Factors Beyond An Advisor’s Credentials That Matter When Hiring a Financial Advisor

When selecting a financial advisor, it is common to start by reviewing their credentials, such as Certified Financial Planner (CFP),  Chartered Financial Analyst (CFA), Certified Public Accountant (CPA), etc. While these certifications are important indicators of a professional's expertise, credentials alone do not reveal how effectively a financial advisor will meet your financial goals or how well the advisor and you will work together. It is important to do your due diligence and evaluate several other factors before you finalize your financial advisor hire. 

This article helps you understand what to look for beyond the advisor’s credentials when hiring a financial advisor to enable you to make an informed choice. 

5 factors to consider other than credentials when selecting a financial advisor:

1. The advisor’s fee model

When selecting a financial advisor, understanding their fee model is essential, as it can significantly impact you in the long run. There are many different types of financial advisors and each may use a different fee model to charge for their services.

Here are some examples of common compensation models:

• Fee-Only: A prevalent financial advisor compensation model is fee-only, where the financial advisor charges a percentage of the assets they manage for you. The percentage typically ranges from 0.5% to 2% annually.
• Fee-Based: Another common model is fee-based, where the financial advisor earns a fee for managing your assets and commissions from product sales. This model offers flexibility in payment options and may be more affordable, but the inclusion of commissions can create potential conflicts of interest.
• Flat Fee: Another common compensation model is the flat fee structure, where the financial advisor charges a set amount for a fixed number of services. A flat fee may be charged for the services or the amount of time the financial advisor spends working with you. This is suitable if you have a fixed budget and are only looking for financial services like a one-time financial plan, etc.
• Hourly Rate: Some financial advisors charge an hourly fee, which can be advantageous if you need one-time advice or help with a specific service, such as debt reduction, investment advice, etc. The costs can vary based on the type of service you get. It can also vary from person to person and place to place.
• Commission-only: In the commission-only or commission-based model, advisors earn a commission on the financial products they recommend to clients. Although the recommendations may be aligned with your needs, the financial advisor could also be suggesting products that bring them a higher commission.

Ensuring that a financial advisor’s compensation model aligns with your budget and financial goals is vital for maintaining a transparent and effective relationship. You should request a detailed breakdown of all charges in writing, including both the financial advisor’s fees and any additional costs associated with the financial products or services they recommend. This can help you understand the total cost of their services and avoid unexpected expenses.

2. Advisor’s Trustworthiness, chemistry, and communication style

Even with top-notch credentials and a fee structure that fits your budget, finding the right financial advisor is about more than just these factors. The chemistry between you and your financial advisor plays a key role in the success of your partnership. Money matters are inherently personal and can be sensitive, so it is important to feel comfortable when discussing them openly. Chemistry is about more than just friendliness. It is about establishing a strong foundation of trust and mutual understanding. If you feel uneasy or uncomfortable with a financial advisor, even if they are highly qualified, the relationship might not be as productive.

Effective financial planning requires honest communication and a sense of trust, which can be difficult to achieve if there is no personal connection between the two individuals. Building a strong understanding with your financial advisor helps ensure that the advice you receive is customized to your unique situation and that you feel confident in their advice and guidance. Without good chemistry, you may doubt their recommendations, which can lead to ongoing financial stress.

Before selecting a financial advisor, you must take the time to meet with them and discuss your concerns and financial goals. It's important to assess how they respond to your needs and whether their approach aligns with your expectations. You must carefully observe their attitude and responsiveness and check if they are willing or reluctant to address your questions and concerns. The first meeting can tell you a lot about the financial advisor’s style and personality and whether they are a good fit for you. So, you must be well-prepared with a list of suitable questions and use your judgment to gauge the advisor’s personality. 

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3. The financial advisor’s affiliations

Not all financial advisors operate independently. Often, an investing advisor can be affiliated with a company or an investment firm, which can influence their recommendations and the financial advice they provide. Understanding the nature of these affiliations is crucial for all clients. Financial advisors who are employed by financial firms or are closely affiliated with specific companies might be inclined to promote products or services offered by their employer. Some examples of this include professionals recommending specific insurance plans or investment advisors suggesting mutual funds from specific companies. This can create potential conflicts of interest, as their recommendations may be influenced by the firm rather than your individual needs. If a financial advisor works for an investment firm, they might recommend a product only because the product is offered or promoted by the firm. In this case, it can be hard to decipher if those products are a good match for you or solely benefit the firm. 

