Hiring a financial advisor can be an excellent way to maximize your financial strategy and ensure you’re doing all you can to meet your money-related goals. A qualified financial professional can set you up for success, whether it’s planning, saving or investing you need help with.
Just one problem: The words “financial advisor” have no official meaning, and there’s no one certification or license that makes someone an advisor. That means it’s buyer beware when you’re in the market for professional advice.
Here’s how to perform an advisor check that’ll help ensure you’re getting your money’s worth. (After all, saving money is the whole point of this endeavor, right?)
A background check is essential when hiring a financial advisor
When you start looking for a financial advisor, you’ll quickly notice a veritable alphabet soup of designations. Your contending confidante may be a CFP, CPA, CLU or FRM — and that’s just the tip of the iceberg. What’s more, not all of those spiffy-sounding titles indicate similar skill sets or educational backgrounds. In fact, some of these so-called qualifications are little more than meaningless name decor.
“Some certifications you don’t even need to [take a] test for,” said Malik S. Lee, founder of Felton & Peel Wealth Management. He’s also a certified financial planner (CFP), and he serves as a member and question writer on the CFP Board’s Council on Examinations.
Certified financial planners, he said, go through a stringent course of study, culminating in a difficult exam; he estimated the pass rate to be just over 60%. And while CFPs certainly aren’t the only qualified professionals on the advisor market, the plethora of options means consumers need to be careful — especially since financial advice is so highly sought-after.
New types of “experts” crop up on the market all the time, Lee said, estimating a current count of about 140 to 150 qualifications to choose from. But many of those designations aren’t accredited or regulated by any kind of governing body, and some “advisors” are little more than insurance salesmen who are looking to make a commission off your purchase of an expensive financial product like life insurance.
“You have to be careful of all certifications,” Lee said, “and you have to make sure you do your due diligence.” Here’s how.
How to check your advisor’s credentials
Whether you’re looking for a financial advisor, investment advisor, planner or broker, the best way to ensure you’re hiring a professional is to delve into what the letters stacked after their name actually mean.
You can start by tracking down the certifying board’s official website, if there is one, and reading more about its requirements and specifications — keeping in mind, of course, that it’s not going to be the most unbiased information available.
But one of the best ways to weed out the bad eggs is to go straight to the Financial Industry Regulatory Authority (FINRA), said Lee.
Choosing an advisor whose designation is accredited by FINRA is a great way to ensure there’s some actual know-how behind those letters. The organization keeps a comprehensive list of professional designations, listing prerequisites, educational requirements, the type of exam students must pass, and information about complaints and accreditation. You can even compare multiple designations at a glance.
Once you feel good about your potential advisor’s designation, you can double down by looking up their specific credentials. For instance, you can ensure that your advisor’s license is current and check to make sure there no bad reviews from previous clients.
A good start is to check out any user reviews that may exist for the firm or broker, either on their Google listing or through a third-party rating site like Yelp. But it’s also a good idea to use a tool like FINRA’s BrokerCheck to get a full report on their employment history, qualifications and disclosure events. Depending on whether the advisor advertises themselves as a broker, investment specialist or insurance agent, there are a variety of different ways to go about the process — both online and over the phone. Check out FINRA’s instructions for full details.
Know before you go: what’s your advisor’s fee structure?
Another shorthand for finding a worthy advisor: Look for a fee-only advisor or fiduciary who earns their keep in exchange for actual management services rather than banking on commissions in exchange for selling you products. Fee-only advisors may charge flat rates for specific services or express their rates as a percentage of assets under management (AUM). There are also fee-based professionals whose compensation structures may combine flat fees, AUM percentages and commissions.
While “fee-only” is good, “fiduciary” is better, said Lee, suggesting consumers look for that term first. Fiduciaries are legally required to act in their advisees’ best interests, regardless of how it affects their paycheck.
What you may want to avoid is an advisor who makes their money exclusively off commissions, as this person may have conflicts of interests if they can earn money selling you a product you may not really need. How exactly a potential advisor is compensated should be one of the first questions you ask in an initial meeting.
If you’re strapped for time or not keen on doing hours of research, certified financial planners and certified public accountants (CPAs) are common designations that serve many investors. According to Lee, these two designations require their members to pass the hardest examinations in the industry, thus indicating a significant, measurable level of financial savvy.
And no matter who you hire, don’t forget: It’s your money. If you find yourself in a professional relationship you’re uncomfortable with, you always have the option of moving on to a different advisor — and it’s an option you should absolutely consider if you have reservations.