To choose an advisor you feel comfortable with – both personally and professionally – it’s smart to take your time, talk face to face, and ask the right questions to help you make an informed choice.
How do I choose the right advisor?
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Chuck Schwab on the advantages of working with independent advisors
Whether you’re starting with a list of recommended advisors or you have a specific advisor in mind, starting with the three questions below can help you make a thoughtful choice.
Consider these factors: risk tolerance, time horizon, income, taxes, and holdings.
Being able to clearly articulate your needs and expectations will help you and the advisors you talk with make an informed decision about whether you’re right for each other. If you are an individual investor, your advisor should understand your goals and your particular financial situation and make recommendations that are suitable for you. Some important factors to consider in defining your goals include:
Consider what level of investment and advisory services you need. For example, some advisors provide clients with a pure investment management relationship while other advisors provide clients with sophisticated financial planning and advisory services in addition to investment management services.
You should also consider the nature of the client relationship that you would like with an investment advisor, including the frequency, level, and form of communication you would like to maintain with the advisor. How often would you like to communicate with your advisor? Would you like to communicate only by phone and email, or would you prefer to discuss your investments in person?
As you begin to talk with advisors, you’ll want to evaluate them objectively. Asking each advisor a consistent set of questions will help ensure that you have the information. You need to make a good comparison.
An advisor’s professional designations can tell you a great deal about his or her education and areas of expertise.
CFP professionals have completed university-level financial planning coursework and passed a 10-hour exam covering nearly 90 topics, from group medical insurance to derivatives. More information >
CFAs must pass three exams, each of which demands a minimum of 250 hours of study and includes corporate finance and financial statements. More information >
Personal financial specialists are certified public accountants who specialize in personal financial planning. The credential requires a detailed exam and significant financial planning expertise. More information >
CIMAs focus on asset allocation and typically complete final coursework at the Haas School of Business at the University of California, Berkeley, or at the University of Pennsylvania’s Wharton School of Business. More information >
Suggestion – Visit the website of the organization that issued an advisor’s credential to verify that the advisor is a member in good standing and to learn about the requirements for certification.
Common credentials – This is not a complete list of certifications. There is no implied endorsement of one certification over another. Professional designations attained by an advisor do not guarantee a profit or protect against loss in periods of declining values.
Investment advisory practices vary widely in the services they provide. In general, they fall into one or a combination of the categories listed below.
If you need someone to manage your portfolio and do your investing, consider money managers. They:
If you need someone to review your situation and help with big-picture planning, consider financial planners. They:
If you need an advisor who can handle both your investing and planning needs, consider wealth managers. They:
Knowing how your advisor is compensated may help you evaluate the relative objectivity of the recommendations you receive. Independent advisors generally work on a fee-only or fee-plus-commissions basis.
Types of compensation and what they mean to you:
Asset-based, hourly, or flat fees: Many independent advisors charge a percentage of the assets they manage for you (typically 1%–2%). This compensation method gives your advisor an incentive to help grow your assets. Hourly or flat fees are often associated with a specific, one-time service (e.g., developing a financial plan). The fee may vary by account size and service. In addition to these fees, you may pay commissions and/or other fees for execution of the trades your advisor makes and for custody of your assets.
Along with an advisory or financial planning fee, some advisors may receive a portion of the commissions you pay when you buy or sell certain financial products the advisor recommends, such as insurance policies or annuities.
Advisors sometimes receive compensation only from sales commissions on the investments they buy and sell for you.
Sometimes advisors charge a wrap fee, which is typically a single asset-based fee for the advice they provide and the execution of the trades they make.
Good communication between you and your advisor is essential. Asking the questions below can help you judge the amount of attention and regular communication you can expect.
What to ask:
In some cases, the firm’s principal may conduct your initial meeting and then turn your portfolio over to an associate or a team that actually manages it. If personal rapport is important to you, ask to meet with the people you’ll be working with.
Regular contact helps ensure that you and your advisor are clear about your financial goals, risk tolerance, and investment strategy. Typically, your advisor meets you in person at least annually – and stays in touch more frequently by phone and email.
At a minimum, you should expect to receive:
A firm’s size – including the number of employees, the assets under management, and the average portfolio size – can have a bearing on the quality of service you receive.
Having insurance is an important step that independent advisors take to protect their clients’ assets when unexpected events arise (e.g., cyberbreach, fraud, breach of fiduciary duty, etc.).
The three most common types of insurance that independent advisors carry to protect their clients’ assets are:
Things to consider:
1Past performance does not guarantee future results.
2The S&P 500® Index is an index of widely traded stocks. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly.
Independent financial advisors typically use independent custodians – generally brokerage firms or banks – to hold and safeguard their clients’ stocks, mutual funds, and other assets.
You want to be confident that your advisor has chosen a custodian that meets or exceeds the security measures required by industry regulators to help protect your assets.
Look for a custodian with important services, such as trade execution and preparation of monthly brokerage statements, which allow your advisor to concentrate on managing your portfolio.
Ask about the custodian’s policies to help protect personal and financial information from unauthorized activity.
You can review pertinent information about an advisor even before you meet.
All independent advisors are required to publicly disclose details about their business by filing a Form ADV. You can review the Form ADVs on the SEC website at www.adviserinfo.sec.gov.
Form ADV, Part 1 describes the advisor’s business, ownership, clients, employees, business practices, affiliations, and disciplinary history.
Form ADV, Part 2 is a narrative brochure that describes in plain English the advisor’s services, fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel. Advisors are required to give you this information before you hire them.
Once you have finished identifying your investment goals and preferences, and are ready to interview advisors, search for independent advisors in your area by using our directory and entering a five-digit ZIP code.