So, you’ve decided you need help managing your financial life. Now what?
The good news: Your options for obtaining financial advice are plentiful today. The bad news: Your options for obtaining financial advice are plentiful today.
What I mean is that you face an abundance, perhaps an overabundance, of choice when making this important decision. You can choose an advisor in your own locale, engage one online that lives across the country, or opt for an all-digital service, commonly called a robo-advisor. The level of service and services vary broadly, as do the price you’ll pay and the compensation structures of advisors.
For definitional purposes here, an advisor is a human professional with the education, training, and experience to provide financial advice. A robo-advisor is an online platform that delivers advice through a digital interface and algorithmic programming based on an individual’s inputs. Robo-advisors are relatively new and attracting investors, especially younger investors, with their convenience, ease of use, and low cost.
Assessing your needs
Before starting your search, step back and assess your own goals and needs. Ask yourself the following questions: What are my objectives? Do I have a single goal, such as retirement? Or do I have multiple, competing goals beyond retirement, such as saving for child’s college education, buying a first or second home, or paying off student loan debt? Do I want a financial checkup or ongoing advice? Do I have more complex needs, such as a saving sufficiency analysis, a retirement drawdown strategy, tax guidance, and estate planning?
Determining whether your needs are simple or comprehensive (or somewhere in between) will help you figure out the level and sophistication of services that you require. For instance, if you’re seeking assistance on investing an inheritance, a onetime engagement with an advisor may suffice. If you have multiple goals and lack the time and willingness to look after your financial affairs on your own, you may benefit from a relationship with an advice provider.
Starting your search
Your second step is to develop a list of potential advisors. Cast a wide net. Many people start with recommendations from friends, relatives, or colleagues. But don’t simply take your college roommate’s recommendation of a golfing buddy or pickleball partner; your old roomie might not know diddly about the qualifications of a good financial advisor or whether an advisor even suits your needs.
You can expand your pool by asking other professionals you work with. (For instance, I found an estate attorney via a recommendation of my accountant.) An internet search is also an option. Use your favorite search engine or avail yourself of the tools of a professional organization, such as Certified Financial Planner Board of Standards, Inc., the Financial Planning Association, or the National Association of Personal Financial Advisors.
As you assemble your list, take your pulse in terms of your comfort level with digital advice. If you are the type of person who absolutely prefers human interaction, drop robo-advisors from the field. I have a friend who (pre-pandemic) preferred to go into the bank and deal with a teller to withdraw money or deposit a check, shunning ATMs and online services altogether. My kids, on the other hand, prefer to do practically everything online—banking, investing, shopping, ordering pizza, etc. You need to be comfortable with your choice, so personal preference should play a role in the search and evaluation process.
Evaluating advice solutions
What should you look for in an advisor or robo-advisor? You’ll want to visit websites, make phone calls, and avail yourself of other resources. Of particular use is a client relationship summary (or Form CSR). All registered investment professionals (and firms) are required to provide you a CSR that details services, fees and costs, disciplinary history, conflicts of interest, and other information.
Form CSR will also tell you whether the individual is an advisor (licensed to provide advice about securities) and/or a broker (licensed to buy and sell securities on behalf of a client). Such advisors are known as “dual registrants,” and I will come back to this later in the blog. You can use the search tool on the U.S. Securities and Exchange Commission’s (SEC) website to find the CSR for a particular firm or individual.
Check the advisor’s credentials, including education, experience, and professional designations. You’ll encounter a veritable “alphabet soup” of designations (e.g., CFA®, CFP®, CPA, CFRA). Some designations are required by regulatory agencies, others are given by accredited organizations, and still others are membership organizations.
The Financial Industry Regulatory Authority (FINRA) lists professional and accredited designations on its website. For example, Certified Financial Planner™ (CFP) professionals are required to hold a college degree, complete coursework and an exam, and adhere to prescribed ethical standards.
RIA stands for Registered Investment Advisor, which is an individual (or company) who serves in an advice capacity. RIAs who manage more than $110 million are regulated by the SEC; state regulators oversee advisors who manage up to $100 million. You can do a background check on both SEC- and state-registered investment advisors by using FINRA’s BrokerCheck.
