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5 Factors to Consider When Choosing a Financial Advisor

5 Factors to Consider When Choosing a Financial Advisor

Wednesday, March 29, 2023/Categories: Bank News, Saving & Planning

Are you looking for a financial advisor? There are many factors to consider when choosing one. The financial services industry is broad and includes many types of advisors with different certifications and specialties. You need to ensure you're working with someone who can help with your specific needs.

Here are some things to think about when selecting a financial advisor: 

Get Recommendations from a Trusted Resource
Ask your lawyer, accountant, or other advisors for their recommendations. They may be familiar with quality planners in your area. If you have a retirement plan at work, find out whether the company offers a list of local advisors they can recommend. Call each planner you're interested in working with and ask how they charge clients, the type of services they offer, how long the planner has been in business, and what credentials they hold. See if their answers match your needs and expectations before continuing.

Make sure your chosen advisor has an established track record of working with clients with similar financial situations. This ensures the advisor has experience working with people in your situation. For example, young families need assistance planning and paying for a child's education, while older couples may only need assistance managing their retirement income. It's better to work with a specialist who specializes in your needs.

Ask the Financial Advisors You Interview About Their Strategies and Approaches
A good financial advisor can show you how they have helped people like you, break down the strategies they use, explain why they are the best at what they do, and have a clear and transparent fee structure. You should understand their strategy before hiring them and how they plan to help you. It may be helpful to interview a number of financial advisors before making your decision.

Consider a Financial Advisors Certifications
Look for a financial advisor who is certified. Certification means the advisor has passed exams and undergoes continuing education to enhance their knowledge and skills. They're also held to a high ethical standard. Here are a few of the most common certifications:

  • Certified financial planner (CFP). A CFP has passed a certification exam covering all areas of finance. They must also adhere to a code of ethics and continue to meet continuing education requirements. A CFP should provide comprehensive financial advice that includes tax planning and estate planning.
  • Chartered Financial Analyst (CFA). The CFA is sponsored by the CFA Institute and is considered one of the most rigorous investment designations. Achieving this certification requires passing three exams that test knowledge of investment management, security analysis, accounting, economics, and portfolio management.
  • Personal Financial Specialist (PFS). Only CPAs are eligible for this designation from the American Institute of Certified Public Accountants. To earn it, you must demonstrate expertise in financial planning for individuals and families.

Consider Their Compensation Structure
There are two fundamental types of financial advisors: those whose compensation structure is aligned with their fiduciary duties and those whose aren't. In the case of the latter, there are a few clear guidelines for determining whether you should use them or not.

Fiduciaries must answer to three different legal standards when providing investment advice. Under the law, they must always act in your best interest (regardless of personal interests), act in a way that is truly independent (they can't take any commissions or kickbacks from investment decisions), and provide unbiased, independent advice. There are situations where financial advisors may have conflicts of interest regarding their own investments.

Ultimately, the most important thing is to make sure you're comfortable with how your adviser's compensation structure works before deciding if they should handle your portfolio directly.

Choose a Financial Advisor with Good Listening Skills
Choose a financial advisor who listens to your concerns and responds to your questions. Listening is an important part of any relationship, but it's especially important in the context of finding a financial advisor.

As with other relationships, you'll need to establish rapport with your financial advisor. This means you should find someone who isn't just willing to answer your questions but is eager to address them. A way to gauge a possible candidate's temperament is to ask how they would handle certain hypothetical situations. Don't be afraid to question them.

The financial industry has its own language, so there's often some explanation involved when talking about complex investment and retirement strategies. A good rule of thumb: if you're confused about what a potential advisor says, they're not doing a good job communicating their ideas or strategies to you. Make sure you can relate to and understand your chosen financial advisor. If they don't know why one option might be better than another, it might not be the right choice for you. Being proactive can spare you from unpleasant surprises later down the road.

Choose a Financial Advisor whose Philosophies Align with Yours
Regardless of how much experience an advisor has and how many awards they've won, if you don't agree with their approach, it's unlikely that you'll be comfortable following their advice. If the advisor is overly conservative or aggressive with your investments, it may not be the right fit. It all comes down to the client's personal goals and risk tolerance.

For example, you might be a financial planner yourself -- but that doesn't mean you have time to manage your own portfolio (unlikely), or that you trust yourself to do so. Perhaps you know more than most about markets but are aware that you can make bad decisions when managing your own money (this is called "behavioral bias"). By hiring someone else to manage your finances for you, you can help ensure there's a logical strategy for the long term -- not an emotional one for the short term.

The Bottom Line
Seeking a financial advisor is something that many people don't feel comfortable with, but it's important to develop a relationship of trust and faith with someone who will be working with you in such an important area of your life. If you have questions or are looking for more guidance, please feel free to utilize the investment team at Andover Bank. Hopefully, the tips shared in this article will help you narrow down your options. All you must do now is find the right fit for you.