There are many misconceptions about financial advisors. For starters, advisors are often thought of as a salesperson, trying to sell you a product that makes them a commission. Or that advisors are unnecessary in a world of robo-advisors and online trading.
In reality, there are a lot of imposters out there operating under the title of “financial advisor.” There are insurance salespeople who just want to sell you products to make a quick buck or hit their quarterly sales goals. Then you have stockbrokers who want to manage investments without creating a true financial plan that accounts for your goals.
A true financial advisor is legally and ethically obligated to work as a fiduciary, which means they put your best interest first. Not their sales goals. Not a specific product. Not one investment strategy. Your best interest comes first. Always.
How do you know if your advisor is a fiduciary? How can you find a financial advisor near you who is committed to working in your best interests? And how can you choose an advisor who will take the time to understand your goals and aspirations?
This comprehensive guide will take you through the process of selecting a financial advisor that is right for you and your family.
We will explain what a financial advisor is supposed to do, how they are paid, the services you should expect, the questions you need to ask, and how to know if they are truly a fiduciary.
Article Contents
- What Does a Financial Advisor Do?
- What is a Fiduciary?
- Financial Advisor Services
- How Much Does a Financial Advisor Cost?
- Finding An Advisor Near You
What Does a Financial Advisor Do?
Before you can determine the right financial advisor for you, you need to know exactly what a financial advisor does – or is supposed to do, for that matter.
A financial advisor’s main duty is to get to know you, then provide a comprehensive, customized financial plan that accounts for your goals, financial situation, willingness to take on risk, family and estate planning needs, retirement objectives, and many other factors.
Within your financial plan, your advisor will help you create efficiencies and adjust the plan whenever you experience a life change, like having a child, buying real estate, starting or selling a business, or facing unexpected expenses like health care costs. In other words, your plan is fluid and will change with you throughout your life.
Advisors can also work in conjunction with other professionals, either in-house at their firm or with third-party professionals whom you already work with. A great example of this is your tax professional. A financial advisor will create a plan that accounts for tax efficiency over the long-term and takes retirement income planning into account, where your CPA might help you think about short-term tax implications when filing your annual taxes.
This type of long-term planning allows you to make the best decision for the future vs. just this next year. Take retirement accounts as an example. Traditional IRAs and 401(k)s are tax-deferred, meaning you only pay taxes when you take the money out of the account after you retire. Roth accounts, on the other hand, are after-tax contributions, meaning you pay taxes today and can withdraw the money tax-free during retirement. While traditional accounts help you lower your tax burden today, a Roth account may be the better option in the long-term, especially if you expect your income to go up between now and retirement.
Another key distinction in understanding what a financial advisor does is to look at their job title. While an advisor may be called wealth manager, wealth advisor, financial planner or retirement advisor, these titles essentially mean the same thing – they should help you build and manage a financial plan. What you need to look out for is if their title includes a tip-off into what they are really about. Watch for words like banker, insurance, broker, agent, trader or dealer. These are usually indicators that the advisor is out to sell products, not always provide advice in your best interest. Of course, not every one of these providers is a bad apple, but it’s important to understand the distinction upfront.
In the end, selecting an advisor comes back to one main question: Is your financial advisor a fiduciary?
What is a Fiduciary?
In the aftermath of the Great Depression, Americans and Congress saw a need for additional regulation of financial services. So, in 1940, the Investment Advisers Act was passed. Essentially, it required anyone who provided advice on securities to register on the state and/or federal levels to inject a layer of accountability.
Over time, there have been many other pieces of legislation that provide additional regulations and consumer protections. However, what you need to understand is the designation of a Registered Investment Advisor (RIA).
RIAs are required to act as fiduciaries, which means they legally and ethically have to make investment and planning decisions in the best interest of their client. RIAs are registered with local state authorities, and also with the Securities and Exchange Commission if they manage a certain number of assets.
To buy or sell a security, RIAs – and even the general public – work with broker-dealers. For example, you could open an account with Fidelity or TD Ameritrade or your advisor may execute a trade for you through one of these broker-dealers. There are thousands of broker-dealers across the country, including banks, investment firms, hedge fund dealers, etc.
Fiduciary Rule vs. Suitability Rule
The distinction you need to make as an investor is the difference between the Fiduciary Rule and the Suitability Rule. Many broker-dealers do not require or even allow their investment advisors to be fiduciaries. This is because they act under the Suitability Rule, which is regulated by the Financial Industry Regulatory Authority (FINRA). This means that they must make decisions that are “suitable” for the investor’s needs, where a fiduciary must make decisions in the “best interest” of the investor.
