Hiring a financial advisor is one of the most powerful things you can do to grow your money and achieve financial security. Yet many people make no decision for years (even decades) after recognizing a need because they struggle to find the right fit and are tired of talking to “brokers”.

Surprisingly, the term “Financial Advisor” can actually mean a number of different things, so in addition to finding someone with the right experience, it’s important to know what they’re paid to do.

Here are four things to look for to make sure you’re finding the right advisor for you:

Fiduciary

Financial Advisors are licensed in one (or up to three) different ways:

Investment Advisor – Provides services to clients in the capacity of a fiduciary, and is required to place client interests ahead of their own (sales commissions are not allowed). An Investment Advisor Representative (IAR) is employed by a Registered Investment Advisor (RIA) firm. (This is how Paceline is licensed.)

Broker – Sells investment products to earn sales commissions, and is NOT a fiduciary. A Broker (aka Registered Representative) is employed by a Broker-Dealer firm.

Insurance Agent – An insurance agent (or producer) earns commissions for product sales. In most cases, insurance agents sell products offered by a single firm.

What to look for:

“Fee-only” advisors work with clients in ONE capacity (fiduciary), while “Fee-based” advisors do BOTH (fiduciary AND commission-based sales). When you receive financial advice from a Fee-only advisor like Paceline, they aren’t paid to do anything else.

Click here to look up the background of an advisor, and their disciplinary history (if any).

Independent

You want an advisor who can construct a portfolio built to achieve your goals, not someone else’s. That’s why it’s important to consider the full scope of services that their employer/parent company performs.

For example, mutual fund companies often have an army of in-house financial advisors, many of whom are brokers. Clients are often limited to (or steered towards) in-house funds, not what’s objectively best.

What to look for:

Independent advisors have access to the largest selection, and lowest cost products available. On an open platform, advisors have no reason to steer a client towards in-house products.

Transparency

Among people that have worked with an advisor before, one of the most common complaints is that they don’t often get a good explanation of what’s going on in their portfolio, or how to understand their financial plan.

The most important input to valuable financial advice is, well, understanding the client. So if you don’t understand what your advisor is doing, they don’t truly understand your financial situation.

What to look for:

A skilled advisor can explain what you’re doing, why, and how it benefits you. If they can’t, that can be a sign that their knowledge level does not exceed that of their clients, or what they’re doing doesn’t actually benefit you. There should be no “black box”.

Experience

Many people are surprised to find out that most advisors don’t have direct investment experience. The most common background is sales, and not necessarily selling financial products either.

The reason it’s so important for an advisor to have experience managing money at scale is because selecting the right investment strategy is a decision made between you and your advisor.

So if your advisor isn’t responsible for all investment decisions made on your behalf, you aren’t part of the process, and that’s not personalized.

What to look for:

Ask an advisor about their investment selection process. If they discuss attributes that make an investment attractive (or appropriate) you’re on the right track. However, if they speak about their firm, or a centralized process, you aren’t speaking to an investment decision-maker.

Discuss which software package they use for financial planning (Paceline uses eMoney Advisor). If they can’t name a software vendor they don’t provide comprehensive financial planning, and if they start talking about guiding clients toward “solutions” (aka financial products) commission-based sales is their primary focus.

If you have questions about selecting an advisor or if you’d like to talk with us about your portfolio, contact Paceline today.