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Make Sure You Hire the Right Financial AdvisorSubmitted by Paul B. Miller, CFP on March 22nd, 2016
Hiring a financial advisor is like selecting the right mechanic for your car. Although the stakes are not the same, you wouldn't trust your vehicle to someone who is going to suggest unnecessary repairs and upgrades just to line their pocket with more money. You should put the same effort into finding the right financial advisor. Remember, these individuals are responsible for helping you accumulate the wealth you need to retire comfortably, so hiring the right financial advisor is critical.
Sales vs. Advice
First and foremost, focus on the demeanor and tone of the individual you are contemplating entrusting your financial health to. Does this person have a sales approach, pushing you to purchase certain funds or stocks? Or are they offering advice on which ones might work best and allowing you to make the final decision? If you only hear from your financial advisor when they want to sell you something, you need to consider hiring a different financial advisor.
The Exchange Act of 1934
The goal of the Exchange Act of 1934 was to regulate the people who sell investments. Typical compensation for financial advisors came via commissions earned on investments they recommend. The title for the individual was a registered representative and their job was to sell investments for the company that employed them, while adhering to the standard of suitability when recommending any investment.
Investment Advisers Act of 1940
The Investment Advisers Act of 1940 established the fiduciary standard, forming a fee-for-service payment schedule and the title of registered investment adviser. These individuals were held to a new fiduciary standard in which they had to put the best interests of the client ahead of their own financial gain.
Knowing the Difference between Fiduciary and Suitability
The two common standards for financial advisors are fiduciary and suitability. As mentioned above, the fiduciary standard requires a financial advisor to direct your investment options based upon the best interests of you as the client, and not the potential fees or commissions collected by the individual advisor.
Suitability standard has a similar underlying premise. The individual advisor must provide you with direction on the best potential investments, but does not necessarily have to provide you with information based upon the best performance of those products. For example, under the suitability standard an advisor could sell you the products offered by his or her own company, even though comparable products may outperform their funds. In this case, the advisor often earns greater commission and has placed their own financial interests in front of yours.
What Questions to Ask as You Consider a Financial Advisor
There are a number of questions you can ask a potential financial advisor, but the most important are the following:
• Will you act as a fiduciary? Registered Investment Advisers are required to do so, while Registered Representatives will not make that commitment.
• How will you be compensated? Representatives earn a commission, advisers charge fees based upon the value of your accounts, hourly fees, or work on a retainer.
• Ask for a copy of their form ADV Part II regarding fees and strategies.
• What credentials do you hold? Most importantly, ask about the titles they hold for financial planning purposes. Is the individual a CERTIFIED FINANCAL PLANNER™ (CFP®), Chartered Financial Consultant (ChFC), or Personal Financial Specialist (PFS)?
Follow this advice and you will increase the odds of finding a suitable financial advisor with whom you can trust your financial health, both now and in the future. Contact Paul Miller CFP®, of Indian River Financial Group today to see how he can meet your needs.