Financial literacy is slowly rising in popularity, especially among the younger generations. More and more young adults realize the value of saving, investing, and having a better handle on their money. The boom in financial literacy has also helped many seek financial advisors to hire to guide them in making the most of their funds.
Financial advisors can be highly beneficial, especially if you’re still unfamiliar with many concepts regarding proper money management. However, there’s a caveat. The demand for financial advisors has also allowed more people to hire anyone to handle their money without considering their options first.
Your money is one of your most valuable assets, and you shouldn’t allow anyone you haven’t carefully vetted to manage it. This brief article will guide you on what to look for before trusting and hiring a financial advisor.
6 Factors You Need to Know Before Hiring a Financial Advisor
There are countless people out there marketing themselves as trustworthy financial advisors. However, it’s best to know them before making your decision.
Below are a few things about financial advisors you need to consider first to prevent making the costly mistake of hiring inexperienced or incompetent financial advisors.
1. Your purpose for hiring a financial advisor in the first place
There isn’t a single type of financial advisor. Most have their areas of specialty. Your goals will help dictate what kind of financial advisor to hire. For instance, if you want to ensure that your life during retirement is financially comfortable, you can search for financial advisors specializing in retirement planning.
Alternatively, ask yourself, “am I looking to hire a long-term or short-term financial advisor?” If you intend to hire one for the long term, you’ll need to consider how comfortable you are with them so you can build a strong relationship that will last decades.
2. The standard qualifications and credentials of a trustworthy financial advisor
What can be troublesome for many is anyone can call themselves a financial advisor, whether they have credentials. Some may call themselves financial advisors after just a weekend of financial training. Despite that, hiring someone with qualifications to manage your finances will still be in your best interest.
Some financial advisor credentials you should be on the lookout for include the following.
Certified Financial Planner (CFP)
The Certified Financial Planner certification is an industry standard for financial planners. If a financial advisor has this certification, it tells you they have a college degree and several years of experience. It also means that they passed the rigorous CFP board examination.
Chartered Financial Consultant (ChFC)
Financial advisors with the Chartered Financial Consultant certification have undergone a rigorous and comprehensive course from the American College. The course equipped them with advanced financial planning skills and knowledge, including risk management, retirement planning, estate planning, gift planning and inheritance, and more.
Registered Investment Advisor (RIA)
Someone who is a Registered Investment Advisor advises their clients on investment matters such as securities and managing their portfolios. RIAs are government registered. They need to have registered with the United States Securities and Exchange Commission (SEC) or state securities administrators.
You can also consider evidence-based advisors who rely on peer-reviewed research to guide their judgments and investment recommendations. They typically limit their investment advice to exchange-traded funds (ETFs), index funds, and passively managed funds. They’re the ones you want to consider if one of your goals is to invest your money in stocks.
You wouldn’t hire someone with a track record of losing money, would you?
When reviewing for or even interviewing financial advisors, always consider their experience. A financial advisor with decades of experience can be more trustworthy than someone who recently acquired their certification. You can also review how long they’ve been working in their specific financial domain, which can improve the quality of your evaluations.
By knowing their history as a financial advisor, you can gauge whether they can are reliable to help you reach your financial goals.
Their standard of care
Different financial advisors can follow one of two types of standards of care: a suitability standard and a fiduciary standard.
The fiduciary standard applies to investment advisors and is one that the SEC or state securities regulators oversee. This standard of care follows that these advisors must put the client’s best interest first.
On the other hand, there is the suitability standard, which brokerage firms and insurance companies commonly follow. This standard means their recommendations are typically suitable for you but not necessarily in your best interest.
Their payment method and scheme
There are different ways that financial advisors make their money. Knowing how clients pay the financial advisor is essential to help you budget how much you’re willing to spend on them. Some financial advisors operate hourly. Others will ask you for a specific amount, depending on which type of financial service you want them to do.
Their method of payment will influence how they’ll work with you. Take, for instance, a financial advisor earning income from stock trade fees. This payment incentivizes them to make more trades on your behalf, even if the opposite may be a wiser strategy.
Services they offer
Similar to your purpose for hiring a financial advisor, it’s vital to understand what services and financial skills they can provide. They may ask for a higher payment if you want them to perform extra duties.
For example, you may have hired a financial advisor to help you with your taxes. They may also offer budgeting and retirement planning services, which means paying more.
Hiring the Right Financial Advisor for You
Your money is among your most valuable assets, and allowing anyone to touch and manage it means playing a dangerous game. Reaching out to more knowledgeable professionals to help you manage your finances is always a good idea. However, it’s vital to practice caution in selecting a financial advisor.
Once you know more about what financial advisor you’re looking for, what tasks you need them to perform, and if they have the credentials you trust, hiring them can help secure your money and future.