Choosing and using a financial advisor

Commission: a fee paid to a financial or investment advisor for selling a given financial product, such as a mutual fund or insurance policy, to one of his or her clients. The fee is paid by the company behind the financial product.

Transaction fee: a charge assessed by an intermediary (such as a broker/dealer) for assisting in the sale or purchase of a security.

Click here for the downloadable version. (PDF)

Life requires us to make many financial decisions that can affect our long-term financial well-being. If you don’t feel knowledgeable enough to make such decisions, consider hiring a professional financial advisor or investment advisor for guidance.

If you take the time to evaluate different advisors, you will be more likely to find one who is the right fit for your needs and priorities. You will also be better able to find a professional whom you feel you can trust to give quality advice with your best interests in mind. If you share finances with another person, such as your spouse or partner, be sure he or she is involved in the process of choosing and then working with an advisor.

Questions to ask
Some employers offer their employees access to financial or investment advisors at no cost to the employees. Also, financial services firms may offer free guidance to clients whose assets invested through the firm exceed a given level. Here are a few questions you should ask to help you determine whether an advisor is credible and trustworthy.

1. Are you a financial advisor or an investment advisor?
An investment advisor will either counsel you on buying and selling specific investments, manage your investments on your behalf, or perform both services. But if you’re looking for comprehensive guidance on your overall financial state, you may want to work with a financial advisor, who will help you create a road map for achieving all your financial goals. It’s important to decide which of these two basic types of advisor you’re looking for, based on your needs and preferences.

2. How are you compensated?
Financial and investment advisors typically fall into three categories based on fee structure:

  • Commission-based. This type of advisor makes money mostly by receiving commissions or transaction fees when you sign up for financial products like mutual funds or insurance, with the commissions being paid by the company or companies behind the products. A commission-based advisor might be the most affordable option. But keep in mind that the advisor might recommend products based more on how much he or she will earn in commissions than on what’s best for you and your money.
  • Fee-only. These advisors are compensated by charging an hourly rate or flat fee to create a financial or investment plan for you, in addition to an annual fee of around 1% to 2% of any invested assets he or she manages for you. With no commissions to sway his or her recommendations, a fee-only advisor may be more likely to provide you with unbiased and objective guidance based on what’s best for your unique situation.
  • Fee-and-commission (or fee-based). These advisors charge an hourly rate or flat fee for developing a financial or investment plan for you and also earn commissions for signing you up for products to implement that plan.

In your initial discussion with an advisor, get clarification on what services you will receive and an estimate of any charges you will incur. Once you’ve settled on a particular advisor, ask him or her to spell out these things in a written agreement. Keep a copy of the signed agreement in your household files.

3. What are your credentials and experience?
It’s important to choose an advisor who is either Know How Now: Financial Education Series Choosing and using a financial advisor Commission: a fee paid to a financial or investment advisor for selling a given financial product, such as a mutual fund or insurance policy, to one of his or her clients. The fee is paid by the company behind the financial product. Transaction fee: a charge assessed by an intermediary (such as a broker/dealer) for assisting in the sale or purchase of a security. Saving and Investing a Registered Representative (RR) working for a brokerage company licensed by the Securities and Exchange Commission or an Investment Advisory Representative (IAR), working for an investment advisory company. An IAR must adhere to a fiduciary standard of care, meaning he or she is required by law to look out for your best interests and is legally held to a higher standard of care than a brokerage representative.

The advisor you choose may also be accredited by one or more of the standard financial services professional organizations. The most common credentials are Personal Financial Specialist (PFS), Certified Financial PlannerTM (CFP), Chartered Financial Consultant® (ChFC) and Chartered Financial Analyst® (CFA). If the individual is registered as an investment advisor, you can view his or her firm’s registration form (known as Form ADV), which is a two-part form that includes information about the firm that is important to regulators (e.g., name, number of employees, form of the organization, nature of the business) and acts as a disclosure document, highlighting information such as services provided, fees levied and other important facts.

It helps to ask how long the advisor has been in practice and the numbers and types of clients he or she has served. You might ask the advisor to put you in touch with two or more clients from the past or present. Once you get such references, contact the individuals and ask how satisfied they are with the advisor’s services.

4. Have you been disciplined for any mattersrelated to your professional conduct?
You can pose this question directly to an advisor. You can also search for his or her disciplinary history on the website of the Financial Industry Regulatory Authority (www.finra.org/investors/toolscalculators/brokercheck) and your state insurance department. If the individual is registered as an investment advisor, you can view his or her registration form (Form ADV) on the Securities and Exchange Commission’s website (www.adviserinfo.sec.gov).

Preparing for a meeting
Once you’ve chosen an advisor, knowing what to expect in your consultations will help you prepare. The advisor will:

  1. Gather detailed information on your assets, liabilities, income and expenses to gain a complete understanding of your financial circumstances.
  2. Evaluate your short-term and long-term financial objectives, taking into account your risk tolerance, time horizon and other planning needs.
  3. Provide specific investment recommendations, including an asset allocation (investment mix) designed for your personal goals.
  4. Implement your chosen strategy using an efficient approach to help minimize investment expenses.
  5. Review your progress regularly and adjust your plan as needs change.

As stated earlier, if the professional you’re working with is a financial advisor, he or she will provide the investment-related services outlined above and also offer broader guidance on achieving all your financial goals.

There are a number of ways to prepare for your first planning meeting so you can feel confident and get maximum advantage out of the session:

  • Determine your goals. Create a list of all your financial goals and rank them by importance.
  • Educate yourself about money matters. Take advantage of free financial seminars to become better acquainted with basic concepts like asset classes, asset allocation and diversification. It might also help to use Web-based, financial calculators to gain a general sense of where you stand in relation to your goals.
  • Gather financial records. Come prepared with information on any stocks, bonds, mutual funds, real estate or life insurance you own. You should also have copies of all recent financial statements.
  • Focus on retirement. Think carefully about your retirement goals, including the age at which you hope to retire; what sources of income you expect to live on, such as a pension or Social Security checks; and what standard of living you hope to maintain when you’re no longer working. Keep in mind that retirement is not merely a destination but a journey – and quite possibly a long journey, given that people today are living longer and spending more years in retirement. The average life expectancy in the United States is about 19 years past the retirement age of 65 — with your own number depending on your gender, lifestyle, health, medical history and family medical history.
  • Be ready to talk about protecting your survivors. You will want to make sure your financial plan includes adequate protection for the well-being of your spouse or partner, your children and other dependents in the event you become disabled or pass away.
  • Assess your risk tolerance. Consider your risk tolerance when it comes to investing your money. Are you willing to risk losing money in the short term in exchange for the possibility of earning more over time? If so, how much are you willing to lose?

Moving forward
After you’ve met with an advisor, staying in charge of your finances will take continuing commitment, time and effort on your part. Don’t lose sight of the action items you agreed to with the advisor, whether those items revolve around putting more money into your 401(k), buying more life insurance or something else.

You may want to work with an advisor on an ongoing basis. Doing so might help you keep your planning on track, and you’ll always have someone to turn to with questions about personal finance. At the end of each meeting with an advisor, you may want to schedule your next touch-base with him or her to make sure it’s on your calendar and the advisor’s. Try to meet at least once a year – or more often if your life undergoes a major turning point, such as a marriage, separation, divorce, or birth or adoption of a child.

If you stick with your planning, eventually, staying financially healthy will become a natural part of your routine.

Explore further
Visit tiaa-cref.org for broader Financial Education, including a variety of resources to help you improve your financial well-being.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Please note that investing involves risk.

© 2013 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017