It is important to ask about a financial advisor’s affiliation to ensure that their recommendations align with your goals and interests.

Here are some key questions you can ask the financial advisor before hiring them:

• Are you employed with any company?
  It is essential to determine if the financial advisor is employed by a company or not. This can help you determine their limitations and flexibility in recommending products.
• Do you have the authority to work independently?
  You must inquire if the financial advisor only recommends products that are approved by their firm or if they have enough freedom to act independently and recommend products suited to your financial needs.
• Does the firm they work for promote or sell their own products?
  Find out if the firm the financial advisor works for offers their own products. In such a case, there is a high probability that the financial advisor may recommend specific products to you to meet their targets.

It is important to note that many capable and ethical financial advisors work with investment firms, so this is not necessarily a red flag. However, it can still be advised to clear these concerns before hiring a professional to ensure complete transparency and build a trustworthy relationship. Additionally, you must also research the firm the advisor works for and assess its reputation. 

4. Their legal standards

When selecting a financial advisor, you must ensure that you receive unbiased financial guidance. This can be done by checking the advisor’s legal standards. There are two types of legal standards a financial advisor may adhere to:

1. Fiduciary standard: One of the key legal standards that financial advisors may adhere to is the fiduciary standard. This single factor can significantly impact how professionals manage your money. A fiduciary is a legal standard where the advisor is lawfully obligated to act in the best interests of their clients. As a result, they always place your financial needs above their own. Financial advisors who are fiduciaries carry complete accountability for the recommendations they offer or the advice they give. The U.S. law and professional standards mandate that fiduciaries uphold this high standard and act with transparency and accountability. Fiduciary financial advisors must also avoid conflicts of interest and disclose any potential conflicts that could influence their recommendations.
    
2. Suitability standard: In contrast, financial advisors who are not fiduciaries may be held to a lower standard, such as the suitability standard. This standard requires that their recommendations be suitable for the client but not necessarily in the client’s best interest. The difference can significantly impact the quality and integrity of the financial advice you receive. Financial advisors who are working under the suitability standard might recommend products or strategies that benefit them financially, even if those options are not the most advantageous for their clients.

It is important to note that not all financial advisors are fiduciaries. Professionals who call themselves financial advisors can offer financial advice without necessarily adhering to fiduciary standards. This makes it important for you to proactively ask whether an advisor operates as a fiduciary or adheres to a suitability standard.  

5. The financial advisor’s soft skills

Evaluating a person’s soft skills helps you gauge their interpersonal and emotional capabilities. Here are some things you should do when looking for a financial advisor: 

• Check their communication skills: Effective communication is very important to ensure there is no confusion, doubts, or uncertainties. You must check the financial advisor’s ability to communicate complex matters to you in a simplified manner. Listening is an equally important aspect of communication. So, you must also check how effectively the person listens to your concerns. Clear, two-way communication can help build a positive working relationship.
• Evaluate their interpersonal skills: Good interpersonal skills help develop a lasting association between you and the financial advisor. The professional’s ability to connect with you and create a comfortable and judgement-free environment can determine the success of your association. The financial advisor should be able to build a relationship with you where you feel comfortable discussing sensitive financial matters.
• Assess their emotional intelligence: Emotional intelligence is another essential soft skill for financial advisors. Clients often experience a range of emotions when dealing with money, including panic, anxiety, fear, and excitement. A financial advisor with high emotional intelligence can navigate these difficult emotions effectively. They can help manage your stress and guide you through challenging financial decisions.
• Ability to resolve conflicts: Conflict resolution skills are important for addressing and resolving any disagreements or issues that may arise along the way during your advisory relationship. Disagreements or differences of opinion are common, but a skilled financial advisor should be able to handle conflicts tactfully and ensure that you feel heard throughout the process.

 

In Conclusion

Selecting a financial advisor requires careful consideration and should not be based solely on recommendations or a review of their educational qualifications and credentials. This is someone you will interact with frequently, and their guidance will be instrumental in achieving significant financial goals, such as wealth creation, estate planning, or financially securing your retirement. Due diligence is essential, so carefully evaluate a financial advisor's fee models, legal standards, affiliations, personality, and soft skills to ensure a smooth, dispute-free relationship.

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