It is one thing to realize that you could benefit from the guidance of a financial professional. But actually securing that guidance can feel like a big hurdle to clear, especially if you are nervous about the prospect because of questions around trust.
“Financial services is one of the least trusted industries in the economy,” said Harvard Business School. In part, this is due to a “matter of information asymmetry,” wherein “much like auto mechanics, financial advisers often know more about the necessity and quality of the service than the client.” But with a little know-how, finding a financial adviser you can count on will become a bit easier.
Focus on fiduciaries
When choosing a financial adviser, a smart way to quickly narrow it down to professionals who will always have your back is to look for advisers who are fiduciaries. When an adviser is bound by fiduciary duty, they are required to act in your best interest at all times. In other words, these advisers “must only recommend investments and other financial planning products that are the best fit for their clients, following certain rules and regulations,” said NerdWallet.
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Some advisers “can act in a fiduciary capacity” but are not necessarily fiduciaries, added NerdWallet. These advisers “may recommend products for which they receive a commission or other form of payment,” presenting a potential conflict of interest.
Understand fee structures
Being aware of how a financial adviser makes money can also offer clarity on where their interests lie. Advisers may only earn money from the fees you pay them, or they may additionally bring in income from selling certain financial products.
The latter arrangement — known as a fee-based financial adviser — “can be a red flag if you feel any pressure during your conversation to add on or upgrade your initial request.” This may also lead to a situation where an adviser “may suggest an investment that isn’t perfect for your situation because they receive a higher payout on that specific investment,” said Kiplinger.
Consider credentials
Another way to sort through the pool of advisers is to seek certain credentials, as these can “indicate a certain level of education and competence,” said Bankrate. For instance, “well-recognized standards such as chartered financial analyst (CFA) or certified financial planner (CFP),” entail completing coursework and passing an exam and also “require their holders to act as a fiduciary.”
These credentials reflect an adviser’s area of expertise as well, allowing you to better assess whether they can meet your needs, like in preparing for retirement or building an investment strategy.
Check disciplinary records
Another thing to weigh is an adviser’s track record. You can verify their employment history and check for any past disciplinary actions on their Form ADV, available through the SEC, or on FINRA’s BrokerCheck website.
Keep in mind that “not all financial adviser disclosures carry equal weight” and that “complaints can happen for a number of reasons and are sometimes the result of what’s going on in the industry,” said SmartAsset. That said, “it can be a red flag if an adviser has numerous complaints on record that are similar in nature,” or a particularly egregious violation in their past.