It might be suitable for you to get into an insurance product that pays the advisor a large commission or is tied directly to that broker-dealer. But it might be better for you to open a retirement account that provides more freedom in the future. That’s why it’s important to work with a fiduciary advisor who is regulated by the SEC.
Imagine you are on the board of directors for a nonprofit, like a local church or food pantry. You take on that responsibility knowing the decisions you make will be in the best interest of the organization and its mission. You wouldn’t base your decisions off personal profit – you’d make decisions that were best for the organization.
That, in a sense, is how fiduciary responsibility works. Advisors focus on the best decision for you as the client and make recommendations based on that. Then, it’s up to you to approve the plan presented.
How to Know if an Advisor is a Fiduciary
The obvious answer is to ask an advisor directly. If you already have an advisor, shoot them an email and ask the question: “Are you legally required to act as a fiduciary?”
The reply should be very to the point with a resounding “yes.” If you receive an answer that tries to walk around the question, chances are they are avoiding the question for a reason. Now, if your advisor is not a fiduciary, it does not mean that your financial plan or investments are not in your best interest – it only means they are not legally required to be.
If you do not have an advisor or you’re searching for a new advisor, you might not have the opportunity to ask that question until after you set up a call or are already in the office, which can be a bit of a headache. Search the advisor’s website for the word “fiduciary” to get an indication upfront.
If you’re not finding a mention of fiduciary, look at their certifications, which will usually be listed in their bio on the website or directly after their name in their email signature or on their website. Many certifications require advisors to be fiduciaries. Here are some of the main ones you’ll want your advisors to have:
- CERTIFIED FINANCIAL PLANNING™ Professional (CFP™): The CFP certification is one of the most distinguished in financial services and is heralded for its extensive examination and continuing education requirements. Advisors with the CFP certification are held to a standard by the CFP Board.
- Accredited Investment Fiduciary (AIF): The Center for Fiduciary Studies regulates the AIF certification, which requires advisors to be fiduciaries while also undergoing continued education on fiduciary responsibility.
- Certified Public Accountant (CPA): A CPA is held to a “best interest” standard, which is not technically the same as a fiduciary standard, but it’s close. Advisors might hold the Personal Finance Specialist (PFS) designation in addition to the CPA, which shows they are specialized in this area.
Dozens of other certifications demonstrate an advisor’s commitment to continued education and knowledge, but won’t necessarily tell you if they are a fiduciary. Advisors may also be a Retirement Income Certified Professional® (RICP®) or Chartered Financial Consultant® (ChFC®), which doesn’t require fiduciary status but is highly recognized in the industry. Attorneys are also held to a fiduciary responsibility, so if you see “Esq.” behind their name, that is an indicator they must act in your best interest.
At the end of the day, the advisor you choose should voluntarily tell you they act in your best interests. If they don’t, you need to ask the question. Having that discussion upfront is highly important and can save you massive headaches down the road.
Financial Advisor Services
There are many layers to comprehensive, holistic financial advice. Not every client needs every service, and not every advisor offers every service. But understanding the main services in the industry will help you decide on an advisor. Do you need a specialized advisor who focuses on a specific service? Or do you want an advisor with a team of specialists behind them who can provide a wide range of services?
Let’s dive into the main services you’ll see offered by financial advisors.
Financial Planning
Financial planning, which is sometimes called wealth management, is the backbone of a financial advisory firm. It’s holistic and comprehensive, taking into account any assets and liabilities. All the other services listed in this article can fall under financial planning, which is what makes it so important.
Think of your life as a whole. You have to think about what you do with your immediate financial situation (budgeting), what money you want to save for retirement (retirement planning), what money you want to invest outside of retirement (investment management), and then all the overlying factors that make up your plan – what happens to your assets when you’re gone (estate planning), the tax efficiency of your plan (tax planning), and what happens as you accumulate more wealth (private client services).
Before an advisor builds a financial plan for you, you’ll go through what we at Carson Wealth call a discovery meeting. There are many different names for this information-gathering exercise. Some firms have a meeting, some use a questionnaire, and some may collect the information throughout other planning stages. Regardless of how the information is collected, your advisor should always collect five or six main categories of information.
- Financial information and history: Before a financial plan comes together, your advisor will need some basic information, like income, current savings and investment accounts, family information, business owner status, etc.
- Goals and objectives: More important than anything else in a financial plan is your goals and objectives. Are you saving for retirement or starting a college fund? Are you hoping to retire at 65 or 70?
- Risk tolerance: One of the main areas that a financial plan can go wrong is when your financial plan does not align with your risk tolerance. If you are cautious about your investments and don’t want to see your accounts heavily impacted by market volatility, chances are that an equity-heavy portfolio is wrong for you. Your age also plays into your risk tolerance – especially if you are retiring in the near future. If your advisor has not asked about risk, then you’re likely with the wrong advisor.
