How to choose a financial advisor
When someone is looking for an advisor, it can be a frustrating search, especially if you've had a bad experience before. The difference in a planner, stockbroker, investment manager, and an insurance or annuity salesperson isn't clear because all of them tend to use the title “advisor.” The industry has become so convoluted that even folks who work in the industry can have a hard time articulating the nuances of the different types of “advisors.” In fact, the regulators of the industry would say that this is all acceptable. I tend to disagree about that, so I want to shed some light here.
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TYPES OF FINANCIAL ADVISORS
Financial Planner & Investment Manager
A financial planning "advisor" or wealth manager gives you a comprehensive review with goals, action steps, and likely investment management. The service can either be one-time or ongoing depending on your situation and what the advisor offers. Perhaps you’re starting to think about estate planning, retirement planning, and things that have a big impact on your financial life. We believe that doing a comprehensive plan is ideal in order to select the right investments and manage them optimally.
Stockbroker
People used to employ this type of “advisor” to purchase stocks on their behalf. Now, with the public access to online trading tools like E-Trade, people can buy their own stocks. So someone who is looking for a stockbroker “advisor” is generally looking for stock tips. If you already have a robust financial plan and you’re looking for help only with stock picking, a stockbroker might be the right type of advisor for you.
Insurance Salesperson
If all you need is life insurance, get some quotes for life insurance at selectquote.com. But if you need specialized strategies within the realm of life insurance, such as buy-sell agreements for small business owners, AND you already have a robust financial plan, then an insurance salesperson could be a good fit for you. If you go through an insurance salesperson or “advisor,” you should be aware that in most cases the insurance salesperson will be commissioned about 50-70% of what you pay in premiums the first year, and even if you are speaking to someone who can offer you insurance from various providers, they typically have minimum product sales they have to meet with their sponsoring insurance company.
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HOW TO RESEARCH A FINANCIAL ADVISOR
Google Search
Read online reviews and get a feel for the reputation of the advisor. Some people like to get references, but I think the Google search is more valuable. Any advisor in their right mind is only going to give you their happiest clients as references. In my opinion, learning about their complete reputation through a Google search is much more telling because the advisor has no ability to screen that… what you see is what you get.
Anyone listed as an active broker with FINRA (Financial Industry Regulatory Authority) has or has had an association with a “broker-dealer,” which means that they can sell commissionable products. Being associated with a broker-dealer means that the broker-dealer has sales quotas that the advisor must meet to keep the association. Therefore, you will want to make a mental note of their status as broker, as it could affect the advice they give you, especially if they are trying to meet those quotas.
You are also checking for disclosures, which can be customer complaints or arbitrations, regulatory actions, employment terminations, bankruptcy filings and certain civil or criminal proceedings that they were a part of. You want it to say NO disclosures (see photo). Check out a broker's listing with FINRA here.
An Investment Advisor Search through the SEC (Securities & Exchange Commission)
will help you confirm that the advisor is registered as an investment advisor representative. An investment advisor is paid for providing advice about securities to clients. In addition, some investment advisors manage investment portfolios and offer financial planning services.
Also, here again, you are checking for their good standing and for disclosures, which can be customer complaints or arbitrations, regulatory actions, employment terminations, bankruptcy filings and certain civil or criminal proceedings that they were a part of. Ideally, you want there to be NO disclosures. You can check out Jeremy Ellisor's or another investment advisor's registration with the SEC here.
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QUESTIONS TO ASK A FINANCIAL ADVISOR
Are you ALWAYS required to act as a fiduciary?
This one question is so critical that we wrote a whole blog post about it here. Most people know that they should be looking for an advisor who is a fiduciary, but most people do not know that there is a rule that allows some advisors and firms to quietly slip in and out of fiduciary duty. In fact, many of the national firm names that are most recognizable fall into this category. It can put you in a jeopardized position when they offer advice without putting your best interest first. Please do your due diligence and learn more about it here. At Convergent Financial Group, we are 100% fiduciary 100% of the time. Regardless of who you work with, you need to find an advisor and firm that can both say the same.
