How to Choose a Financial Advisor – by Eric Brotman
My name is Eric Brotman and I am the President and Managing Principal of Brotman Financial Group in Lutherville, Maryland.
I hold a Master’s Degree in Financial Services, and I am a Certified Financial Planner Practitioner™ and an Accredited Estate Planner.
For nearly 20 years, I have been counseling families on how to plan for wealth creation, preservation, and distribution.
When many people think about financial planning, they tend to only concentrate on their investment portfolios.
But a comprehensive financial planning process includes much more than investment management.
It includes cash management and budgeting, retirement planning, estate planning, tax planning, risk management and insurance planning.
In today’s video, we will be discussing several tips involved in choosing a financial advisor, including how to identify advisors, the credentials they should carry, vetting potential planners and their backgrounds, as well as what questions to ask before engaging in a planning relationship.
Our goal will be to help you make an informed selection of a financial advisor.
To identify potential financial advisors, I recommend that you begin by seeking advice from trusted individuals.
This may include your friends and family as well as colleagues or other trusted persons who can help guide the financial decision-making process.
I also recommend that you visit the Financial Planning Association or the (FPA) website at and select the option to “Find a Planner.”
The FPA website is a good tool to help locate advisors in your area. It also provides information into the types of clients each advisor represents.
Once you have a list of several advisors, you will want to review their credentials.
When selecting an advisor, you want to look for credentials which reveal a background in financial planning.
There are many industry-specific credentials and designations, some of which take years of study to earn and others which are mere certificates of participation.
In general, look for the Certified Financial Planner™ or (CFP®) designation, as it is the gold standard for the financial planning industry.
To earn a CFP® designation, a candidate must pass six (6) courses and a two-day, 10-hour board exam.
Additionally the candidate must have at least three (3) years of experience in the field, and most importantly must maintain objectivity and act as a fiduciary while keeping the client’s best interest in mind.
Some advisors work for various financial institutions as captive agents or employees, which can limit the range of products or services available to their clients.
Other advisors are independent and have an open range of products and services available to their clients manufactured by multiple financial institutions.
At the end of the day, you wouldn’t see a doctor without an M.D., so in my opinion, it is important to know if an advisor is a CFP® or not, and also to whom the advisor is primarily responsible – their employer or their clients.
Before choosing to work with an advisor, you may want to conduct a professional background check on him or her.
You may also want to see if they have a history of complaints against them or if they have been involved in a personal bankruptcy or have had legal actions taken against them.
To research a potential advisor, you can verify that your advisor is a CFP Practitioner by going to the CFP Board’s website at .
You can also check disciplinary history by using the Financial Industry Regulatory Authority’s Broker-Check, which is available online at .
Once you have the names and contact information for a few advisors and have moved through the vetting process, I recommend that you interview one or more of your top candidates.
The questions you ask during the interview are vitally important to making an informed decision.
The example questions that I provide are in no particular order and the intent of these questions, is to help you determine what is in your best interest.
I will start by asking how the potential advisor selects specialists, like
accountants,
attorneys,
financial institutions (like banks or credit unions),
insurance agents,
real estate agents,
mortgage brokers
And if they would be willing to work with your existing specialists.
Think of the financial advisor as your general contractor and the specialists as the sub-contractors.
The outcome of your work with this advisor can often rely on the quality of the specialists they or you choose.
Ideally, you want an advisor who will work with your existing specialists, or someone who has relationships with people who are considered experts in their fields, and not just relationships with in-house specialists or staff.
What services does the advisor provide personally?
In other words, does the advisor provide recommendations on all of the services in a comprehensive plan, or only on a few services.
If the advisor is a stock broker, for example, he or she might limit the scope of their relationship with you to just your investment or retirement portfolio.
In most cases, you’ll want to work with someone who can bring your entire plan into focus.
What are the fees and costs of doing business with this advisor?
There are several ways in which advisors are compensated, and they are regulated by the types of licenses held by the advisor, not by their professional designations.
Only registered representatives or investment advisory representatives can earn fees for investment advice or commissions on financial products.
