first understanding your own financial needs and goals. Your financial journey is unique, and finding an advisor who resonates with your philosophy and possesses the expertise relevant to your specific needs is crucial for a successful partnership. Clearly defining your financial goals, preferences, objectives, risks, and values empowers you to identify professionals whose expertise aligns with your unique requirements. Whether it is specialization in small businesses, debt management, retirement planning, or tax issues, tailoring your choice to your specific needs ensures that your financial advisor is not just competent but also attuned to your individual financial journey.

Start by clarifying your financial objectives. For instance, ask yourself if you are focused on retirement planning, wealth accumulation, home ownership, or navigating tax complexities. Knowing your priorities will guide you in choosing a financial advisor with the right skill set and specialization. For example, if you are a small business owner, seeking a financial advisor experienced in catering to the financial intricacies of small businesses can be invaluable. Likewise, consider your long-term financial goals. If your primary concern is planning for retirement, selecting an advisor well-versed in retirement planning strategies becomes imperative. In such a case, you must seek out professionals with a proven track record in helping clients successfully navigate the complexities of retirement, including investment strategies, income and tax planning, and risk management. You must also evaluate your risk tolerance and investment preferences. If you are risk-averse and prefer conservative investment strategies, an advisor who understands and respects your risk profile is essential. On the other hand, if you are open to more aggressive investment approaches, finding an advisor with a history of managing higher-risk portfolios may be more suitable. Consider a scenario where you seek assistance with tax planning. In such a case, partnering with a financial advisor specializing in tax issues ensures that you receive tailored advice and strategies to optimize your tax situation. They can help you explore tax-efficient investment options, such as 401(k)s and Individual Retirement Accounts (IRAs), deductions, and credits, ultimately maximizing your after-tax returns. 

Apart from professional competence, personal compatibility is equally important. As you assess your needs, you must consider your communication style and preferences. Are you looking for regular face-to-face meetings, or do you prefer virtual communication? Finding a financial advisor who can accommodate your communication preferences enhances the overall experience and fosters a collaborative relationship. Reflect on your financial philosophy and values. For example, if you prioritize sustainable and socially responsible investments, you may seek out advisors who share these values and can integrate them into your financial plan. This alignment ensures that your advisor understands and respects your ethical considerations while making investment recommendations.

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Tip 4: Ask questions

Engaging in open and thorough communication is a crucial aspect of choosing a suitable financial advisor. Financial advisors allow you to interview them before you hire them. During this initial consultation, you must take advantage of the opportunity to ask pertinent questions that will not only shed light on the financial advisor's qualifications but also help you gauge their compatibility with your financial goals. Here are some key questions to ask your financial advisor: 

1. Are you a fiduciary?

Understanding whether your potential financial advisor operates as a fiduciary is paramount in establishing a relationship built on trust and transparency. A fiduciary obligation means that the financial advisor is legally bound to prioritize your best interests above all else. Unlike non-fiduciaries, such as broker-dealers, who are only required to recommend certain investments that may benefit them in some way, fiduciaries go the extra mile. They are committed to recommending investments that meet suitability standards and are the best fit for your financial objectives. This distinction ensures that your financial advisor is aligned with your goals and will strive to optimize your financial well-being, fostering a relationship built on accountability and reliability. 

2. How will our relationship work?

The dynamics of your relationship with a financial advisor are essential for a successful and collaborative partnership. Asking about the advisor-client interaction helps set clear expectations. It is important to inquire about the frequency of meetings, accessibility for phone calls or emails between scheduled appointments, and the preferred communication channels. Knowing how often you will connect and the ease with which you can reach your financial advisor outside formal meetings ensures that the working relationship aligns with your preferences. For example, if you prefer regular check-ins and immediate access, finding a financial advisor who offers such communication practices enhances the overall experience and contributes to a more effective financial planning process.

3. What is your investment philosophy?

Understanding the investment philosophy of your potential financial advisor is crucial for aligning your financial goals with their approach. Your financial advisor's philosophy should resonate with your beliefs, risk tolerance, and long-term objectives. For example, if you prioritize investments with a positive societal impact, ensuring that your financial advisor can craft a portfolio reflecting these values is essential. This alignment becomes particularly crucial during market downturns. Your financial advisor's investment philosophy serves as the foundation for a resilient financial plan that withstands market fluctuations. At this time, your financial advisor's ability to convince you to adhere to the agreed-upon strategy can prevent emotional decision-making. If both parties are aligned with each other’s thought processes, they are more likely to listen and understand one another. 

