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Five Questions To Ask Yourself When Hiring A Financial Advisor

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It’s easy to find tips on how to pick a financial advisor, but it’s harder to know what is best for you. We all see the endless ads from the legacy brokerage firms, banks looking to expand their ‘share of wallet,’ low-cost discount shops, and robo-advisors. Further adding to the confusion is that the industry still allows insurance salespeople, who may not be securities licensed, to sell products that often look like financial investments.

This decision about how to have your money managed is deeply personal, and there is no one correct way for everyone. If you choose to hire an advisor, here are some important questions to ask yourself to help you feel confident in your decision.

Do I trust this person? We don’t usually pick our personal physicians based on a slogan or a television commercial, and we don’t rank ‘top doctors’ based on who performs the most surgeries. Yet many of the larger financial firms, whose ads are commonplace, use these metrics to differentiate themselves. However, at their core, these large banks and brokerages are often publicly traded organizations whose advisors have sales goals, sales incentives, and sales managers—whose primary compensation is driven by volume (think Wells Fargo scandal). In that profit-driven world, sales and quarterly production are key drivers. If this doesn’t appeal to you, then instead ask your friends who they are using or research local, independent advisors who live and work in your community. Carefully check their backgrounds, meet with several practitioners, and ask a lot of questions before making a decision. Be sure to confirm how the advisor is compensated and ask for references. These steps should lead to a greater feeling of trust, which is integral to the success of the relationship.

Is the advisor asking the right questions and is he or she a good listener? As with any successful relationship, good listening is critical—especially when it comes to personal discussions around money and family. It is important to feel comfortable that your advisor is not only knowledgeable but also empathetic to your unique situation. Also imperative is that they understand not only your goals, but also your concerns and fears around investing. For example, if you tell an advisor that you have one million dollars to invest and that you’re a high-risk investor, the advisor should go deeper and ask how you will feel if you lose $200,000 or more during a bear market? This discussion will help the advisor gain a greater understanding of your true risk tolerance. Asking deeper questions and carefully listening to the answers puts the two of you on the same page and may help avoid emotional reactions or disappointments later.

What do the designations and letters after an advisor’s name mean?  Not all financial designations are created equally. For example, some, like the Chartered Financial Analyst (CFA) designation and the Certified Financial Planner®(CFP) certifications, take several years to complete and include a proctored, multi-hour exam. Others are self-study programs with a final exam that can be taken online at home. As a result, you may see a lot of initials after a financial advisor’s name, but they might not mean much. It’s best to understand what each designation is, who sponsors it, and how it was earned.

What sort of education and experience does the advisor have? Perhaps surprisingly, there is no academic prerequisite needed to pass a Series 7 licensing exam (the test that FINRA requires in order to sell securities) or to call oneself a ‘financial advisor’. This is why it is important to ask about education and relevant work history. For example, an advisor who was a banker may have experience with real estate or the challenges business owners face; someone who served as a trust officer may be well versed in inter-generational wealth transfer, and an advisor who previously trained as a family therapist may understand family dynamics and the role of money in relationships. Experience in these related areas may be valuable if you want your advisor to take a comprehensive approach and if you are looking for integrated advice. The bottom line is education, both from academia and professional experience, matters.

How does the advisor get paid? The way we compensate advisors is becoming a hot button. The so-called ‘fiduciary standard’ offers some protection for consumers who prefer a level fee-compensation structure and a move away from a commission-based brokerage relationship. Legally, a fiduciary must adhere to a higher standard of care than a traditional broker. Level fees help the consumer know that the advisor is not biased toward a given product or service based on how much they get paid. For a variety of reasons the industry is moving more to this important fee-based standard—but keep in mind it is just one of several important factors to consider.

Working with a financial advisor is a deeply personal relationship. There should be a high level of trust, a strong ability to communicate, an understanding of the advisor’s knowledge and capabilities, and an understanding of how he or she gets paid. When you are comfortable with all these variables, chances are you will get more out of the relationship. So ask the hard questions in the beginning, and you will be less likely to be disappointed later.

Contributor’s Bio

Mark Avallone is the author of Countdown To Financial Freedom, and founder and President of Potomac Wealth Advisors, LLC a financial advisory firm serving clients through holistic financial planning and wealth management.  Avallone writes on a variety of financial topics, and his contributions have appeared in the Wall Street Journal as well as in Forbes where he is a regular contributor. He has appeared on CNBC and has been a repeat guest on the Fox Business Network. His insights have also appeared in USA Today, U.S. News & World Report, The Washington Post, and other leading publications.

Securities and Investment Advisory Services offered through H. Beck, Inc. Member FINRA, SIPC 6600 Rockledge Drive, 6th Floor, Bethesda, MD 20817

(301) 468–0100

Mark Avallone is a registered representative and an investment advisor representative of H. Beck, Inc., which is unaffiliated with Potomac Wealth Advisors, LLC.

 

 

 

 

 

 

 

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Mark Avallone, MBA, CFP®, CRPS®

About Mark Avallone, MBA, CFP®, CRPS®

I am the Founder and President of Potomac Wealth Advisors, an independent financial advisory firm headquartered in Rockville, MD and author of Countdown To Financial Freedom: Your Path To A Meaningful And Vibrant Retirement. My commentary on the markets and the issues facing investors has appeared on the CNBC, CBS, NBC, FOX News Channel, Fox Business Network and in USA Today, US News and World Report, The Wall Street Journal and other publications. Previously, I was a Senior Vice President in The Private Bank of Bank of America and a VP in the Corporate Banking Division of Mellon Bank. I am a CERTIFIED FINANCIAL PLANNER practitioner, a Chartered Retirement Plans Specialist(™) and hold an MBA degree from Rutgers University. I am a proponent of financial education and have been an Adjunct Professor of Finance at The University of Maryland University College. For more information please visit my website, www.PotomacWealth.com. You can contact me at 301-279-2221 or at Mark@PotomacWealth.com

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