Hiring a financial planner to secure your financial future is no less than trusting a doctor with a critical procedure, having a skilled pilot in times of turbulence, or working with a real estate agent to find the perfect home. A financial planner handles one of the most important areas of your life – your money. Therefore, you need to take some time to evaluate your needs and assess potential financial planners based on multiple factors.
If you are thinking of using a financial planner, this article will help you with the selection process.
What should you consider when looking for a financial advisor?
1. Understand their role and how it sits with your needs
Financial planners’ expertise extends to a range of financial decisions, including estate planning, tax strategies, insurance coverage, etc. While some financial planners provide comprehensive financial planning guidance, others may focus on specialized areas. Understanding what a financial planner offers and how their services fit into your specific financial situation is essential. Financial needs vary from person to person, so taking the time to evaluate your own situation in detail can help ensure you choose the right professional. With a vague understanding of your needs, you may end up hiring a planner whose services may not align with your financial goals.
Financial planners can be especially beneficial for those seeking structure and direction in their financial life. A goal-based financial planner may be the right fit if you need help setting clear financial goals but do not require active investment management. They offer guidance without managing investments directly, making them suitable if you prefer to handle your own portfolio but also need strategic advice from time to time. On the other hand, some financial planners take a hands-on approach. They offer investment management services alongside financial planning. So, they will actively manage your investment portfolio and help with asset allocation. They will also make suggestions based on prevailing market conditions. If you want ongoing professional management of your investments, this type of financial planner may be a better fit.
When choosing the right financial advisor, it is important to understand what they bring to the table before you hire them to ensure they can add value to your financial planning routine. Selecting a professional whose services align with your specific goals will ensure a smooth and hassle-free working association.
2. Know their credentials
It is important to check the credentials of the professional before hiring one. A financial planner’s qualifications can tell you a lot about them. Not only is it a reflection of their educational background, but it can also tell you a lot about their regulatory standards. Moreover, working with a certified professional gives you peace of mind as they are less likely to engage in fraudulent activities.
Most financial planners are Certified Financial Planners (CFPs). CFPs must pass a comprehensive exam and adhere to strict ethical guidelines. Their training covers a broad range of financial topics, which offers them a well-rounded expertise in personal finance. Another highly regarded certification is the Chartered Financial Analyst (CFA) designation. CFAs specialize in investment analysis. Other respected designations include Chartered Financial Consultants (ChFCs). They are similar to CFPs but specialize more in insurance and estate planning. Some professionals may also hold the Certified Investment Management Analyst (CIMA) credential, which focuses on investment consulting and portfolio management. Financial planners who provide investment advice must register with the Securities and Exchange Commission (SEC) or a state securities regulator. Some planners may also operate as investment advisors, insurance agents, brokers, or accountants, each with different licensing requirements.
Make sure to check if the financial planner has any of these certifications to ensure you hire someone who is well-qualified and can be trusted. Some planners may also have more than one credential, which can be an added bonus, bringing more expertise to the table. You must also verify the financial planner’s registration status to check if there has been any disciplinary action against them in the past.
You can check the same on the Financial Industry Regulatory Authority (FINRA) and the SEC’s Investment Adviser Public Disclosure (IAPD) database. These databases help you track a professional’s conduct and past performance, and if you find any history of regulatory violations or client disputes against them, you can reconsider your choice and look for a more reputable professional.
3. Check their fee structure
One of the most important things to look for in a financial advisor is their fee structure. The money you spend on professional financial advice can vary significantly depending on the planner’s fee model. Therefore, understanding how they charge for their services is crucial.
If the financial planner follows an Assets under Management (AUM) model, their fee will be a percentage of your total investment portfolio. In this case, their remuneration will be tied to the performance of your portfolio. So, the higher your investment goes, the more money they can make. Make sure to clarify whether the percentage they charge remains fixed throughout your association or whether it increases as your portfolio grows. Sometimes, financial planners may increase the AUM percentage when your assets’ value goes above a certain threshold. Knowing how fees scale with asset growth can help you make an informed decision.
Some financial planners may offer flat-fee packages, where a set amount will cover a bundle of services, such as estate planning, investment management, tax planning, or retirement strategy. While this structure can be appealing if you are looking for comprehensive financial planning, it is important to confirm exactly what is included in the package. You may have to pay an extra cost if you need additional services. Moreover, you would have to be careful about using their services, as assuming that everything is covered could lead to unexpected fees. Getting a clear breakdown of the services included is important to ensure you are not caught off guard. It can also help you strike a deal where you can include the services you want in the cost of their advice.