4. What investment benchmarks do you use?

Understanding the benchmarks used by your financial advisor offers insight into their investment strategy and performance measurement. Financial advisors should utilize benchmarks directly related to their investments or provide clear explanations for any deviations. You must be wary of advisors using generic benchmarks that may not accurately reflect the risks associated with their investment approach. For instance, if a financial advisor claims their goal is to outperform the S&P 500 but invests in a diversified portfolio beyond large-cap U.S. companies, this mismatch could indicate a lack of transparency. Questioning the choice of the individual’s benchmarks allows you to gain a deeper understanding of the financial advisor's methodology and ensure that performance measurements align with the unique characteristics of their investment strategy.

5. Do you have many clients in a similar position to me?

Exploring the financial advisor's experience with clients in situations similar to yours provides valuable insights into their expertise. Some advisors specialize in specific financial circumstances, while others cater to a diverse clientele. If your financial situation presents unique challenges, understanding whether the financial advisor has successfully navigated similar cases is crucial. A financial advisor with experience in addressing circumstances like yours is better equipped to provide tailored solutions and guidance. Whether you have a distinct portfolio size, specific financial goals, or unconventional circumstances, aligning yourself with an advisor familiar with comparable scenarios ensures that your unique needs are understood and effectively addressed.

6. What services do you offer?  

Understanding the range of services offered by a financial advisor is essential for informed decision-making. Understanding the full scope of the services provided by the financial advisor ensures that their expertise aligns with your financial needs and contributes to a more effective and personalized financial planning experience. For instance, a tax planner can be suitable if your primary concern is tax optimization. Likewise, a debt management expert is ideal if you are in a debt trap.

Tip 5: Check their fees

Understanding the fee structure of a financial advisor is crucial in making an informed decision that aligns with your financial goals and preferences. The cost of hiring a financial advisor can vary based on several factors, including the type of advisor, the scope of services, geographical location, and the advisor's level of expertise. Here are various fee models commonly employed by financial advisors:

1. Fee-only: Fee-only financial advisors do not receive commissions from selling financial products. Instead, they directly charge clients for the services provided. Their fee structures may include a percentage of Assets under Management (AUM), hourly rates, flat fees for specific projects, or a combination of these approaches.  
2. Fee-based: Fee-based advisors receive compensation from both clients and commissions from investment providers. They offer a broader range of financial products and earn a commission when clients purchase these products. Some fee-based advisors may charge a fixed annual fee for all services, irrespective of whether they earn a commission from recommending some investments or not. 
3. Robo-Advisor: Robo-advisors are automated digital tools that provide financial advice and investment management based on advanced algorithms and client input. These platforms offer a cost-effective option for investors by creating automated plans tailored to individual requirements.
4. Commission-only: Commission-based financial advisors derive their income primarily from the financial products they sell or the accounts they open for clients. The more clients they sell their products to, the higher their earnings. Their compensation is directly tied to completed transactions or initiated accounts. Common products offered by commission-based advisors include insurance packages and mutual funds. 
5. Flat rate: Flat-rate financial advisors charge a fixed fee, depending on the time or services they offer. Clients know the upfront cost of the services they will receive, with fees varying based on the complexity of advice, the duration of the association, and the advisor's expertise.
6. Hourly rate: Hourly rate financial advisors charge clients based on the time spent providing financial advice and services. This model is suitable for clients seeking one-time advice who do not want to commit to a long-term contract that may entail higher fees.

Understanding these various fee structures empowers you to choose a financial advisor whose compensation model aligns seamlessly with your budget. This ensures a transparent and mutually beneficial financial advisory relationship.

To conclude

Your financial advisor is not just a guide. They are your partner in securing a prosperous future. Hence, you must vet them properly and leave no room for doubt or uncertainty. Thorough vetting is not a mere checklist but a strategic process of aligning yourself with a professional who possesses the requisite skills and resonates with your preferences, attitude, and financial aspirations. Following these five vetting tips can help make an informed decision and foster a relationship built on trust, transparency, and shared financial goals.

Use the free advisor match service to get matched with vetted financial advisors who can help you attain your financial goals and objectives. Answer a few simple questions based on your financial needs, and the match tool can help connect you with 1 to 3 financial advisors who are best suited to help you.