Hiring a financial advisor to handle your investments isn’t something to take lightly. The person or team you work with must be trustworthy, dependable, and knowledgeable about your specific goals.
Understanding what you’re looking for and which kind of advisor you need to reach your financial objectives will save you time when finding the best person for the job.
In this guide, we’ll explain the role of a financial advisor and outline the 5 key questions to ask them during your search for the right expert.
The Role of a Financial Advisor
Wealth management begins with education about the topic, allowing you to set achievable expectations. Without knowledge, it’s easy to fall for low-risk/high-reward investments that may not be legitimate or overlook the ones that are legitimate out of fear of falling for a scam.
Financial advisors excel in this area. An experienced advisor can help you familiarize yourself with the factors determining wealth management, such as asset classes, compounding interest, tax-advantaged strategies, and the importance of patience.
Advisor Options
What exactly does a financial advisor do? It depends on who you hire.
For example, all financial planners can advise you, but not all financial advisors are planners. You’ll see designations like:
- Certified Financial Planners (CFPs)
- Chartered Financial Analysts (CFAs)
- Chartered Financial Consultants (ChFCs)
- Certified Investment Management Analysts (CIMAs)
The designation shows you the amount of education, exams passed, and work experience a person has, but they can be found in various advisory roles.
Let’s look at the various common categories of advising and what each one does.
DIY
Do you prefer to handle your finances alone? If so, you’re likely a DIY type, which means you manage your financial planning without hiring an advisor.
When you use self-directed investing, you’re researching options, gauging the risks versus potential benefits, and deciding where you want to place your money.
Buying and selling is solely at your discretion; your financial decisions are yours to control without soliciting advice from another professional, aside from online platforms, apps, and other tools.
While this strategy gives you carte blanche on everything from budgeting to estate planning, it can be risky.
Your investment decisions are your full responsibility, and it’s often tempting to make decisions based on emotions like fear of the market or greed. You’ll spend a lot of time researching and monitoring your investments and continuing to learn about what’s trending.
If you are unaware or misunderstand something, it could cause costly errors — and many times, we don’t know what we don’t know.
Robo Advisors
Unless you have a lot of time on your hands and can become an expert in finances, the DIY option usually isn’t the best bet. So, what’s next?
In today’s technologically advanced world, the solution could be AI with the help of an algorithm-based online advisor, aka a robo-advisor.
Robo-advisors are investment platforms that offer financial advice based on algorithms. These programs consider your preferences and risk choices, and then generate suggestions to help manage your portfolio based on the information you provide.
Online advisors offer the benefit of lower-cost services such as automated investing and portfolio creation, and frequently have low account minimums. They’re accessible from anywhere with an internet connection.
However, you may find the investment options limited. Most robo-services can only do cash transfers and deposits, and they minimize the types of accounts you can create.
Brokers and Banks
Looking for the “traditional” financial advisor route?
Banks and brokers top the list, but banks support the actual advisor by offering products and services. Brokerage firms are the platforms where investment transactions occur. Financial advisors work at the firms, and clients may receive special offers on bank products if they hire a bank-affiliated advisor.
In this setup, brokerage firms research and support advisors on investment and trading, and banks provide banking or lending services. Regulation changes in the past few years have dictated that brokers work in the best interests of their clients or disclose potential conflicts of interest, such as a financial incentive from the bank to offer a particular product.
Broker-client relationships are often finalized once the transaction is completed, and commissions are earned on products sold, which may be proprietary to the bank or specific companies with whom the broker has a relationship.
Note that some financial advisors operate within a dual standard, falling under the “dual-registered” or “hybrid” category. These individuals may hold a Registered Investment Advisor (RIA) designation but also be broker-dealers. This double designation can increase conflict, as they must determine whether the client is better off receiving a broker or advisory relationship.
Insurance Agents
Sometimes, insurance agents offer financial advice. This happens when they’re selling products that manage risk, such as life, auto, or health insurance. These agents typically receive a commission for selling insurance policies that protect people or businesses from loss that occurs from a risk, like illness, death, or property damage. Their scope is limited to insurance, while financial advisors offer comprehensive planning to achieve goals.
Fee-Only Advisors
Another type of financial advisor is the fee-only professional. They typically don’t receive commission or any other compensation, as a bank or brokerage firm would, thus reducing the potential for conflicts of interests.
Because many fee-only advisors are fiduciaries they’re legally required to offer and act in the client’s best interest.
Clients pay fees through an agreed-upon avenue, such as:
- Hourly rates
- Flat fees
- Percentage of assets under management (AUM)
This structure offers clients complete transparency and disclosures on their advisor’s compensation. The advisor is able to choose from products available from an open set of companies, giving them better objectivity.
Registered Investment Advisor (RIA)
RIAs (such as the professionals at OJM Group) offer personalized advice to clients, helping them manage their assets in line with their financial goals and risk tolerance.
