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How to Choose a Financial Advisor

Use this simple checklist to find the right coach for your investment decisions.

"Financial education pencils"

Choosing your advisor may be one of the most important financial decisions you make. Your advisor will be your partner in making financial decisions and choosing your investment strategy. Many people call themselves financial advisors or financial planners. Yet, not all financial advisors are created equal! Let’s take a look at how to find the right advisor for you.

Start With a Fee-Only Advisor

The first rule is to screen for a fee-only advisor. Why? Because then you know you have an advisor that puts your interests first. A fee-only advisor is not a stockbroker or insurance salesperson. A fee-only advisor is a Registered Investment Advisor, who is legally required to put your interests first. A fee-only advisor does not get commissions, earn kickbacks, or receive any other type of hidden compensation. To learn more about fee-only advisors and to locate one, check with the National Association of Personal Financial Advisors.

Financial planners who have a financial stake in their recommendations to a client face an inherent conflict of interest and cannot be considered objective and unbiased. This can be true even if planners truly believe they have only the best interests of their clients at heart.

Unfortunately, the vast majority of financial advisors in the United States are sellers of financial products. Some or all of their income may depend upon their ability to steer their clients to a limited number of the thousands of financial products available today. These advisors can include stockbrokers, analysts, insurance agents, and financial planners. Many of their clients are not aware of their advisors’ dependence on selling products, or do not recognize its difference.

In fact, NAPFA believes that many of the problems that beset Americans today in their financial affairs—including the mismanagement of debt, failure to protect retirement assets, and poor allocation of savings and investments—relate directly to the conflicts of interest that pervade the marketplace.

Use This Financial Advisor Checklist

What else should you look for in a financial advisor? I recommend the “4 Cs”:

  • Competence: Check for experience, education, and reputation.
  • Compensation: A fee-only advisor will not be motivated by commissions.
  • Credentials: Choose a Registered Investment Advisor. RIAs are required to put your interests first. Also look for credentials such as a Certified Financial Planner or a Certified Public Accountant/Personal Financial Specialist.
  • Comfort: You will be trusting this person with your financial future as well as your goals and dreams. Make sure you feel comfortable talking to your advisor and that you feel like your advisor really listens to you! The comfort factor is at least as important as the other factors. Not only do you need to feel listened to, your advisor should be available to you as needed, communicate frequently, be responsive to your calls and emails, and explain strategies in a straightforward manner.

Finally, know that any decision you make does not need to be forever. If you no longer feel as comfortable or confident with you advisor as you did previously, it could be time to find a new advisor. Don’t hesitate or feel shy about changing. After all, it’s your financial security at stake.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Morningstar, Inc. does not market, sell, or make any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

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