Feb 2, 2023
How to find a financial advisor you can trust
Figuring out how to find a financial advisor you can trust is a major step in setting yourself up for long-term financial success and creating peace of mind. Trust and value go hand in hand. With a trustworthy personal financial advisor on your side, you might be better prepared to make well-informed decisions and manage your wealth throughout every stage of life.
A recent CFA Institute survey revealed that the more educated an investor is, the more likely they are to trust their financial advisor.1 This makes sense because humans inherently tend to fear what they don’t know. While trust is earned over time, you still need to find a financial advisor you can trust today, so here are three starting points that may help you on that journey.
Ask about these topics
Here are five topics to raise with a potential financial advisor. If the advisor can answer your questions clearly and you feel comfortable with their answers and their communication style, you might be off to a good start.
Fee schedule: A trustworthy advisor should be transparent about how they charge for any given financial service as well as any other fees a client may experience in working together. Though there are typical financial advisor fees associated with the pay structure, it’s important to read the fine print of any agreement to screen for additional underlying charges that are not clearly stated upfront.
Services included: Check for additional fees or costs for extra services. CI Dowling & Yahnke Private Wealth Advisors, for example, includes most financial planning services as part of its asset-based advisory fee. When interviewing advisors, you will likely want to know exactly what to expect before moving forward.
Advisor certifications: Ask what type of professional certifications the advisor has earned. Though there are others, two distinguished designations you'll likely see are Certified Financial Planner (CFP®) and Chartered Financial Analyst (CFA).
Referrals: As you build out a wealth management plan, you may need other professionals to help and offer advice, like an accountant or an attorney. Many financial advisors offer recommendations for these additional professionals. Ensure that you understand whether or not the advisor is compensated for referrals. If so, be aware that this financial incentive may influence their recommendation.
Investment philosophy: A good financial advisor likely has a clear-cut investment philosophy and trading strategy that they can explain to you. In our opinion, you should be wary of anyone who guarantees quick returns or can’t offer specific suggestions for your personal financial situation.
Finally, be sure to search for a financial advisor who meets your needs. Some may have minimum balance requirements, for instance. Others may have expertise in specialized areas you need, like managing the sudden wealth from an inheritance or dealing with the complexities of executive compensation.
Understand the investment philosophy
It’s good to have some background knowledge before you ask about a financial advisor’s investment philosophy. That way, you help yourself to better understand the details behind what they’re telling you. Here’s a quick overview of six elements of investing that we believe should be part of every financial advisor’s philosophy, and some of our thoughts on each.
Goal setting: Your financial advisor should use your personal goals as the starting point and overall guiding force behind any recommendation. That means you should have a conversation about the purpose of your wealth and what financial goals you hope to achieve at different milestones.
Avoid market timing: Trying to time the market with quick trades is rarely successful on an ongoing basis and may simply result in higher costs and lower investment returns compared to a disciplined investment approach. When figuring out how to select the right advisor, avoid those who include market timing as part of your financial plan.
Asset allocation: There’s no one-size-fits-all formula for allocating your portfolio among stocks, bonds and other types of assets. A trustworthy advisor should be straightforward about that and should make recommendations based on your own specific financial goals and objectives.
Rebalancing: Find out how frequently your portfolio is monitored and how often rebalancing to reset the asset allocation occurs. Your financial advisor should be poised to help you avoid emotional trades and instead focus on making decisions based on a disciplined investment strategy.
Trading fees: Your financial advisor should address ways to minimize portfolio costs. Ask about trading fees and expense ratios for recommended investments. In our view, a good advisor looks at the total cost of trading decisions in order to protect and grow your portfolio over time.
Taxes: Paying taxes can significantly impact how much your portfolio earns you. Be sure your advisor touches on tax-advantaged accounts and strategies like tax-loss harvesting. They can even help you create a plan for charitable giving if it makes sense based on your finances and values.
Choose a fiduciary
You want to choose a financial advisor who puts your interests first. Avoid any potential conflicts of interest by understanding their motivations and their incentives. Finding out how they get paid and why they recommend investments is a great starting point when selecting the right advisor for you.
One way to be sure your advisor avoids conflicts of interest is to limit your search to financial advisors who are held to a fiduciary standard rather than those held only to a suitability standard. A fiduciary has a legal obligation to put your interests ahead of their own and to reduce any conflicts of interest.2 In contrast, a suitability standard simply ensures that a recommended product is suitable based on the information you provided about your financial situation and goals.3
To be clear, a registered investment advisor is a fiduciary, whereas a broker or insurance agent is not.4 There are a few unique requirements that come along with the fiduciary standard, and we think they make a big difference in what to expect from your financial advisor, including:
- Disclosure: When there is a conflict of interest, or an incentive to recommend a particular product, a fiduciary must provide disclosure.5
- Duty of care: There is both an ethical and legal duty to the client, which requires advisors to make decisions in good faith and a reasonably prudent manner.6
- Duty of loyalty: This requires an advisor to be completely loyal to the client at all times and imposes the responsibility to avoid possible conflicts of interest.7
Where to find recommendations
If you’re starting from scratch or coming from an unsatisfactory experience at another firm, you may be wondering where to find a financial advisor you can trust. Many people naturally reach out to their network of family and friends to find recommendations. This can be a good starting point since you can get direct feedback on an advisor’s track record and client service. Plus, you may share similar values as those within your social circle.
However, keep in mind that your financial needs may not mirror those of your friends and family. For instance, you may need to look for a financial advisor with experience in managing private wealth or more complicated structures.
Another potential source of recommendations is other trusted financial professionals. Your CPA, for example, likely has a strong understanding of your financials and may be able to match you with an advisor who is experienced in the areas you need.
Also remember to vet potential advisors using client referrals. While it’s not the only thing you should care about, speaking to existing clients can give you an idea of what to expect. You can ask a potential financial advisor for client referrals to get an idea of their strengths.
Choosing a fiduciary financial advisor you can trust takes some research, but in our view it's worth the time and effort. Not only might you have greater peace of mind that your investments are looked after, but you might also gain additional confidence in your long-term financial plan.
ABOUT THE AUTHOR
Jake Erlendson, CPA, CFP
Jake joined Dowling & Yahnke in 2006. He is dedicated to serving the Firm’s clients and delivering personalized investment and financial planning advice. He played an integral role in the development of the Firm’s Portfolio Management and Analytics Group. Additionally, Jake is a member of the Firm’s Investment Committee.
Jake holds the Chartered Financial Analyst (CFA) and CERTIFIED FINANCIAL PLANNER™ (CFP®) designations. He graduated from the University of California, San Diego with a Bachelor of Arts degree in Economics.
Jake grew up in the San Francisco Bay Area. He has lived in San Diego for over 15 years and currently resides in Poway with his wife and two children.
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable, suitable, or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees which would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
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