How to Find a Professional Financial Advisor

The following is an excerpt from The Financial Crossroads.

How then, can you determine how to find a truly professional advisor, or if you already have an advisor, how do you know that he or she is a professional?  Here are six criteria to which a truly professional advisor should be held.  Your advisor should be:

1. Educated

• Minimum of a Bachelor’s Degree; preference for advanced degree——Master of Business Administration (MBA), Master of Science in Finance, or Master of Financial Planning (very few exist)——and/or financial planning specific certificate(s)

2. Credentialed

• CFP®, Certified Financial Planner™, is the financial planning credential
• CPA, Certified Public Accountant, is the accounting credential, and an excellent addition to your financial planner’s resume
• CFA, Chartered Financial Analyst, is a very demanding credential, specific to investment analysis
• JD, Juris Doctorate, indicates you’re working with an attorney; very demanding degree, often accompanying planners who specialize in estate planning
• CIMA, Certified Investment Management Analyst, is awarded by the Institute for Certified Investment Management Consultants
• AIFA® and AIF®, Accredited Investment Fiduciary Analyst and Accredited Investment Fiduciary are two newer credentials that are growing in reputation dealing specifically with investing as a fiduciary
• ChFC, Chartered Financial Consultant, is good but should be in addition to CFP® credential and probably indicates insurance sales background
• CLU, Chartered Life Underwriter, almost always indicates insurance sales background and should be combined with CFP® for credibility

There is a veritable alphabet soup of letters that people put behind their names, but any of them that are not preceded by CFP®, CPA, CFA, or JD are either less than central to the practice of financial planning or masking a lack of appropriate credentials.

3. Experienced

• Minimum of 5 years experience and working in conjunction with senior planner or minimum of 10 years, and still ideally partnering with a more seasoned planner

4. Independent

• Should not be working for one of the Big 3, but also be wary of “Independent Broker Dealers” which carry the word independent, but often reflect the sales practices of the Big 3
• Purely independent financial planning and Registered Investment Advisory (RIA) firm optimal

5. Fee-only

• Steer clear of conflict-of-interest by steering clear of commission

6. 100% Fiduciary

• Contrasted with part-time fiduciaries in the fee-based model or no-time fiduciaries in commission-only realm

There is no panacea or bias-free utopia in financial planning.  I am part of the National Association of Personal Financial Advisors (NAPFA) as well as the larger Financial Planning Association and several sub-associations, groups and think tanks, and the discussion of how we can improve compensation models is endless, and will be, because we’ll never find something that will be optimal for every single client and advisor.  The best advisor decision starts with you.  Review the different variants listed above and determine what is best for you.  An excellent online resource is available for you at www.focusonfiduciary.org.  This is a website designed by NAPFA to help consumers differentiate between advisors and salespeople.  Also keep your eye out for a coalition that has been formed with the CFP® Board, the FPA and NAPFA to ensure that the fiduciary standard becomes the minimum standard for financial advisors in the wake of the financial crisis.

Comments

[DanXnguyenesq]

I would clarify that the "JD" title only means they are a law school graduate, not an attorney. The title you may be referring to is "Esquire" or "Esq.", to those who have been accepted into that particular state's Bar.

[George]

Who are the "Big 3"?

Edward Jones, ?, ?

[Learn Save Invest]

Its great advice to make sure that you find a financial planner who is correctly qualified. Credentials are a great way to ensure someone knows what they're talking about. However, beyond credentials, always keep your eye on why an adviser might make give you particular investment advice. Sometimes they see dollar signs instead of having your best interests at heart. Don't let your adviser become your brain. Take their advice, and see if it makes sense to you. Only then should you go down a particular investment path.

