While good advice from a qualified financial planner can mean the difference between a successful retirement and outliving your money, I wouldn't trust most financial advisors with my own money, and I don't think you should either.
Simply, I don't trust most so-called "financial advisors" because they are unqualified. Unfortunately, no qualifications are required in order for an individual to give himself the title of financial advisor. An 18-year old high school graduate has as much right to refer to himself as a financial planner as any professional in the industry. In fact, there are approximately 929,700 individuals in the U.S. that refer to themselves as financial professionals. Let's examine what job functions these "financial advisors" actually perform:
- 411,500 are insurance agents
- 312,200 are stock brokers
- 206,000 are personal financial planners
While these people work in the finance industry, are they majority actually financial planners? If you seek advice from a "financial advisor" who is actually an insurance agent, what advice are you most likely to receive? You'll probably be told to purchase life insurance and annuities. Similarly, a stock broker is likely to recommend stocks, bonds, and mutual funds, but will they do any true planning to determine if you are on pace to meet your retirement goals? Not likely. The job functions that most people equate with financial advisors are simply not performed by most financial professionals.
How can you ensure your advisor is a true financial planner who will examine all elements of your financial situation and look out for your best interest? First and foremost, look for a Certified Financial Planner (CFP). Certified Financial Planners must undergo two years of intensive training followed by a rigorous two-day examination (with a pass rate of approximately 50%). A code of ethics must be adhered to and participation in a continuing education program is required. CFPs are trained in many aspects of the financial-services industry, including investments, insurance, retirement planning, taxes, estate planning, and more.
How many of the 929,700 "financial advisors" in the country are CFPs? Approximately 67,323, or about 7%. Consequently, I believe approximately 93% of so-called "financial planners" lack the formal education to provide comprehensive financial planning for their clients.
The other qualification I would recommend in a financial professional is to ensure they are objective. Can an advisor who is paid a commission for recommending one product over another truly look out for your best interest? Unfortunately, most advisors at brokerage firms, insurance companies, and banks face this dilemma. To avoid this conflict of interest, work with a fee-only financial advisor. These planners never collect commissions from the products they recommend, and are paid solely by their clients in order to represent their best interests. Fee-only planners get paid by the hour, the project, or as a percentage of the assets they manage for clients.
Importantly, fee-only advisors are fiduciaries, meaning they are required by law to put your interests first, similar to a doctor or an accountant. Commission-based advisors are not held to the same standard. In fact, they are required by law to act in the best interest of their employer.
(BEWARE: fee-based is not the same as fee-only. While fee-based advisors charge their clients directly for their services, they still have the ability to collect commissions from the products they sell.)
So how many of the 929,700 financial advisors out there are fee-only CFPs? Shockingly, only approximately 2,400, or .3%!
Choosing to work with a qualified financial planner can dramatically increase your odds of success. Investors who employ the services of a good financial advisor are much more likely to reach their retirement goals and improve their long-term outlook. Set the bar high so you end up with an advisor who is competent, ethical, and on your side.