- Legacy planning: Similar to your goals, your advisor will want to know you want to leave behind one day to your loved ones. This goes beyond assets. It’s your legacy – your philanthropic ideals, your values, and your plans for the next generation of your assets.
- Concerns: Your advisor should ask you about your concerns early on in the process. What are you hesitant about when working with an advisor? Are you afraid of a market crash? Do you not want to invest in companies with poor sustainability practices? Do stocks or equities give you pause? Be open and honest about your concerns.
- Questions: The advisor should act as a teacher and answer any and all questions you have about the plan or the process. And you should have questions. The only way to truly know if your advisor is acting in your best interest is to ask the right questions. We’ve even put together a scorecard with 10 questions you should be asking!
Your advisor will take all of this information and use it to create a customized financial plan that meets all of your needs. Your financial plan will set the stage for how you manage your wealth in the years leading up to and in retirement.
Retirement Planning
Similar to financial planning, retirement planning takes a holistic view of your situation and combines it into one comprehensive plan. But while financial planning focuses on growing wealth, retirement planning is about distributing wealth and other income sources in the most efficient way possible.
To start, retirement planning is really focused on retirement income planning. It’s about how you generate income when you no longer have an employer or business paying you regularly. For many people, retirement income planning focuses on two main sources of income: retirement savings and Social Security. There are plenty of other income sources out there, too, like insurance products, lines of credit, home equity cash options, rental income, etc. But for brevity, we’ll focus on the most common: your investment accounts and Social Security.
- Retirement savings: The amount of money you saved up for retirement. Usually, these assets are held in employer-sponsored retirement plans or advisor-managed plans like IRAs. Your advisor will help you determine when to draw from which accounts, required minimum distributions, and the tax implications of the decisions you must make.
- Social Security: When you file for social security has a lasting effect in retirement. You claim benefits anywhere between ages 62 and 70. However, full benefits do not kick in until you’re 67, and increase 8% per year if you wait until 70. Of course, waiting is not always the best option based on tax situation, life expectancy or other priorities. Your advisor will help you determine when you should consider claiming Social Security benefits.
The other side of retirement planning is thinking about your life in retirement. Health issues are much more common as you get older, and it’s valuable to consider where you’ll live in retirement or how you’ll pay for those added expenses before you’re faced with those choices. It’s also about protecting yourself and your family in case something were to happen to you. So, in addition to your retirement income planning, you’re advisor will talk to you about:
- Medicare and Medicaid: Your health coverage in retirement is covered by Medicare and Medicaid. You’re required to file at age 65, but that doesn’t mean there’s no cost to your care. Your advisor can help you file, plus think of outside income sources to pay for health care, like a health savings account.
- Life insurance: If you have a family, chances are you need some level of life insurance. No one likes talking about what happens when they’re gone, but life insurance is a great way to protect your family during the loss of a loved one.
- Long-term care: One item to consider as you approach retirement is how you’ll pay for long-term care, like assisted living, in-home nursing or a retirement home. Not everyone can age in place, in the comfort of their own home. Having a plan in place to account for this scenario is vital.
There is plenty more to explore with retirement planning that your advisor will help you uncover. You’ll need to understand your retirement income plan before you step into retirement – so be sure to contact an advisor today if you have questions.
Estate Planning
Your legacy is about much more than your assets. It’s your personal values and philanthropic goals. It’s how you’re remembered by future generations, both within your family and beyond.
Financial planning is about accumulating wealth. Retirement planning is about efficiently using that wealth. And estate planning is about what happens to that wealth and those values when you’re gone.
Estate planning is about what you leave behind. There are several ways you can structure an estate plan, much of which depends on the assets you’re leaving behind or who you are leaving those assets to.
Your heirs will likely receive the assets through a will or trust. Some advisors will require you to work with an estate planning attorney to create these legal documents, however some advisors (like those at Carson Wealth) have an in-house estate planning team that can help.
When you do not have an estate plan in place, it can cause serious problems for your loved ones, tying up assets for years with thousands spent in court or legal fees. Further, estate planning includes much more than the creation of a will or trust.
You must check your beneficiaries on every account you own regularly – which your advisor should remind you of annually at least. You need to select a trustee who you can depend on to make the right decision – and who knows what the right decision is. You also could consider charitable giving options with part of your estate, funeral arrangements, life insurance as an estate planning tool, and many other areas of this service.
Estate planning is much more than signing a will. Your advisor should be well-versed in this area of financial advice.