Lastly, if a financial advisor charges an hourly fee, it is important to clarify how often they would be meeting you in a month. Your meetings may be face-to-face or virtual. You must also clarify exactly how they calculate those hours. The financial planner may bill you for only the hours they spend with you or the hours they spend researching investment options, preparing financial plans, or following up on your behalf. Some financial planners also use a time-based billing mechanism, where they charge every 15 or 30 minutes, so knowing their system can help you budget.
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4. Find the right fit
Comfort and trust play a huge role in your professional association with a financial planner. The planner will likely be privy to a lot of your personal and financial needs and goals. So, you must select them carefully. You must be comfortable with them enough to discuss sensitive financial topics. If you sense hesitation or discomfort when speaking with a financial planner, they are likely not the right match for you. For them to be a suitable fit, you must have a strong connection that allows for honest discussions about your financial situation.
There are a number of things you can look for in a financial planner to ensure they are the right fit for your needs. You can start by checking if they throw around complicated terms at you without breaking things down in a way that makes sense. If you struggle to make informed decisions due to a lack of understanding, you may not enjoy working with them. You must also pay attention to how they explain things. Check if they simplify complex topics and answer your questions with patience or confuse you with multiple strategies and products.
The financial planner must take the time to hear you out and understand and acknowledge your financial concerns and goals. They may not be a good fit if they interrupt you in between or dismiss your questions. You should also be able to talk to them openly. If you do not feel at ease with your financial advisor, you may end up holding back important details that could affect your financial plan.
It is important to find someone who communicates well and makes you feel comfortable. Hence, before making a decision, consider scheduling an initial meeting and pay attention to how the financial planner interacts with you. In this meeting, you can analyze their behavior, professionalism, and ability to connect with you. You can come prepared with questions and see how they handle them. Based on your evaluation, you can either hire them or go for the next best option.
Things not to do when selecting a financial advisor
1. Making hurried decisions
Hiring a financial advisor is an important decision that can impact your long-term financial well-being. It is not something you should do on impulse. So, make sure you take the time to research and evaluate your options. This can help you find the right fit and hire someone who truly understands your financial goals and priorities.
If you hire the first financial planner you come across without comparing your options, you may end up with someone whose approach does not align with your needs. So, slow down and do your due diligence. Meet with multiple financial advisors, ask them questions about their fee structure, working model, etc., and pay attention to how they communicate. Make sure they are transparent about their fees, and they take the time to understand your unique financial situation. You must also evaluate if you feel comfortable discussing your concerns with them.
It is okay if the process takes time. Finding the right person to manage your finances can take weeks or even months, and that is perfectly fine.
2. Hiring a financial planner just because someone recommended them
Taking recommendations from family, friends, or colleagues can be helpful, but you should not blindly rely on their choice. Just because a financial advisor works well for someone else does not mean they will be the right fit for you. Your income, expenses, goals, and personality may be entirely different and require a different approach or level of expertise.
Sometimes, loved ones tend to be enthusiastic about the financial planner they use, and they may even pressure you into hiring the same person. While their experience can help you shortlist planners, it should not replace your own due diligence. A financial planner who helped your friend with general financial planning may not be the best choice if you are looking for something more detailed like retirement planning or tax optimization.
Instead of making a quick decision based on someone else's recommendation, use it as a starting point. Meet the professional yourself, ask detailed questions, and assess whether they truly understand your financial needs.
3. Not checking their credentials
Skipping this step could lead to disastrous consequences. When your money and future financial security are at stake, you need to be absolutely certain that the financial planner is qualified and trustworthy. Do not just take the planner’s word for it and do your own research. Check if they hold recognized certifications like Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA). Also, verify if they are registered with the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA), depending on the type of financial services they offer.
A quick background check can give you peace of mind. Look up their history, see if they have any past disciplinary actions, and confirm their expertise aligns with your financial needs.
To conclude
Financial planning is a long-term process that evolves with your life. The right financial planner can provide lifelong guidance and support as your financial needs change. They can help you not only with financial planning but also bring clarity and peace of mind. To ensure you make the best choice, take your time and follow the steps outlined above.
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