How to Choose a Financial Advisor

Instructor: LeRon Haire
In this lesson, we will define what a financial advisor is as well as addressing the best methods to be used in selecting the best financial advisor for your specific situation.

Selecting a Financial Advisor

Are you currently trying to decide how much money to save for next year's vacation to the Bahamas? Or perhaps you want to know how much money is needed to retire at an early age? The answer to these questions are not simple and may require the help of a financial advisor. A financial advisor is someone who is trained to give financial assistance to individuals in various financial areas and topics. Let's take a look at some factors that will help you select the correct financial advisor for your specific situation.

When searching for a financial advisor, it is important to check the advisor

Advisor Qualifications

Different financial advisors offer different services. Some are well-versed in all financial topics, while others specialize in areas like retirement or risk management. It is important to find a financial advisor who offers the types of services you need.

You must also find out if the individual is properly trained as a financial advisor. Although not necessary, certifications can enhance a financial advisor's reputation, making them a more attractive option for those seeking their services.

Advisor Licensure

Similar to a pilot or truck driver needing a license to operate their respective vehicles, a financial advisor must also have certain licenses, depending on the services that they offer. For example, financial advisors who buy or sell stocks and bonds will need an appropriate license to do so. In some instances, a financial advisor may also sell insurance products, which will require a license issued by a state board. If this situation pertains to you, then you must also make certain that the financial advisor has the appropriate licensing.

Advisor Compliance Records

You can vet financial advisors and learn more about their compliance records by sorting through public information provided by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Both of these organizations maintain online databases that allow you to research advisor and firm compliance records and learn about cases of fines, fraud, lawsuits, and suspensions associated with a particular advisor of firm.

Advisor Compensation

Have you ever been to a business where the employees work on commission? If so, did you ever feel as if you were being pushed to purchase a product that would benefit the employee's pockets more than it would benefit you as the consumer? This is the reason why a consumer should always find out how an advisor is paid.

Financial advisors who are paid commission must meet a fiduciary standard, which means that they must have the consumers best interest at heart when assisting with financial matters. If you feel uneasy working with a financial advisor that works on commission, then it would be in your best interest to select one that does not work on commission.

Although commission compensation is one of the most common types of compensation, it is not the only form of compensation. Here are a few examples of the different types of compensation that exists for financial advisors:

  • Hourly Fee: Some financial advisors get paid by the hour. So, the more hours that are worked, the higher the pay. Their wages are often based on various factors, including experience and certification or non-certification.
  • Flat Fee: Some financial advisors charge flat fees that do not change (hence the term flat).
  • Retainer Fee: A retainer fee allows financial advisors to be paid upfront in return for performing services for the client.
  • Advisor Incentives: In many situations, financial advisors have bonuses and incentives in place if they reach a targeted goal. Clients should also seek to know if advisors have incentive clauses in their compensation packages.
  • Commission Only: Commission only compensation means that the advisor will be paid a commission for the products they sell. So if they don't sell you the product, they don't make any money.

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