It is natural to feel a little uneasy when planning your financial future. After all, if you’re new to Personal Finance, Investing, Retirement Savings, and everything else, it can be daunting to know where to start. You don’t want to make a huge mistake with your Hard-Earned Money!
Well, that is where a Financial Advisor comes in. But how do you find one, let alone one you can trust? What are the attributes of a good Financial Advisor? What sort of qualifications does a Financial Advisor need to have? And what is the best way to work with a Financial Advisor to plan for your future?
So, we’re going to discuss how you can find a Financial Advisor, what to look for, and how to work with them to get the best results.
What does a Financial Advisor do?
By examining the name itself, you can find the answer to that query. A Financial Advisor is a person who counsels people on money-related choices. Financial advisors can assist you with various Financial Issues, such as Assets Management, Tax-Obligation, Stocks, Funds, or other types of Insurance.
You might have heard of other professions with similar names, such as Financial Planners and Wealth Managers. These professions each have specific jobs in the industry. A Financial Planner is more focused on long-term planning and less on transactions. While a Wealth Manager works with “High-Net-Worth Individuals.”
While we can all agree that a Financial Expert is a valuable member of your team of professional Advisors, before choosing the best advisor, they must meet all the right requirements. If you make a wrong decision, it can do more damage than good.
Here are three core areas to address before entrusting any Financial Professional with your Hard-Earned Money. They’re known as the three C’s: Custody, Conflict, and Competence. Get these areas right, and you will likely have found yourself a great counselor.
First “C”: Custody
In 2008, “Bernie Madoff” became a headline in the Finance world. He was one of the Best Money Managers in the country before his collapse. When customers gave money to Madoff, He would deposit it into his accounts. Madoff would present financial documents showing incredible developments. He provided the funds without difficulty if his customers asked for a withdrawal.
The money withdrawn was not their actual money. It was funded from new investors. Because he had control over their accounts, Madoff spent their money. He thought he could continue this scam if there were a constant flow of new assets. But when the markets crashed in 2008, investors were strapped for cash. They began to panic and demand withdrawal requests. There were too many withdrawal requests, and Madoff failed to accommodate everyone.
Don’t Give Access to All Your Money
What does this mean for you? You should engage with a Financial Advisor with an established asset separation policy known as “Custody.” Invest your funds at a respectable brokerage business that provides detailed statements, such as Vanguard, Fidelity, or Charles Schwab.
You can issue a limited power of attorney if you want to authorize your Financial Adviser to do trades using your account. But your Financial Advisor should never have access to your funds. It’s like the saying goes: “Don’t give your money to anyone if you don’t want them to be able to take it quickly.”
Bernie Madoff stated, “Third-party custodians should be required for advisors and brokerages.” Independent custodians should be in charge of keeping customer funds.
Second “C”: Conflict
The Second “C” to check in a Financial Advisor is “Conflict.” Unfortunately, not all Financial Advisors recommend investment vehicles in the client’s best interests. They do not operate under the “Fiduciary Standard,” established by the “Investment Advisors Act of 1940,” and define a registered investment advisor.
According to a "Fiduciary Standard," the client's best interests must come first. Wikipedia defines a "Fiduciary" as "a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person." A registered financial advisor acts as a fiduciary and is required to exercise the greatest degree of care.
Difference Between Investment Brokers & Financial Advisors
One of the differences between Investment Brokers and Financial Advisors is that brokers are not required to act in your best interests. They should, and most do, but some don’t. And if your Financial Advisor also wears the hat of an Investment Broker, then they need to be sure to do each job properly.
Financial Advisors must disclose any potential conflicts of interest, and advisors are not allowed to engage in transactions that benefit their personal and professional interests. There’s also the suitability standard; this requires them to provide suggestions that fit their client’s situation.
Financial advisors are subject to this standard, but investment brokers are not. So they may make suggestions based on what will give them a bigger profit margin. These Financial Advisors are called “Dually Registered Advisors” or “Dual Hat Advisors.” They can work as an independent investment advisor and investment broker. They must behave in your best interests if they are in their “Financial Advisor” role.
Research Before Selecting Your Financial Advisor
When they wear their broker hats, they are released from such duties. So how can you tell if this person has two roles? You can always look them up online. The company’s name will be your first stop. Then, search the broker-dealer. If you see that, it implies they are properly registered. And if so, you’ll probably see that many of the company’s funds will wind up in your portfolio.
You shouldn’t be shocked If an Advisor you deal with attempts to sell you their firm’s funds. You have to question yourself about the finances of the corporation. Keep in mind that you want this individual to continue acting in your best interest or your family’s best interest. And not for his personal or professional gain.
Third “C”: Competence
It is the most important thing to look for in a financial advisor. Finding a reliable and knowledgeable financial counselor is more than just picking a name. To find what’s best for you, examine your advisor’s qualifications. A Certified Financial Planner or “CFP” is the highest qualification. A person who has earned a formal accreditation from the “Certified Financial Planner Board of Standards” is known as a Certified Financial Planner.
CFPs assist people in a range of Financial Management topics, including Retirement, Investment, education, Insurance, and Taxes. Another distinct and accepted classification is the CPA profession. In terms of Tax Planning, this individual is an asset. These titles require extensive college coursework, a formal test, and ongoing study.
Choose The Experienced Financial Advisor
Next, you should determine whether this Financial Advisor is best for you. The higher the net worth of the clientele they work with, the better. You don’t want someone learning their job while working for you. You wouldn’t want to be your dentist’s first patient. Don’t be a part of someone’s learning process just because they say they can do it. Make sure the Financial Advisor you’re dealing with has a plan that you can support. Let them explain their plan.
The expert you’re working with must have feasible concepts and a systematic approach. Ensure this individual has been thoroughly vetted and is a good fit for you.
Let’s say that the recent market volatility has you worried. A Financial Advisor can assist in presenting a context that demonstrates how volatility and acceptable returns coexist.
Find a Financial Advisor who can competently explain the market, share how to execute a successful plan, and educate you in a non-patronizing manner. Communication is key!
Relationship With Your Financial Advisor
Lastly, your relationship with your Financial Adviser should include some encouragement. According to studies, encouragement from an advisor has a favorable, all-around effect, enhancing both behavior and returns. You should remain actively involved even if you choose to work with a Financial Advisor. This Financial Advisor should be there to help you, not to take your place.
Remember to seek someone who can positively influence your behavior by teaching you, promoting a good environment, and motivating you to achieve success in all facets of your life. You might have heard horror stories about bad Financial Advisors taking advantage of unsuspecting clients. But now that you have a better understanding of “How to find a trustworthy Financial Advisor to bring you to a more profitable and secure future, hopefully, you will avoid those sorts of issues.
And most importantly, do your research, do Due diligence, and educate yourself on money matters.