5 Traits To Look For In A Financial Advisor

I get asked on a fairly regular basis how does one go about finding good, quality financial advice? This is a tough question for me to answer without coming across as sounding too biased or too self serving. However I truly believe in my personal opinion the best advisors out there operate as such:

1.) Fee-Only – what this means is the advisor is solely compensated by fees paid directly to him by the client. The advisor does not earn a commission for buying/selling investments for the client. The advisor does not get paid a % up front for buying a particular mutual fund for the client. The advisor does not get financial kickbacks from a broker-dealer or mutual fund company for doing business with them. The advisor does not collect referral fees for sending the client to another service provider. The only revenue generated to the advisor is from the fees the client pays him or her for providing advice to them.

2.) Certified Financial Planner (CFP) – the advisor should have CFP after their name. This designation is given by the Certified Financial Planner Board of Standards to those who have successfully passed a two day, 10 hour exam that covers a wide range of topics such as financial planning, insurance, retirement planning, investments, estate planning, and tax. I know from personal experience that this is a very challenging exam that tests your ability to understand all of these concepts and how they interrelate with one another as it pertains to a person’s total financial picture. Being able to use this designation after passing the exam also requires having at least 3 years of relevant work experience. Working with a CFP practitioner should be essential for anyone who is serious about having someone look over their complete financial affairs.

3.) Experience – finding someone who has at least 10 years of experience in the field will help you weed out career changers and newcomers who have not been through a number of different market cycles. This is very important because it gives the advisor a better historical perspective especially when things seem really bad like what has happened recently. Even though we preach to our clients that we can help them take emotion out of the game, newer advisors have never been through the emotional roller coaster the markets can bring. Many prognosticators expect this roller coaster ride to get even bumpier going forward into the future.

4.) Fiduciary – in this day and age of Bernie Madoff, entrusting someone with all of your wealth can be a very scary undertaking. You need to find someone that you can put all of your faith in that they will do the right thing. But even this may not be enough as many advisors on the surface appear to be trustworthy people. Find someone who is willing to go beyond this and take on the added responsibility of being a Fiduciary. Check the wiki link out for what Fiduciary means by clicking here. The key part of this definition is to act at all times for the sole benefit and interest of another. Wouldn’t you want your advisor to be a Fiduciary?

5.) Independent – the advisor is not tied to a broker-dealer which limits him to certain investment products to work with and tells him how he should operate his practice. Instead the advisor can work with any brokerage firm he chooses and pick and choose amongst any investment out there in the universe. Many of the larger brokerage firms have either gone under or merged with others in the last few years. A lot of these firms have been in the news for a lot of negative things which has caused quite a public backlash against them. You now see more and more brokers breaking away from these firms and starting their own companies as Fee-Only advisors. When you think about it, at the end of the day, the larger publicly traded firms have to do what’s best for their shareholders which may or may not be in the complete best interest of the retail client. Look for someone who is totally independent and operates on their own as a Registered Investment Advisor (RIA).

If you are looking for someone to help you, I highly recommend finding someone who has these 5 traits. There are never any guarantees but working with someone who possesses these qualities should give you a comfort level that you’ve found someone competent, qualified, objective and who is truly looking out for your best interest at all times. Good luck!

About the author

Carleton McHenry, CFP®

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  • The point that you made about finding a financial advisor with years of experience really resonated with me. I want to have a qualified professional help me with my finances. I will be sure to implement this information into my future plans. Thanks for sharing such valid advice about money planning.

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