There are, quite literally, hundreds of thousands of registered financial advisors in the United States. With a wide variance in level of experience, credentials, and compensation structure, it can quickly become overwhelming if you’re starting from scratch when trying to choose one for yourself.
Unfortunately, the industry is also ridden with bad actors, which sheds a bad light on those that are truly out to do good work for their clients. In this article, we will review 9 questions (and our transparent responses) that I believe should be asked by everyone looking to hire a financial advisor, to ensure they are getting the best possible experience. The information in "What to Look For" sections below are opinions and, as such, should not be construed as tailored advice, but general education on narrowing down your choice for a sound advisor.
What to Look For:
The answer should be a resounding "Yes."
There are 2 standards of care in the financial services industry: The Suitability Standard and The Fiduciary Standard. A fiduciary (someone who operates by the fiduciary standard) is legally and ethically required to act in the best interest of their clients. An advisor who is only held to the suitability standard may recommend investment & insurance products that are merely “suitable” to the client, which leaves the door open for more conflicts of interest.
For example, let’s say an advisor has two similar investment solutions available for a client who wants to invest for retirement. Solution A is a mutual fund with a high fee (that the client pays) that he receives a portion of, and Solution B is a low-cost mutual fund that he receives a much lower kickback for. A fiduciary would recommend Solution B, because it’s lower cost to the client and is expected to produce similar results. An advisor operating under the suitability standard would legally be allowed to recommend Solution A to give themselves a bigger pay day, even if it costs more to the client.
It's important to note that just because an advisor states they are a fiduciary, doesn't mean you should sign the dotted line right away - and certainly doesn't mean they are actual an ethical person (just like we have laws, but criminals still exist). Did you know Bernie Madoff was a fiduciary? Now you do.
Spark’s Answer: Yes. Spark Wealth Advisors, LLC is registered as an independent registered investment advisor (RIA) - RIAs (and the advisors that work under them, i.e. us!) are held to the fiduciary standard.
What to Look For:
At a minimum, an advisor should have the FINRA (Financial Industry Regulatory Authority) Series 65 or Series 66 license, which is public record available on www.brokercheck.finra.org.
This means they are a licensed investment advisor and subject to regulatory scrutiny (that’s a good thing for clients). Sadly, this license is not required to hold oneself out as a “financial advisor”, so it’s important to verify this first.
Beyond the 65/66, additional licenses may or may not be relevant to providing financial advice. In other words, more FINRA licenses does not make a better advisor. One of the more common licenses is the Series 7, which means the person is affiliated with a broker-dealer, i.e. a large financial institution that sells financial products for commissions (not always a good thing - see Question 1.)
A bachelor’s degree or master’s degree in finance may signify a more comprehensive understanding of the financial world, but these degrees often focus on corporate finance or business administration, so they don’t necessarily mean the advisor is automatically more versed in retirement or estate planning.
Certifications such as CFP (Certified Financial Planner) display a basic level of competency across the major areas of financial planning: Cashflow & Debt (Budgeting), Insurance & Risk Management, Investment Planning, Retirement Income Planning, Income Taxes, & Estate Planning. The CFP designation is quickly becoming the gold standard in the industry. It also solidifies a shift in the industry away from selling products and focusing more on the planning aspect - helping clients achieve goals and live the life they want with their money, not just making more of it.
With that said, an advisor with CFP next to their name does not automatically make them an exemplary advisor, and I personally know dozens of incredible advisors who do not have the CFP designation, so don’t put too much weight on these three letters (I write this as a CFP myself).
Other more focused certifications can be valuable, to advisors and clients alike, who focus on (or fall into) a “niche”, or subset of the population that has specific financial needs and circumstances. For example, a Certified Student Loan Professional (CSLP) is likely going to be intimately familiar with different student loan forgiveness programs, paydown strategies, grants, etc.
Spark’s Answer: Christopher and Jake both hold the Series 65 FINRA License and Jake holds the CFP designation. At the time of this publication, Christopher is studying for the Enrolled Agent certification, a tax-focused certification issued by the IRS.
Similar to the note about the specialty certifications and designations, it’s important to work with an advisor who has experience working with people that have similar financial circumstances as you, fit into the same demographic, and have the same personal values as you.
You wouldn’t go to a cardiologist for an ankle sprain would you?
Financial advice is no different here. Most advisors are generalists. They have knowledge and experience that is a mile wide but an inch deep. If you want an advisor that is going to solve problems you didn’t know you had, ask this question. You want a specialist in your area, not a generalist.
Spark’s Answer: Spark was founded with the primary goal of serving the LGBTQ+ community and their unique financial goals and values. Many of our clients are do not identify as LGBTQ+, but they are allies - we have no room for hate in our client base.
We primarily serve those approaching retirement (within 5-10 years). Our focus here is tax-efficient retirement income planning.
We also serve high-income earners who are earlier in their career (30s-40s). These folks are typically not thinking about retirement too much yet, so we focus more on maximizing cash flow, planning around equity compensation, and saving for near term goals like purchasing a home or starting a family.
What to Look For:
A transparent explanation of compensation structure is extremely important when it comes to hiring a financial advisor. Conflicts of interest matter, and they are most common around forms of advisor payment.
Financial advisors are typically paid in 1 of 3 ways:
Commissions are tied to the sale of an investment or insurance product and are paid by the financial institution that creates the product to the advisor. While there are some commission-based financial products out there that do benefit clients, they are often oversold by “advisors” who are lining their pockets in the process. Whole life insurance, variable annuities, A-share mutual funds, Indexed Universal Life (IUL) policies are all examples of such oversold products.
