What we’ll cover:
Choosing a financial advisor - someone who can manage your investments, give tax and estate planning, advice, and a whole host of other things - can be as personal of an experience as you want it to be. It all really depends on your financial situation and what type of relationship you’re looking for. Because someone who manages your financial life will inherently know a lot about you.
To help us out with this topic, we spoke to Jill Schlesinger, CFP®, host of the Jill on Money podcast sponsored by Marcus by Goldman Sachs, and a CBS News Business Analyst.
Schlesinger says to consider these five things when looking for a financial advisor.
There are five common fee structures a financial advisor offers:
“Generally speaking, it’s not that one fee structure is better than the other,” Schlesinger said. “But you have to understand what the fees are. So before proceeding with any engagement, you have to answer a basic question: how is this prospective advisor charging me?”
Schlesinger’s advice: if you’re uncertain about committing to a certain fee structure, don’t be afraid to ask for alternatives.
Schlesinger said to think about your situation and what you really need from a financial advisor.
You could just be looking for a simple way to organize and manage a retirement account, something that an algorithm can manage based on your age and risk tolerance.
Or, you could be the flipside of that.
“There are other people who have very complicated financial lives,” Schlesinger said. “This may be something where they just inherited a lot of money, or are about to get married and merging money and have a ton of different aspects to their financial lives.”
This an extension of the previous consideration about understanding your needs.
Is your financial situation such that it warrants a dedicated financial advisor? If so, that could require a scheduled appointment. Could a roster of advisors do? Or would you rather bypass human interaction altogether and go with a robo advisor?
“Because it’s one thing to say, ‘hey, I’ve got a million dollars, I’m paying you $10,000 a year - I don’t want to talk to the junior advisor on the team,’” Schlesinger said. “Or, it may be that a person wants to go with a digital platform, pay their $300, all their records are digital, and they don’t care who picks up the phone. They don’t care if it’s a robot or a dedicated person.
“Your specific situation will dictate what works best for you, but before you start the process, it’s best to clarify and manage expectations.”
Technically, anyone can call themselves a financial advisor. That’s why it’s important you ask a potential advisor for their credentials and background.
There is an array of licenses available depending on the services an advisor offers.
Financial advisor credentials can include CFP® certification or CFA (Chartered Financial Analyst). A series 65 is required for someone to be an investment advisor in certain states.
The SEC recommends reading FINRA’s Understanding Investment Professional Designations to get a better idea of the different financial industry credentials. Investor.gov has a list of tips for selecting a financial professional.
“There are people who are just licensed to transact business, like those with securities or insurance licenses,” Schlesinger said. “But those people are not necessarily folks who have the depth of knowledge or have proven that they want to take a holistic approach to examining your financial life. “
Advisor fiduciaries are supposed to offer advice and products with your best interest in mind. They’re usually registered with the SEC or a state securities regulator and are fee-based.
On the other hand, non-fiduciary advisors are held to a different standard of conduct known as the “suitability” standard, which by definition may appear similar to a fiduciary – they must make recommendations that are suitable for their client – but differs in several ways.
For one, these advisors, or broker-dealers, are only required to have a “reasonable basis to believe” their recommendation is suitable for their client based on their profile. They also tend to earn a commission based on the products they recommend, which could be in conflict with your best interest.
The Securities and Exchange Commission in June adopted a new regulation, called Regulation Best Interest, that calls for advisors to act in the best interest of clients when recommending investment products. Any conflict of interest must be disclosed.
Critics of Regulation Best Interest point out that the final Reg BI doesn’t define “best interest”. Still, the Financial Industry Regulatory Authority will enforce Reg BI. And according to ThinkAdvisor, FINRA is considering revising or eliminating its current suitability rule.
“I think it’s important to understand whether someone who’s giving you financial advice or selling you a financial product has your best interest at heart,” Schlesinger said. “And that’s not to say that somebody who doesn’t have that best interest is going to try to screw you, but it is important to be able to filter that advice or that sales pitch through the lens of ‘does this person have the obligation to put me first? Before the company?’”
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