One of the tenets of personal finance is investing your money and at one point, you will have to go to a personal finance advisor for that. After all you cannot buy stock yourself. You do not have a series 7 or 63 license do you!? And you may not even want one but that is another topic.
Many people do not want handle other peoples’ money for many reasons. It takes a special kind of mentality to have that type of confidence and wherewithal.
However, the market is full of people who call themselves a personal finance coach, finance planner, or advisor. This makes selection of a personal finance advisor even more critical.
Here are five things you need to consider before you hire a personal finance advisor and it should not be a business or anyone who is trying to get you to invest regardless if the investment is stellar or not just to register another transaction fee. Think about that! OK, here we go:
- Education – Education plays a key role in understanding the complex world of finance. And a personal finance advisor who is educated in the same field and possesses relevant certification from Securities and Exchange Commission is the most suitable person to handle your financial planning. Competent personal finance planners or advisors will already have their website and should be publishing blogs and articles. That should be a good starting point for your search. If they do not have a website or not any online presence, that should raise a red flag for you.
- Credentials or Certifications – Apart from self-proclaimed financial planners, any financial planner worth his salt will have a certification to boast of. For instance, a Certified Financial Planner (CFP) certification is awarded to only those candidates who have undergone extensive study materials, have taken 6 hour long test and have 3 years of experience under their belt. Moreover, the CFP has to renew his certification every three years. A CPA, EA, AFC, and CFA would have undertaken similar training. If you wish to work with the best, look out for these certifications and your search is almost over.
- Fees – This is one of biggest factors that will determine whom you will hire. Typically, a personal finance advisor can charge you in two ways – flat fee that is charged hourly or per session. The other is commission based. Financial advisors who charge you flat fee are always recommended. That is not the case with financial advisors who work on commission basis. The premise is simple, a financial advisor is likely to give a biased advice if he is getting paid through commission. This might give rise to conflict of interest. For instance, a particular mutual fund might be most suitable for your risk appetite, however, if the advisor is getting more commission from some other mutual fund company, he will recommend that. If your assets are in the higher bracket, you can go for another compensation model wherein the advisor gets a percentage of total assets under management.
- If you plan on doing a lot of training or one trade a week for example, a business that has a large transaction fee may not be your best bet. If you want to invest for the long term, then a company that helps you choose that asset and has a large transaction cost may be OK for you.
- Level of Care – In the financial advisory world, you will typically come across personal finance advisors in Registered Advisory Firms and in banks and financial institutions. Both sell financial products. While advisory firms are fiduciaries, advisors at banks and financial institutions will act by suitability standard. A fiduciary will always look for its client’s best interest while the one that goes by a suitability standard will find the most suited (not the best) solution for you. With that being said, the fee factor also comes into play. So not only you now have to decide between advisory firm and a bank, you also need to factor in how the advisor will get paid.
- Relation that Matters – This element is very subjective. Do you prefer your financial advisor to check-in with you every now and then or you want it to be an annual affair? Again, several factors come into play here. If you are busy and would not like to disturbed every few months for long meetings, than the latter would be appropriate for you. Consider your comfort level with the advisor too. You have to have rapport with them!
Like any other professional, financial advisors too are made different. You will have to take into consideration several factors before you decide which is the best suited financial advisor you need or want to hire. No one is perfect and no system is perfect. That is also something you have to consider.