The problem with commission-based advisors is that they are more salesmen/saleswomen than true financial planners a lot of the time. They often have no incentive to help with ongoing financial planning, since once the product is sold, they receive their commission, either one-time or an ongoing “trail”, no matter what happens after that. If the advisor works for a company with the words “life” or “mutual” in the name, then they likely sell insurance products.
Fees, on the other hand, are tied to the service provided by a financial advisor and are always paid directly by the client to the advisor. Fees are more transparent for clients, because they know exactly what they are paying the advisor. It’s in an agreement that is signed at the outset of the relationship. Fees can come in a variety of forms:
Many advisors hold themselves out as “fee-only” to separate themselves from commission-based advisors who do not act in a fiduciary capacity. With a fee-only engagement, the only money changing hands is between the client and the advisor. There are no third-party payments influencing the recommendations like there can be with commissions and insurance companies. In other words, the fee is the fee, regardless of what investments are recommended, so the advisor has no reason not to recommend what is in the client’s best interest.
Most advisors are compensated by both fees and commissions, sometimes called “fee-based”. So, they primarily are paid by fees but may also recommend products that pay a commission. Many of the well-known national firms are fee-based. This is not inherently a bad thing, but just understand that advisors there may be influenced by what pays them the most.
Spark’s Answer: We are a fee-only firm and charge an annual % of AUM not to exceed 1%. We have a separate service offering for those who have not accumulated a high level of assets. For this service we charge a subscription fee of $195/month for individuals and $245/month for couples.
What to Look For:
At a minimum, all advisors should be able to provide or tell you a comprehensive list of services including cash flow planning, financial planning, investment management, estate planning, tax planning, and risk management / insurance review.
Specialized advisors may focus on additional services like retirement income planning, high-net worth estate planning, equity compensation, or catering to the specific needs of small business owners.
Most people would be best served by an advisor that specializes in their unique situation rather than a “generalist” advisor at a large firm who will attempt to help anyone that will pay him/her.
Spark’s Answer: We offer all of the services listed after “at minimum” above, with a focus on retirement income planning & high-income professionals.
What to Look For:
Investment management philosophies can generally be categorized as active or passive.
Active management entails frequently buying and selling different investments with hopes of outperforming the broader stock market. This approach can come with high fees, more taxes, and perhaps not surprisingly, underperformance compared to its benchmarks.
Passive investment management aims to mirror a given stock market index, as history has shown very few fund managers have been able to outperform the market consistently. This style of investing is typically very low-cost, with less tax consequences and predictable performance in relation to the stock market index that it aims to replicate.
For ultra-high-net-worth clients, asset classes beyond the traditional stocks, bonds, and cash may be warranted for additional diversification. Think private equity, private credit, futures, options, commodities. With that said, most people’s goals and risk tolerance can be met with traditional equity and fixed income mutual funds. In short, don’t fall for overly complex strategies as a sales tactic.
Spark’s Answer: We believe in passive investment management backed by evidence and financial science, also known as factor investing. Factor investing favors companies that possess certain traits, or “factors” that have a history of outperforming other types of companies. Factors include company size, price, profitability, and momentum.
What to Look For:
Communication is of the utmost importance when it comes to the success of a relationship with a financial advisor. Financial planning is an ongoing process, and when life happens, you should be able to easily reach your financial advisor or at least know the next time you’re scheduled to meet. For an advisor to act in your best interest, they have to know what your best interests are. Without regular communication, this becomes more difficult.
Regular, scheduled meetings (quarterly, semi-annually) and availability for additional consultations as needed should be clearly outline at the outset of an engagement with a financial advisor.
Beyond frequency, be sure to ask what method of communication as well - email, phone, text, face-to-face, etc.
Spark’s Answer:
During initial onboarding we meet with new clients a minimum of four times over the course of a few months. We then meet at least semi-annually in the springs and fall to review and update financial goals, progress reports and reassess investment allocations. We welcome clients to contact us in between meetings because we know life events can happen at any time.
What to Look For:
Clear explanation of the process and any associated fees, as well as flexibility and access to your funds.
If a financial advisor is engaging you in true financial planning, they should know when you anticipate needing withdrawals for various expenses and goals. Of course, you bear the responsibility of being transparent about this with them to begin with.
The process of withdrawing traditional investments like mutual funds, ETFs, stocks, and bonds, is very straightforward these days. If your advisor is suggesting anything to the contrary, it should be a red flag.
The custodian may or may not charge any transaction fees or processing fees relating to withdrawals - these should be communicated to you ahead of time.
You should know if you can receive your funds by ACH, check, or wire transfer.
Spark’s Answer:
Withdrawals from investment accounts can be automated at no cost to you. Part of our process is to plan your future cashflow needs in detail so we can assign specific investments and a time horizon to every dollar.
What to Look For:
Open communication with other professionals you work with.
Most financial advisors do not file taxes, nor are they licensed estate attorneys or insurance agents. However it is extremely important that they allow open communication with these other professionals to coordinate and implement recommendations.
Spark’s Answer: We regularly speak with clients’ CPAs and estate attorneys if we feel that a client’s estate plan needs to be updated or to ensure all appropriate tax documents are filed each year.
Most people that work with an advisor end up staying with them long-term. Asking the right questions up front when “shopping” for an advisor, or even a new advisor if you’re unhappy with your current one, can make all the difference in the success of your relationship.
Unfortunately, not all of them our out to do the most good - some are salespeople disguised as financial advisors selling high-fee products to those who don’t know any better. But that won’t be you now, will it?
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