[LIndsey]

You HAVE to be able to trust the planner, they are going to be in charge of your money. If your gut says something isn't right, go with your gut and find a new planner. On another note, fee-only isn't right for everyone. It depends on your portfolio size & the amount of attention you require. For someone who is just starting out and making an automatic investment into a single fund in an IRA and only requires 1 meeting a year, a fee-based plan will have them paying for services they don't need yet. For someone with a large portfolio & who meets with their planner 4 times a year, fee-based is most likely the way to go. You need to look at all your options and have them explained before making a choice.

[J in FL]

Yea same question here... who are the Big 3?

Edward Jones... who else? MorganStanleySmithBarney? Merrill Lynch (BofA)?

anyone have any ideas?

[Mark]

Another great option for finding a trusted financial advisor is www.kingdomadvisors.org

My understanding is that they go to through a pretty rigorous qualification process before joining this network.

[AF]

People must realize that not everyone has the capability to handle money the optimal way it should be handled. And this is where professional financial advisors come in. Admitting to one's self that one is not capable to handle his finances by himself is the first step if someone wants to become organized financially.

[The Biz of Life]

I've talked with a handful of financial advisors, but elected not to do business with any of them. Most of the things they recommend a reasonably financially literate person could figure out for themselves without paying the .5 to 2% of assets per year. 3/4 of them just crank your information through a canned software program that spits out one of their cookie-cutter financial plans. The only advantage I could see was having access to DFA Funds, but ultimately wasn't worth the fees.

[Tyler]

Tell me how you want to define the big 3 and I can tell you the big three.

Revenue?
Assets under management?
Market Cap?
Number of FAs?
Number of Clients?
Number of Branch locations?
Etc.

By most ways to rank size/big 3, Edward Jones wont even come close. (I would be very surprised)

[Tyler]

1 Merrill Lynch-Bank of America
2 Morgan Stanley- Smith Barney
3 UBS

Without any support data, off the top of my head, these would top my list of 'Biggest 3' Financial advisory firms. (These firms have massive general public FA divisions.) Not making any statements of quality, only size.

[FMF]

For reference --

Big Four:

http://en.wikipedia.org/wiki/Big_Four_auditors

Big Three:

http://answers.yahoo.com/question/index?qid=20091110211038AAmnSp5

[Tyler]

FMF-

I think he was asking about Financial Advisory firms not Accounting firms.

By all measurements, except number of financial advisers, Edward Jones comes a distant 4th when compared to the following firms...

MER-BAC: Rev-12.6b Assets Under Mgmt (AUM) 12.6b
MS-Smith Barney: Rev 3b AUM 1.5 Trillion
UBS: Rev 3.9b AUM 694b
Edward Jones: Rev 1B AUM 496b

(data is 2009 q1-3)

[billy]

I've often been tempted to hire Edelman Financial. His point of view is quite convincing. Investment options have become far more complex in the last 20 years. Paying his company 1.5% to 2% per year for a diversified portfolio (beyond equity and bond investments)and the freedom from planning is inviting to me. Using low-cost ETFs drops costs to the Vanguard Index fund level.
Has anyone used Edelman Financial Services?

[George]

The author's comments indicated that the financial Advisor should be Independent. - Should not be working for one of the Big 3,

which is where my initial question came from. I did not believe he was referencing one of the Big 4 auditing firms - used to be big 8. But I was unsure of his reference. Thanks, Tyler - I will assume your answer is what he was referencing.

thanks.

[FA]

There is a definite advantage to working with an independent financial advisor in that they are not being leveraged into investing your money in a manner being dictated by their corporate headquarters. Many advisors are affiliated with large corporations but are actually independent, which gives them the best of both worlds. I would therefore argue that it is preferable to work with an independent firm that does have some connection to a larger firm as they will have more resources, options, and research to pull from. Also some of their investments will be insured at a better rate allowing you to invest with lower fees.

[Josh]

The Big 4 accounting firms:

Deloitte
Price Waterhouse and Cooper
KPMG
Ernst and Young

Top 3 Ibanking firms

UBS
Goldman Sachs
JP Morgan
Morgan Stanley