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What You Need To Know Before Looking For A Financial Advisor


The more experience you have and the more you know on a topic or subject, the easier it is to make a good decision. Finding a financial advisor is not something people do with frequency, so they do not have much experience doing so. Therefore, having the knowledge becomes critical when looking for the perfect financial advisor for you.

The following information is the bare minimum that you need to know before you start looking for a financial advisor.

Who are financial advisors?

Anyone can call them self a financial advisor, which should be scary! There are no required qualifications to refer to yourself as a financial advisor. Those that could fit the category would include:

  • A representative of a Registered Investment Advisor (RIA) firm that provides advice or does financial planning
  • Stockbroker that works for a broker dealer that buy and sell securities
  • Financial service company employees such as at Vanguard, TIAA, Fidelity or Charles Schwab
  • Insurance agent that sells insurance or annuities
  • CPA that does taxes and accounting
  • Enrolled Agent that does taxes
  • Attorney that does estate planning work and other legal matters, such as real estate transactions

Certifications or Designations

Since anyone can call them self a financial advisor there needs to be a methodology to know that a given individual has a minimum standard of training and experience in that field. It is easy with a physician. You know that they have the required schooling to earn the MD degree and passed the state examination to be able to practice in the State. Similar with a licensed plumber or tax preparer.

But what are the standards for financial planner or financial advisor? According to Financial Industry Regulatory Authority (FINRA), there are 184 financial designations. Some are extremely hard to obtain, yet others can be obtained with little effort and by simply paying a fee.

If you work with a financial advisor that does not have one of the following designations you have no way to adequately judge their competency as an advisor.


Certified Financial Planner (CFP) must have a 4-year college degree, complete the required coursework prescribed by the CFP Board, pass a comprehensive 6-hour test (usually about a 45-55% pass rate), have three years of experience, abide by the CFP® code of ethics and maintain continuing education requirements. This is considered by most to be the best certification to look for when you want financial help in a number of areas.

A Chartered Financial Analyst (CFA) is a professional designation awarded by the CFA Institute. Candidates are required to pass three levels of examination (usually 45% to 55% pass rate each) covering areas such as accounting, economics, ethics, money management, and security analysis. This may be the designation that you may desire if you solely want help with investments.

A Chartered Life Underwriter (CLU) is a professional designation awarded by The American College of Financial Services for individuals who wish to specialize in life insurance and estate planning. It represents a thorough understanding of a broad array of personal risk management and life insurance planning issues. Look for this designation if you are looking for help with personal insurance.

The Chartered Financial Consultant (ChFC) designation was designed by The American College of Financial Services primarily for insurance sales people to compete with the CFP designation. The ChFC has no final test requirement nor an ethics component. You may look for those with this designation if you cannot find an advisor in your area that is a CFP®.

The Personal Financial Specialist (PFS) is only available for those that are a Certified Public Accountant (CPA). This designation requires much less education than the above designations (only 75 hours) and relies mostly on work experience in the financial planning field. Look for the PFS if you’re primarily looking for help with taxes.

There are many other designations but the above are considered much more meaningful as a financial advisor. Other designations can be very specific to just investing or mutual funds or retirement, but your advisor should have broad knowledge, experience and be committed to ethical treatment of clients.

Forms of Compensation


Fee-only is the method that Registered Investment Advisors utilize. They are only paid directly from their client and the fee is known ahead of time. The fee may be by the hour, by the project, a fixed fee (sometimes referred to as a retainer fee), a percentage of assets that the advisor manages for the client or could be a combination of these options. Less than 5% of all financial advisors are fee-only.

Commissions were how advisors and their firms were first paid and many still are. There is always a potential conflict of interest with this approach between what is best for you and what is best for the advisor. The sales person may recommend one product over another due to the commissions that they and their firm would earn from the sale rather than what is best for you.

Fee based is often referred to as the Hybrid methodology, whereby the advisor can both collect fees and commissions. Roughly 84% of active SEC registered investment advisors are also dually registered with FINRA as representatives of a broker dealer. Another roughly 10% to 12% of registered investment advisors are licensed to sell insurance. Most advisors at major broker dealers, like Morgan Stanley, Merrill Lynch, Edward Jones and JPMorgan/Citi are hybrid advisors.

Some advisors are employees and may be paid a salary with or without bonuses, but their employers are compensated by one of the prior three methodologies.

Your Legal Protections or Safeguards

When it comes to your legal protections or safeguards there are two standards of care when working with a financial advisor.

The Fiduciary Standard means that the advisor must know you and your situation and provide the recommendations that are always in your best interest at all times. This is clearly the better safeguard for you, the consumer.

The Suitability Standard applies to those that sell investments and insurance products. They have to understand you and your situation and then make recommendations that are “reasonable”. They do not have to do what is best for you, nor disclose the amount of commissions or bonuses that they are paid or other factors that may sway their recommendations.

A dilemma exists with the hybrid advisors because sometimes they operate as a fiduciary and yet at other times they operate under the lower standard of the suitability level of care. In this case it is very hard to know under what safeguard they are operating under at any point in time.

Financial Recourse

When working with a financial advisor, there is often a document that you sign at the start of the process as to the terms that you agree to abide by. In most of these agreements there is a requirement of binding arbitration clause. This means that if the advisor screws up and you are negatively impacted, your only legal recourse is binding arbitration, and you cannot sue them.

It is in your best interest to have an agreement that does not require binding arbitration and does not restrict your recourse if the advisor makes a major error.  

Compare the Advisors “Form ADV”

This form that is referred to as the “Office Brochure” is a standardized document and is a requirement by the Securities and Exchange Commission (SEC) of all Registered Investment Advisors. It lists how the firm conducts its business and any security violations that have been committed. It makes comparing advisors much easier. If they do not have an ADV form it makes it extremely difficult to understand how they operate.

In conclusion you need to know what certification or designation an advisor has obtained, how they are compensated for their service, what legal protections you have and what is your recourse if they foul up.

There is more to ask when interviewing potential advisors but the above is the foundation of information you need to know before you research a potential financial advisor.

Also published on Forbes.










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