What experience do you have?
It’s very easy to GET into this business, but it’s very difficult to STAY in this business, so looking at longevity can be telling. Ideally, if you are over 50, you want someone who is a little younger than you, but still experienced. If you are in your 20’s or 30’s, you would typically want someone a little older than you because of their experience.
Who do you work with?
Some advisors specialize in serving young doctors, retirees with pensions, or the worst answer you can get… “anyone.” You want to know if their client base description also describes you. The more experience they have providing what you are looking for to people like you is proof positive that they will have a greater understanding and knowledge of how to best serve you.
How are you getting paid?
COMMISSIONS FROM PRODUCT SALES
Many advisors get commissions for selling annuities, insurance, and similar products. Folks might be surprised to learn that the advisor’s commission on a $500,000 annuity could be about $50,000! If you’re thinking that’s a very steep commission, you and I are in agreement. With life insurance, the advisor typically receives 50-70% of the first year’s premiums as commission. That’s no small commission either!
KICKBACKS OR 12B-1 FEES FROM INVESTMENT COMPANIES
This is an annual revenue stream paid to your advisor by an investment company. It is considered an operational expense and is included in the fund’s expense ratio. It is generally 0.25%-0.75% of the investment.
ADVICE ONLY
This where you want to get a yes. If the advisor is only paid for offering you advice, they are not incentivized to make certain recommendations to enhance their own income. I personally think this is best and it’s how we do business at Convergent. Just to be clear: investment products and insurance are not all bad. BUT, if used, they should be one small part of your financial portfolio, not the primary vehicle.
🔗 For more information on how different advisors get paid, check out this blog post.
Will I be working with you or your staff?
Especially in larger firms, it is not uncommon for the senior advisor to handle the initial meetings with a client and then turn them over to a junior advisor or even an admin person.
What's your service model?
You want to find out what you can expect from each step of the initial process and how your ongoing relationship with the advisor will work.
What will I get from you? Can I see a sample?
In the case of a financial or investment plan, for example, you want to actually see what the delivered product looks like. Not only will this set clear expectations, but it will also help you understand if what they’re providing is what you want. Their ability to do this is also a telltale sign of whether they are actually a financial/investment advisor or an insurance advisor.
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FINALIZING YOUR DECISION
Ask yourself...
Did the advisor pass all 3 research tests?
Did the advisor answer all of my questions completely and to my satisfaction?
Did I get the sense that the advisor was forthcoming in all answers, but especially regarding how they get paid?
Will I be satisfied and well-served by the deliverables and the ongoing service level of the advisor?
Can the advisor provide what I actually need?
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TIPS & WATCHOUTS
An advisor says, “You don’t pay me. The company that issues this product or mutual fund pays me.” This is a big red flag that they are getting paid commissions or kickbacks. I’ve seen annuities that pay 10% of the deposits to the advisor! That could be $50,000-$100,000 for meeting with someone maybe twice! A good advisor should be very comfortable explaining exactly how they get paid and how much they get paid. I’ve said it before and will say it again… trust me, nobody is working for free. It’s costing you something to work with an advisor regardless of how they might try to skirt around it.
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When you ask who they typically work with, the advisor responds “anyone.” That is a good indication that they are probably just selling products or investment vehicles for commissions or kickbacks. The translation of “anyone” is “I can sell [product or investment] to anyone who has the money to purchase or invest.” That doesn’t necessarily mean that this person is evil and out to get you, but it would give me pause personally. I’ve heard too many stories from folks who come to see me after they get burned for me not to be leery.
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When it comes to insurance, one way you can tell if an advisor has your best interest at heart is whether they are pushing you to buy insurance from them or encouraging you to shop the marketplace for the best value.
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When you ask for a sample financial or investment plan, the advisor's ability to provide one is a telltale sign of whether they are actually a financial/investment advisor or an insurance advisor.