A financial advisor is trained to help people make decisions about investing their money and planning for their financial future. This planning includes retirement planning, brokerage advice, tax arrangements and real estate investments. An advisor can also give guidance on creating savings accounts, dealing with debt and creating a budget for daily living.
The most common reason people turn to a financial advisor is for retirement planning. The advisor can help forecast future economic trends, select long term investments, decide how to use a 401(k) or IRA and calculate tax liabilities.
In the U.S., a financial advisor is required to be licensed to give advice on securities investments, but does not need specific education for any other kind or advising. A financial planner must have certain education credentials and pay an annual recertification fee. This certification allows them to deal with client’s estate planning, insurance planning and financial status.
The most common certifications are Certified Public Accountant, Chartered Financial analyst, Certified Financial Planner and Chartered Life Underwriter. According to the Wall Street Journal, a Certified Financial Planner is the best advisor because he or she is licensed and regulated and takes mandatory classes on different areas of financial planning. They need to pass a rigorous exam that is administered by the Certified Financial Planner Board of Standards.
Choosing the right advisor takes some research and should not be done quickly. Most people have a long relationship with their advisor, so they need to trust that person. It is recommended to meet several possible advisors and ask questions to determine if they are the right one.
Some of the questions to ask are:
• What are their fees?
• What services do they give for those fees?
• Do they get a commission if a client purchases a stock they have recommended?
• How long has the advisor been in business?
• Will he or she give potential clients the names of previous clients?
• What is their area of expertise? Is it retirement or estate planning or small business finances?
It is important to consider fee structure because if the advisor is getting paid on commission, their decisions may be biased. If they get a flat, hourly rate, they may have no personal interest except to give their client’s the best possible guidance. Another type of payment is an annual percentage of all the assets they are looking after. This may be one percent of investments, retirement, college savings account and other accounts.
A good advisor takes into consideration the client’s lifestyle and investment risk comfort level. When selecting an advisor, the client should ask potential advisors about their code of ethics. The client can look at this and find the word fiduciary as well as language that requires the advisor to look after their client’s best interest.
It is recommended to ask friends or colleagues that are in the same stage of life that it client is in if they have an advisor. The aim is to find an advisor who has been successful with clients who are in the same stage of life. An advisor who specializes in retirement planning, may not be the best for a person just starting their career.
National Association of Personal Financial Advisors (NAPFA)
The National Association of Personal Financial Advisors (NAPFA) is a group of advisors who are only fee based. This means their only revenue comes from client’s fees. They accept no commissions and pledge to act in their clients’ best interests. These standards meet or surpass the CFP requirements.
Once a short list of possible advisors is made, the client needs to ask for an explanation of a complicated financial concept. The potential advisor needs to be able to explain complicated financial concepts in common language, so the client knows exactly what’s going on. If the advisor uses a lot of financial jargon, and speaks over the head of the client, they should find someone else.
If possible, the client should try to have a grasp of the financial areas in which they want help. This way, they will be better able to determine how skilled the potential advisor is. It is important to know the difference between a stockbroker and a Registered Investment Advisor (RIA). The RIA is required to abide by a fiduciary standard and stockbrokers are not.
The minimum services an advisor should provide are:
• Tracking investment cost basis
• File tax returns and help with tax questions
• Examine risk management
• Estate planning
• Refer clients to another professional if required
A good financial advisor is like a life coach. They help their clients with complex financial decisions for the long term. They will help in making decisions about buying a car, how to finance a college education, refinancing a mortgage, insurance and much more. They will know if their clients are paying too much or getting a competitive rate for many purchases and loans. Their clients can rest assured they are in good hands.
By Andre Bradley