Often people think of a financial advisor as a broker, giving you investment advice and managing your trades. Undoubtedly, that can be a big part of the advisor's role, but it can be more than that. A financial advisor can be like a coach, helping you pursue maximum performance as you work toward your financial goals and even pushing you to aim higher. We believe your advisor should help you create and stay on track toward your financial goals, including investing, saving for retirement, accumulating wealth for your heirs, or other specific objectives.
A good financial advisor will periodically review your financial health status with you to ensure that they fully understand your income, assets, liabilities, and plans. The advisor needs accurate, up-to-date information about your risk appetite and risk tolerance to help you fashion your asset allocation and investment strategy.
What are some of the qualifications for a financial advisor?
A financial advisor needs to have a valid Series 65 license (available after passing the Uniform Investment Adviser Law Examination), allowing a person to provide investment and broader financial advice. The exam is administered by FINRA (the Financial Industry Regulatory Authority, a private, non-governmental association that regulates member brokerage firms). FINRA manages the licensing of brokers and was previously called the National Association of Securities Dealers. While it is not part of the U.S. Government, it is overseen by the Securities and Exchange Commission in some respects (such as appeal).
Some also hold the designation of Certified Financial Planner, which has extensive requirements for issuance. You may find a financial advisor at your bank, insurance company, or brokerage. Many are independent agents working for individual clients on their own as registered investment advisors. In such an arrangement, the individual is an investment advisor representative and the employing firm is a registered investment advisor.
How do I choose the best one for me?
One of the first things to consider if you already have an advisor is to find out if the advisor is acting as a fiduciary. That seems to be an overused word in the investment world, but it's important to understand. At its foundation, fiduciary responsibility is both legal and ethical. It requires the person with that title to put the client's interests above their own, and their employer's. An advisor with fiduciary responsibility should be recommending actions based on your best interests. This requirement can help to distinguish a fiduciary as a potential choice as your advisor.
Registered Investment Advisers (RIA) have fiduciary obligations. In contrast to brokers (who are typically compensated by the individual transaction and are only required to recommend investment choices that are suitable for their clients), clients pay the RIA a percentage of their assets as a fee.
The broker who recommends that you buy or sell a stock may be earning a commission on each transaction, and both the individual and their employer likely benefit from higher activity levels, regardless of whether the trades are in your best interest.
You can determine if an advisor is subject to fiduciary duty by checking the National Association of Personal Financial Advisors or through the Securities and Exchange Commission search tool. Another option is to choose a fee-only financial advisor. You pay these advisors on an hourly basis for their knowledge, which is designed to eliminate the motivation for them to make recommendations that they could benefit from.