How do you choose a financial advisor?
If you are new to investing, this question seems overwhelming. Inexperienced investors can feel like they don’t even know what questions to ask, or what makes one advisor better than another. When searching for the right financial advisor, you should always keep the advisor’s experience, reputation, and knowledge of the industry in mind. Ask trusted friends and family who they recommend. And when you meet with an advisor, don’t be afraid to ask questions like:
How are you compensated?
How do your returns compare with others in your field?
How much time will you spend on my investments?
It’s easy to make assumptions about financial advisors, some of which may be true and some may not. When you are unsure, though, the best thing to do is ask plenty of questions and know as much as possible about the person with whom you are entrusting with your money.
Few questions are more important when choosing a financial advisor than this:
“DO YOU HAVE MY BEST INTERESTS IN MIND?”
Trust is critical. No one wants an advisor who ignores their clients’ money while drawing an annual fee. Or, worse, align themselves with an advisor who is not properly trained or knowledgable.
Trust and peace of mind are among most people’s top priorities. The point of hiring a financial advisor is to minimize the level of worry and stress you experience with your investments, while allowing a trained professional to do what they do best. Ideally, this trained professional can communicate objective truths about your ability to achieve your financial goals, giving you not only peace of mind, but also a clear path toward financial success.
If trust and objectivity are critical components for you, it might be wise to consider investing your money with a fiduciary.
WHAT IS A FIDUCIARY?
Fiduciaries are financial advisors who work for a flat fee rather than commission or product fees. They offer advice based on the best interests of the client instead of what generates the most commission. Fiduciaries must also do his or her best to ensure investment advice is made using accurate and complete information.
What does a Fiduciary Do? Here are four easy explanations:
1 - A Fiduciary Works in the Client’s Best Interest:
Fiduciaries are legally and ethically bound to act in the best interest of the client. The fiduciary, then, cannot receive commission or product fees from client accounts. This is important because it creates separation between the fiduciary’s recommendations and their client’s finances. Working in the client’s best interest means the fiduciary makes recommendations based solely on what is best rather than what draws the largest commission.
2 - A Fiduciary Avoids Conflicts of Interest:
Conflicts of interest occur when a person is no longer reliable due to conflicts between his or her interests and the interests of those they represent. Fiduciaries keep conflicts of interests at bay by fulfilling their legal and ethical obligation to prioritize their client’s interests first. By charging flat rates rather than drawing commission, a fiduciary has nothing to lose by offering alternative investment strategies through means other than the fiduciary’s own company or firm. As a client, this provides you with peace of mind that you’re receiving objective advice that is truly best for you.
A fiduciary can, however, manage funds as a broker if you choose to invest with their firm. As per their obligation to put you first, there should be a transparent conversation about the change in pay structure before you agree to invest with them. Once you invest, the fiduciary will draw commissions and fees as your broker.
One reason to invest with a firm that acts as both fiduciary and broker is to keep all financial planning and investing in one company. Many physicians and dentists find this approach helpful because it creates financial symmetry and minimizes energy spent ensuring your financial plan is being properly executed through your investments. A fiduciary who also acts as a broker is, to put it simply, a one-stop-shop for all your investment needs.
3 - A fiduciary is a Guide, not a Salesperson:
An important part of the fiduciary’s role is to keep their client educated in all the latest investment opportunities and strategies. Fiduciaries function as a guide, not a salesperson. Your decisions do not affect the financial status of the fiduciary. So, when new investment opportunities arise, fiduciaries help you understand the risks and rewards, as well as the best approach to maximize your investments without ulterior motivations.
4 - A Fiduciary Maintains an Objective Financial Focus:
A fiduciary has the freedom and flexibility to keep financial advising simple. Most questions regarding financial planning have a definitive and objective solution if you just follow the math.
Traditional brokerage firms are sometimes handcuffed by a limited number of products used as investment tools, some of which may not be the best way to maximize your dollar. Fiduciaries, however, create customized investment strategies based on objective facts that serve you best.
Which Financial Advisor Should I Choose?
Choosing the right financial advisor is all about your needs and financial goals. For some, a traditional brokerage firm is adequate. Others have found fiduciaries to be a preferred choice primarily for the reasons above. It is important to know what you want to accomplish with your investments, and you should certainly trust the advisor with whom you are working. Ask around, get recommendations, and make the decision that's best for you and your future.
written by: cory jones