Learn more about Forrest at NerdWallet’s Ask an Advisor
At some point, everyone needs a financial planner.
Think about your financial health the way you think about your physical health. You can do a lot on your own, and you might not need a doctor very often. But many people regularly see the doctor anyway, just to check in and make sure everything’s OK. If something is wrong, that checkup might turn into a more significant visit.
As time goes on, your health starts to change and you have to deal with things you didn’t deal with before. The same is true for your finances.
Two questions to ask
When you start looking for financial help, you’ll find plenty of people willing to provide it. But are they looking out for your best interests, or their own? Financial service providers go by many names — broker, broker/dealer, advisor representative and financial planner, to name a few — but when you’re looking for one, you really need to ask only two questions:
1. Are you a registered investment advisor or a broker/dealer? Simply put, registered investment advisors (RIA) are legally obligated to put their clients’ interests first, even if it means they’ll be paid less. This is known as the fiduciary standard.
By comparison, broker/dealers are not held to the fiduciary standard, but instead are held to the suitability standard. This means that the firm or associated person must have “a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile,” according to the Financial Industry Regulatory Authority, which oversees these firms. None of this language indicates that the representative has to put a client’s interests first.
2. Are you fee-only, or do you accept other forms of compensation, like commissions? Investment advisors must disclose how they’re compensated in a filed document, known as an ADV. Part of the ADV form discloses how an advisor is compensated, whether it’s through fees, commissions or some other way. If asked, advisors must answer in the same way they outline their compensation in their ADV.
Fee-only planners will proudly state that they take a fee, the amount of which is disclosed upfront, and that they receive no other compensation for any advice they give you — no commissions, referral fees, kickbacks or any other hidden fees. Other planners won’t be able to. It’s that simple.
How to find a fee-only planner
The first step is to ask friends and family whether they have a financial planner they trust. If they like their financial planner, odds are that you will too. If no one you know has a financial planner, ask your accountant or lawyer or another trusted professional for recommendations.
Also check out the National Association of Personal Financial Advisors (NAPFA). Its website has a “Find an Advisor” search tool that can provide a listing of fee-only financial advisors in your area. One thing to keep in mind, particularly if you live in a remote area, is that many advisors provide virtual appointments online.
The bottom line
Good financial advice is expensive. But it’s not nearly as expensive as no financial advice, or even worse, bad advice. Make sure you hire a financial planner who is duty-bound to prioritize your financial interests above his or her own.
Image via iStock.