Advisors can be paid a flat fee, an hourly fee, or a retainer fee for their advice.
They can be paid a percentage of assets under management or a recurring annual retainer fee.
They can also be paid commissions for making transactions.
While none of these compensation arrangements are “good” or “bad” per se, in my opinion, the best way to get objective advice is on a fee-basis or based on a percentage of assets under management. That way, a client pays an advisor to do analysis and provide recommendations which are not tied solely to the sale of one or more products.
There are an array of questions you can ask a financial advisor about how they work with clients. Some of those questions could include:
How often will the advisor meet with you each year?
How much communication can you expect on an ongoing basis?
Are there fees associated with each meeting or with each conversation, or are the services bundled?
Does your advisor have a team of specialists and assistants who are available to you?
Will you have online access to your planning and accounts?
Does the advisor have plans to grow the firm and how might that impact your relationship moving forward?
The responses to these types of questions will largely be based on what you are personally seeking from the advisor. Determine how you want to proceed and evaluate the responses based on your needs.
What is expected of you in the planning relationship?
In most cases, to do an excellent job of financial planning, an advisor should expect you to be forthright with your financial picture, and open to discussions about sensitive issues.
If you are married or in a committed relationship, it is generally important to have both parties at each meeting, so that everyone is on the same page.
It may also be necessary for the client to gather documents, contact former employers, make changes to employee benefits, or take other steps to make the plan accurate or up to date.
What is involved in the financial planning process?
In an ideal situation, the planning process should include:
Establishing financial goals;
The gathering of relevant data;
Full analysis of the data;
Development of a plan for achieving your goals;
Implementation of the details of the plan; and
On-going monitoring of the plan to keep it on track
Who are the typical clients of this advisor or firm?
It is important to have a sense of who the advisor’s other clients are to make sure you are a good fit.
In my opinion, you never want to be an advisor’s biggest client, or their smallest one.
You may also want to avoid anyone promoting recent short-term investment performance or bravado about beating an index or being a great market timer.
You also want to choose an advisor who has a planning and investment philosophy that is in harmony with yours. For example:
Are you risk averse or a risk-taker?
Does your advisor believe in a buy-and-hold strategy with passive management or does he or she try to time markets or make frequent tactical changes?
Does your advisor favor a more offensive or defensive posture to planning?
All of these questions will help you determine if the potential advisor is a good fit for you and your family on a personal level.
These questions will not determine if the advisor is good or bad at what he or she does, again it is about personally matching your preferences with an advisor.
Lastly and perhaps most importantly, does the planner represent specific companies or products?
In my mind, it is difficult to know that you are getting objective advice when an advisor’s compensation is driven by product sales.
Whether the recommendation is to buy a mutual fund, an annuity, or an insurance product or even to hire a proprietary money manager, I believe that it is a potential conflict of interest which prospective clients should request be disclosed in advance of engaging in the planning relationship.
At the end of the day, in making a decision about who to hire to help you manage your finances, I feel you should do everything in your power to make certain that your advisor is representing your best interests at all times.
The up-front disclosure of potential conflicts of interests does not preclude objectivity in rendering advice. However, if the advice you receive is heavily or entirely reliant on proprietary products, you may at least want to seek a second opinion prior to engaging.
I hope you are now armed with the tools you need to select a financial advisor that fits your needs and has your interest at heart.
Let’s quickly summarize the five (5) steps you should take when selecting a financial advisor:
1. Seek an introduction from a trusted source.
2. Look for an advisor with credentials, especially the CFP® designation.
3. Do a professional background check.
4. Ask which services are provided in-house and if you can maintain relationships with your own specialists.
5. Interview one or more prospective advisors to make sure the relationship is the right fit for you.
In closing, I believe that financial planning is like medicine – you wouldn’t expect to get a diagnosis without being thoroughly examined by a doctor.
When engaging in a financial planning relationship, in my opinion, you’ll want to select an advisor who is doing comprehensive planning on as objective a basis as possible, and always with your best interest in mind.
I wish you a bright financial future.
Good day.