Investing

4 steps to follow when hiring a financial advisor

A financial advisor can put you on the right path. Here's how to find a trustworthy professional.

Twenty/20

When calamity strikes, financial or otherwise, it's good to have someone to turn to. Maybe that's why financial advisors have been so busy of late. More than 3 in 4 advisors (78%) have seen an increase in client inquiries during the Covid-19 pandemic, according to a recent survey of certified financial planners by the CFP Board. It found clients are seeking advice on topics ranging from managing volatility in their investments to paying down debt to caring for aging parents.

Some people don't feel they need a financial plan — they have a long-term plan in place, perhaps, and they don't feel at all confused about matters relating to their money, their budget, their debt, or their investments. Most people aren't that lucky, though.

Maybe you could use some guidance here and there, and the problem is that you assume you couldn't afford it. Depending on how you pay for advice, you may be mistaken. And if you're diligent about choosing a financial planner who's right for you, the advice you get may eventually pay for itself, says Justin Nichols, a CFP and director of operations at the Garrett Planning Network, a collective of fee-only advisors.

"If you get started on the right track and avoid some things that would be financially detrimental, you'll likely look back in 10 to 20 years and really value that financial plan you made, even if it seemed like a lot of money at the time," he says.

Whether you think you need extensive financial planning help or just want to make sure you're on the right path, hire a trustworthy financial advisor you can afford by following the four tips below.

Avoid conflicts of interest

Start by making sure you're getting objective advice. One way to help ensure this is to hire a fee-only financial advisor — that is, one who receives 100% of his or her compensation from clients and has a fiduciary obligation to act in a client's best interest. Some advisors and other financial professionals may receive commissions or payments from third parties for recommending certain financial products, such as annuities or mutual funds that come with sales charges and high expense ratios.

"You'll get much more objective financial and investment advice, without conflicts of interest, from a fee-only planner," says Nichols.

Payment models and prices vary (more on that in a second) but you can find fee-only planners through groups such as the Garrett Planning Network, the National Association of Personal Finance Advisors, or the XY Planning Network, which specializes in advice for millennials and Gen Xers.

If you get started on the right track and avoid some things that would be financially detrimental, you'll likely look back in 10 to 20 years and really value that financial plan you made, even if it seemed like a lot of money at the time.
Justin Nichols
CFP, director of operations at the Garrett Planning Network

Choose an appropriate payment model

The fees that fee-only planners charge vary. Planners may charge a flat annual fee for their services or an hourly rate. Some planners use a subscription model, charging a fee up front followed by monthly subscription payments. Others charge a flat fee for packages of advice, like creating a financial plan. Still others might charge you a fee equivalent to a percentage of your assets (if they're managing your investments for you) or a percentage of your income.

For young or fiscally inexperienced folks, the hourly model is probably most appropriate, says Douglas Boneparth, a CFP and ambassador for the CFP Board. He is also the president of Bone Fide Wealth in New York City.

"If you want to set up a financial plan or just do a basic budgeting session, you can get just a few hours from a financial planner, and that's that. As an industry, we've moved on from the model of trying to get assets in the door," he says.

Depending on the advisor, expect to pay $100 to $300 an hour for planning services, Boneparth says. A subscription model will likely lock you in for the year, but may be the best option if you're looking for ongoing financial advice.

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Know your credentials

As you shop for a financial advisor, you may notice that all of these people have an alphabet soup of designations after their names. The one to look for: CFP. To earn the designation, certified financial planners have to pass a rigorous exam and accrue 6,000 hours of professional experience or 4,000 hours of apprenticeship under the tutelage of another CFP. They can handle matters ranging from budgeting to retirement saving and investing to estate planning.

"If you work with a CFP, you're getting something — the understanding that this person has equipped themselves with a high degree of knowledge specific to financial planning," Boneparth says.

If your financial planning needs skew toward tax planning, consider a certified public accountant (CPA) who also holds the personal financial specialist (PFS) designation. The PFS stamp means that they've undergone additional coursework on financial planning. "It's a very relevant designation," says Nichols.

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Do your due diligence

The search process for a financial advisor should start like your search for any professional service. Ask for references from people you trust. If you find a planner you could see yourself working with, ask them about their credentials, professional experience, and educational background. And make sure they're relatable, says Boneparth.

"You want to find someone who gets your situation, someone who understands your position and life and who has empathy for where you're coming from," he says.

Do a background check as well, SEC Chairman Jay Clayton tells Grow: "If someone has disciplinary history, the chances that you're dealing with someone you shouldn't be dealing with go way up, and you want to know a lot more before you agree to work with them."

Type your potential advisor's name into the SEC's Investor.gov page and at Finra's BrokerCheck. Both sites will give details on an advisor's credentials, exams, and professional experience as well as any official client complaints or criminal or regulatory infractions.

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