Here are some other questions to ask, some of which apply to robo-advisors. Is the advisor independent, or an employee or service of a national firm, such as a brokerage firm, bank, or insurance company? Is the firm stable? How much does it manage? What is its ownership structure? One of the most critical questions to answer: Is your candidate a fiduciary?
A fiduciary acts in the best interests of the client at all times when providing financial advice. It is also good to know if an advisor has discretionary control over your account, meaning they make buying and selling decisions as well as execute transactions on your behalf. Such authority enables the advisor to make trades without your permission as long as such trades are in accordance with your objectives. A nondiscretionary account is one in which you make certain trading decisions, such as a change in your target asset allocation or the removal of a specific fund.
Digging into the details
You’ll want to ensure that the advisor can provide the services you want. Check minimum requirements and insurance protections. Find out more about the advisor’s investment approach. Ask for a sample portfolio. Inquire about the investments that advisor recommends. Low-cost, broadly diversified funds and ETFs should be the mainstays of a portfolio balanced between domestic and international stocks and bonds.
A good advisor will also seek to minimize the drag of taxes on your portfolio. Determine, too, if you’ll receive advice on other assets, such as money held in an employer-sponsored retirement plan.
For robo-advisors, in particular, get a feel for the website or app. Is it intuitive and easy to use? Does it offer a complete description of the services provided and fees charged? Is there educational content? What about account security?
Next, turn to performance. Be wary of advisors touting market-beating returns or their ability to pick winning stocks and funds. You’ll want to know instead if an advisor’s recommended portfolio has produced competitive results versus a relevant benchmark over the long term. More importantly, you’ll want to know how the advisor will show progress in reaching your identified goals. The advisor should also clearly explain the accompanying risks of the recommended portfolio and individual component funds.
Finally, evaluate cost and compensation. You will pay a fee for the advice, which I call the engagement cost. You will also pay a fee for the underlying investment products comprising your portfolio (i.e., the expense ratios of funds and ETFs and any commissions), which I call the execution costs. These 2 costs represent your “all in” costs.
Note that some brokerage firms offer free, questionnaire-based planning tools that provide asset allocation and fund recommendations. You’ll pay the costs of funds, usually the firm’s house brand, so make sure the expense ratios are reasonable.
It is also critical to understand how the advisor is compensated. A reputable advisor will be completely transparent and candid when discussing fees and compensation.
Fee-only advisors are compensated directly by their clients for their services. Typically, fee-only advisors charge on an hourly basis, a flat fee per plan, or a retainer. Some advisors offer subscription payment models, in which you pay a monthly or annual fee. Again, you’ll pay the expense ratios of the recommended products.
Another common arrangement is for an advisor to charge a fee based on the percentage of assets managed on behalf of the client. These fees generally range from 0.25% of assets (i.e., $250 on a $100,000 investment) to 1.5% or more (i.e., $1,500 on a $100,000 investment). Advisor compensation will vary; some advisors are salaried, others may be compensated as a percentage of the assets managed.
As noted earlier, some financial professionals are registered to provide both advice and brokerage services. As such, you may be charged both an asset-based fee as well as commissions and expense ratios on the funds recommended to you. These commissions may be explicit (e.g., a sales charge) or imbedded in the expense ratio of the fund in the form of a 12b-1 fee. This fee is part of the expense ratio and used to compensate an advisor for selling the fund. It is worth knowing if an advisor is receiving payment to sell you specific funds.
So far, I’ve largely focused on the objective, nuts-and-bolts part of selecting an advice solution, but there is also a subjective element to the process. If you plan to work with a human advisor, assess whether you are comfortable with the advisor’s personal and professional style. Is this a person you can trust with your private financial details? Are you confident in the advisor’s ability to manage your money? Can you see the advisor as a partner in securing your financial future? If you are considering a robo-advisor, is the firm offering the service credible, stable, and trustworthy?
There are a number of reasons to seek the help of a financial professional. If you choose to do so, I hope you are now better equipped to find the advisory solution that best meets your needs.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
CFA® is a registered trademark owned by CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and Certified Financial Planner™ in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.