Investment Management
Within financial planning will be your investment accounts. If you have an employer-sponsored plan, that will likely be a 401(k), 403(b) or some type of pension. Outside investments are most commonly an IRA, Roth IRA or 529.
Within each of these plans are mutual funds or ETFs where you can invest your money. Some funds will be stock-heavy and fluctuate with the market, some will be bond-focused and attempt to be more consistent. There will be funds made of large companies, some made up of small companies, some that focus on growth-based companies and some that focus on international companies. The point is, there are a lot of options out there. Without someone trained in investments, it’s very difficult to select which funds align with your long-term goals or risk tolerance.
In addition to your retirement accounts, many investors also have brokerage accounts, where you can buy and sell individual equities. While the availability of trading individual stocks and bonds is greatly increasing with new technologies, it’s not a good idea to try to beat the market, especially without professional guidance. In fact, a small percentage of professionally managed accounts beat the market over the long term, which means you’re better off investing in an index fund or a mutual fund that mirrors an index than you are trying to buy individual stocks on your own.
Your advisor can help you select the investments that are right for you, based on your risk score and personal goals.
Tax Planning
There is a key distinction between tax planning and tax preparation. Tax planning will account for efficiencies over the long term, while tax preparation considers annual efficiency. Tax planning is proactive, while tax preparation is reactive.
Your advisor should be able to help you determine which type of retirement account to use (Roth vs. traditional), the order in which you should withdraw from your accounts, the required minimum distributions of each account, plus the tax implications of any potential planning decisions you’d like to make.
Tax planning becomes even more important as you approach retirement or if you own a business. Your advisor should help you through major decisions, like selling that business or buying a rental property. No one wants to pay more than they have to in taxes, and your advisor should be able to help you make wise decisions.
Your advisor should also work with your tax professional or CPA to ensure your near-term plan and your long-term financial plan align, because the decisions you make today could have a major impact on your retirement income.
Private Client Services
Once you’ve accumulated wealth, at a certain point you’ll need incredibly detailed and specialized help, something not all advisors are equipped to handle. From changing legislation to tax efficiency, estate planning, philanthropic giving, investment accounts and complex financial planning, you’ll need a team of advisors and specialists focused on your plan.
Some firms offer private client services in this situation. Unlike a typical financial advisor, a private services advisor usually only deals with ultra-high-net-worth clients that require extra attention and additional services, like family meetings, alternative investments, legal reviews and private banking.
While not all investors will need private client services, it is important to know if your advisor has access to this level of service as your wealth continues to grow.
How Much Does a Financial Advisor Cost?
If you’ve made it this far, you’re probably thinking, “Great! I’d love to work with a fiduciary financial advisor. But how much does it cost?”
The good news is, fiduciaries have a responsibility to be transparent, both with your financial plan and with their fees. And the key here is fees. Typically, advisors charge a small percentage of a fee on the overall portfolio, typically between 1% and 2%.
Now, various services may incur different fees, but for the most part, it will be that small percentage on the overall assets held in the financial plan. Talk to your advisor about the fees you’re being charged if you don’t know. Some firms charge flat fees. Others charge a marketed advisory fee, with other hidden fees disclosed in the fine print of your investments. It’s important you understand all the costs associated with your plan.
Additionally, you’ll want your advisor to explain the value you receive by paying those fees. If you’re hearing from your advisor once a year just to quickly go over your plan and make a few small adjustments, chances are you are not receiving the value you deserve. In fact, that is the legal minimum you must receive!
Often you’ll find that your fees are reduced with the more money you have invested with that advisor. So if you have three different investment accounts with three different advisors, it might be smarter to move all of those accounts into one financial plan with one advisor, thus reducing your fees and giving you a singular plan.
I encourage you to talk to your advisor about fees today if you have any questions. If you are not paying a fee or you paid an up-front cost for advice, there is almost always a reason! Chances are that the advisor made a commission on selling you a product vs. charging you for ongoing fiduciary planning. Any fiduciary should be able to quickly and easily explain their fee structure based on your individual plan.
Finding an Advisor Near You
The financial step when searching for a financial advisor is to know where to look! Most people want an advisor in their community – someone they can meet with face-to-face. And there are benefits to in-person meetings, too. It’s why we have over 130 locations across the country.
But we also have clients located far outside of our offices. Because when it comes to finding the right advisor, location isn’t necessarily the No. 1 priority.
There is a lot that a financial advisor can do for you. We spend years developing our craft and earning certifications to stay sharp – because there will always be people who need help managing their financial plan.
If you’d like to get to know one of our fiduciary advisors, please schedule a complimentary consultation. We’ll set up a time to get to know you and put a plan in place for your future.
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The views depicted in this material are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.