What would the ideal financial advisor look like to you? Would he or she provide you with sound advice that protects your interests? Sometimes, even though the financial advisor talks a good game, ultimately they want to sell you a stock, fund, or insurance product that is in the best interest of their company, not your wallet. So, you have to be careful when choosing one. The good news is that with research and asking the right questions you can eliminate questionable candidates and find one who puts your financial interest first. FreedomPlus provides these tips for carefully choosing an advisor.
#1: Find out what kind of license the financial advisor has.
The first clue as to where a financial advisor’s interests lie is in the type of license that he or she maintains. You want to look for a registered investment advisor (RIA). According to FreedomPlus, a RIA is required by law to be a fiduciary, which means that the advisor must act in your best interest. However, this can be tricky. You see, a RIA can also be a broker – and brokers are not held to the same accountability standards as RIAs.
How can a financial advisor be both? Good question. These kinds of financial advisors are dually registered, which means that in some cases they must act in your best interest. And in other cases, they can play the role of the broker and sell you products that earn them commissions and kickbacks.
Even if the RIA does not carry dual registration, they can still be affiliated with a broker-dealer. And again, in this case, they can steer you towards the investments that they are promoting – whether they are actually what is best for you or not. You can ask the financial advisor if they are affiliated with a broker or just look on their business card. There will be a sentence on the bottom that reads something like “Securities offered through (name of company), member FINRA and SIPC”.
FreedomPlus advises that it is best to stick with a RIA that is neither a broker or affiliated with one to protect your investments.
#2: Find out what types of financial planning services are offered.
Many financial advisors do not offer much beyond investment strategies and portfolio management. Some are not even allowed to offer tax advice by law. But as your wealth increases or your holdings become more complex, having a financial advisor who can provide overall wealth management advice, including tax efficiency, is invaluable.
FreedomPlus recommends that you look for a financial advisor who is the “whole package”, meaning they can help you grow your investment portfolio and a myriad of other financial issues such as:
- College planning for your children
- Retirement planning
- Estate planning
- Business planning
While many advisors have limited capabilities, keep searching until you find one that fits your needs.
Tip #3: Use a third-party custodian to hold your funds.
According to FreedomPlus, you should look for a financial advisor who is willing to maintain a secure environment through a third-party custodian for the money that they manage. This type of system protects your money from being confiscated by an unscrupulous financial advisor (think back to Bernie Madoff). Plus, if you ever decide that you need to switch financial advisors, you don’t have to move your money – you just need someone new to take over managing the custodial account. Any reputable RIA should agree to this, and it is common practice, even amongst some of the big banks and investment houses.
Whoever you decide to choose to manage your money, remember to do your homework, ask the right questions, and seek recommendations from others. A reputable RIA will welcome this kind of due diligence on your part.