5 Steps to Hiring a Financial Advisor

A professional advisor can be of great help if chosen well. Here are some practical tips on how to do it.

Valerio Baselli 8 July, 2021 | 3:38AM
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Shaking Hands

Investing your money effectively is a complex business. Do-it-yourself investing might not be  viable option for all. And so, in most cases, it is a good idea to rely on a professional. Easy, right? Not quite.

The financial-advice industry features a bewildering array of titles, designations, and compensation schemes. Some advisors are fiduciaries (commonly understood to mean that the client trusts that the advisor or firm will put the clients interests above their own), while some aren’t. And even though advisors must obtain licenses if they're selling securities, and pass tests and log work experience if they want to earn certain credentials (such as the certified financial planner designation), there aren't any minimum standards in place for calling yourself a financial advisor.

Choosing the right consultant requires thorough due diligence. It's no wonder so many investors shortcut the process, opting for recommendations from friends and family members with limited financial backgrounds.

The process can be broken down into two parts. The first involves taking stock of your needs. The second part is to take what you just learned about your own needs and goals to identify an advisor who can help you meet them.

Here we highlight key 5 steps – which are probably not exhaustive – to pick the right financial advisors.

Step 1: Understand What You Need

Are you looking for someone to take over management of everything, or just someone to do portfolio management, or to invest in stocks? Do you need someone to do a one-time checkup and financial plan, or do you require an ongoing relationship?

You need to determine not so much how the process will work, but what both sides expect from the relationship. Is there a specific issue, or a small number of issues that require immediate attention?

Also consider the investment philosophy with which you are comfortable. Do you want an advisor who prefers index or active funds or individual securities? Buy-and-hold or more active investment?

Step 2: Be Clear What (and how) You Will Pay

Advisor compensation can get messy. One of the first questions to ask is whether the advisor is fee-only, fee-based, or commission-based. 

  • Fee-only means that the advisor is compensated by charging fees for various services and is never compensated with commissions.
  • Commission-based advisors accept commissions to recommend products (while there is nothing right or wrong about this, remember that some advisors could choose to recommend products that pay out the highest commissions, not necessarily the product that might be the best for you).
  • Fee-based advisors may charge primarily fees for services they provide but may also accept commissions. 

Some advisors are compensated via a percentage of assets under management. Others receive retainer fees or in some cases even hourly fees. You need to know what you will pay and how.

Step 3: Shortlist and Shop Around

Start by assembling a short list (no more than five possible candidates). Once you have done that look for references from trusted professionals you already know and work with, such as an accountant or attorney.

Step 4: Winnow it Down

Once you've generated a short list, get in touch with each candidate, notifying them that you're considering interviewing them using their services, and asking them to complete a short questionnaire that will help you narrow your list. Morningstar has developed a downloadable questionnaire adapted from Sheryl Garrett’s Personal Finance Workbook for Dummies.

Garrett recommends following up with in-person interviews with at least two finalists. You should come into the interview with an idea of what you are looking for and be very upfront (this is what I want; this is what I need). Garrett also advises paying close attention to the prospective advisor's style of communication and overall approach to working with clients.

It’s also worth asking about designations the person has earned. Every country has its own specifics, but generally speaking a certified financial planner is a financial planning expert accredited by the Certified Financial Planner Board of Standards. In order to use the CFP designation, planners must complete an educational program, pass a comprehensive exam, and log extensive financial planning-related work experience.

Step 5: Make the Hire (this is not the end)

Finally, it is time to pick one. But the work doesn’t stop there. On the acontrary, it is the beginning of a process that includes numerous discussions and planning. But if you've chosen well, it's worth it.

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About Author

Valerio Baselli

Valerio Baselli  Valerio Baselli is Senior International Editor at Morningstar.

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