RIAs are in the investment advisory business and register with the Securities and Exchange Commission (SEC) or the state securities authorities.
As an RIA, your advisor would have a fiduciary duty to you: they are fundamentally obligated to always act in their client’s best interests and provide suitable investment advice. They aren’t tied to a specific program or family of products, allowing them to tailor their suggestions to your investment management and personal finance needs.
These advisors can provide a wide range of holistic financial services, from simple investing to wealth management and asset protection. An RIA may benefit individuals looking for portfolio management, retirement planning, or investment assistance. Fees are often based on AUMs rather than commissions through a transparent fee structure.
5 Questions to Ask a Financial Advisor
Various investment philosophies influence how an advisor views your investing options and the financial advice they offer you. (value, growth, fundamental analysis, socially responsible). Your advisor’s values shouldn’t conflict with yours.
To ensure your advisor is acting with a strong fiduciary and shared-value responsibility, ask these five questions:
1. Does the Advisor Owe Their Clients a Fiduciary Duty On a Long-Term Basis or Transactional Basis?
The distinction here is not whether the advisor would be acting in your best interest in general — that has been established through recent legislation. The question is whether you’re working with someone like a:
- Registered broker-dealer who is only obligated to perform in your best interest on a transactional basis
- Registered investment adviser who works in their clients’ best interest on a long-term basis
2. Can The Advisor Provide a Detailed Explanation of How They Are Compensated?
Transparent fee structures are vital, regardless of how an advisor receives their payment:
- Some use a flat fee.
- Others take a percentage of assets under management.
- Many advisors receive commissions on their investments, sales charges on mutual funds, and charges on operating expenses.
- Registered investment advisors usually have access to institutional fund classes, allowing them to charge lower expenses than many broker-offered retail shares.
There is no right or wrong way, but you should know how your advisor receives payment and approve of what you’re paying for. Understanding fee structures also allows you to try to find the same investments at a lower cost.
3. Does The Advisor’s Firm Make Money in Other Ways on Your Individual Investments?
Financial benefits can come from outside of your investment.
Ask for clarification on how the advisor or firm could benefit financially from your portfolio’s securities, such as through revenue sharing in mutual funds that passes off an extra payment to the advisor in higher fees to the investor (and could impact the advisor’s suggestions).
This scenario is also seen in exchange traded notes, closed-end funds, and other securities.
4. Does The Advisor Utilize Proprietary Securities?
Proprietary products can often be high-quality. If your advisor uses proprietary in-house securities, that doesn’t have to be a “bad” investment, but you should research them thoroughly, as there may be conflicts of interest for the advisor related to these investments.
5. Does The Advisor’s Firm Engage in Investment Banking Activities?
Not all firms do this, but if the one you’re talking to says yes, the next step is to determine how the individual and the firm are compensated by your purchase. Are they incentivized to obtain the investment?
These questions are not comprehensive, but they should give you a strong idea of what to look for when you evaluate a prospective advisor. Recognizing the potential factors that influence an advisor’s recommendations helps you to ensure they are acting in your best interest.
Other Factors to Watch For When Choosing a Financial Advisor
Once you find an advisor who matches your financial investment philosophy, there are a few other factors to consider.
Communication Style
For instance, if your communication styles don’t align, it can impact your comfort level. How frequently do they plan to check in with you? What style of check-ins do they use (in-person, phone, virtual, email, etc.)?
Personality
Personality matters, too. While going with your gut isn’t always reliable, if you notice an instant clash in your initial meeting with the person handling your money, it will be hard to build trust with them.
Services They Provide
Next, verify that the services they offer will expand with your goals. For a long-term, holistic approach, look for someone with experience and knowledge in handling:
- Portfolio management
- Asset protection
- Tax planning
- Insurances
- Financial planning, including retirement and college education planning
- Estate planning
Approach to Planning
Their planning approach may be holistic, taking a bird’s-eye view of your short-and long-term financial picture, or comprehensive (evaluating your net worth through financial goals).
Being Familiar With Your Industry
Regardless of the approach, look for a client-centric advisor who wants to help you succeed and is familiar with your industry. For instance, those with higher income brackets, like physicians, have distinctly different needs and goals from the average investor, and their investment strategy path should reflect their unique demands.
Conclusion
We always want to believe that the person or team we entrust our investments to has our best interests at heart.
While it’s okay for your financial advisor to want to make money, they should put the legal and ethical responsibilities of your investment before a profit. Potential conflicts of interest don’t have to be deal-breakers, but they should be clear and transparent up front.
At OJM Group, our registered investment advisors are experienced, knowledgeable, and professional. When you want an expert you can depend on to act in your best interests for the long haul, OJM Group is the name to remember.
Contact us today to schedule your initial consultation.
Disclosure:
OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of practice in the State of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact practice in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.
For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice, or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
Index Disclosure: An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Index returns shown are price returns, which exclude dividends and other earnings.