• Harry N. Stout

How to Choose a Financial Advisor (and Do I Really Need One?)


Written by: Paul Werlin, President, Human Capital Resources, Inc.


Financial Advisor, Stockbroker, Registered Investment Advisor, Financial Planner, Certified Financial Planner, Investment Specialist, Retirement Specialist, Investment Advisor — could it be any more confusing? Who does what and how these professional works to help people make smart decisions about their money? It would take a small book to fully explain the similarities, differences and qualification requirements of all these people who want to provide you with investment advice. So, in this article I just want to cover a few basic to help people understand three things:

Do you really need an investment advisor?

What are the basic differences between investment advisors? And what should you focus on when hiring an advisor?


First, there are no clear-cut dollar amounts or life-events that “require” anyone to hire an advisor. Intuitively, it just seems logical that if someone wins the lottery or gets a large inheritance, they should seek out financial help. But what about ordinary people? The rule of thumb is that when an individual (or couple) can pay all their bills, have a 3-6 months emergency fund in the bank, and still have money available, they should consider finding investment help. Now of course, it is very possible for someone to be their own advisor. But it takes time to learn about investments, taxation, investment products, insurance products, portfolio styles, and on and on.


Certainly, if someone is just starting out, they can open an IRA or investment account on their own and put their money into a quality growth mutual fund or ETF (exchange traded fund). But there are more than 8,000 mutual funds and more than 5,000 ETFs. Just picking one is no simple matter for an amateur. And it is an ongoing job to review your investment, market trends, interest rates, tax laws, etc. Most people do not have the time to commit to spending the time necessary to make wise informed decisions.


So, if you decide you want professional advice, where do you turn and how do you pick someone right for your needs? Well, before you even get to the selection stage, it’s important to understand the 2 fundamental types of advisors: Financial Advisors (what people used to call “stock brokers” and “registered representatives, although they can have other names as well), and Register Investment Advisors (RIAs). There are some particularly important differences between these two: FA’s work for brokerage firms like Merrill Lynch, Raymond James Morgan Stanley or independent broker/dealers. They typically are paid a commission from the products they sell. They are registered and licensed by FINRA (the Financial Institutions Regulatory Authority) and must pass rigorous exams to demonstrate their product knowledge, understanding of securities laws and ethical standards.


They now work under a so-called “best interest” standard, which means they must only sell products that are in the best interest of their clients and disclose any conflicts of interest and how they are compensated. RIA’s on the other hand, tend to be independent of large brokerage firms and are regulated directly by the Securities and Exchange Commission (SEC). RIAs are considered to be acting in a fiduciary capacity, and so held to a higher standard of conduct than registered representatives. This fiduciary standard mandate that an RIA must always put the client’s best interests ahead of his or her own, regardless of all other circumstances. RIAs are also required to disclose any possible conflicts of interest to their clients and act in an ethical manner in all their business dealings.


Some RIAs charge clients a percentage of their assets under management while others charge either an hourly or a flat fee to dispense advice. Advisors who choose this model for their practices must obtain a Series 65 license (which primarily deals with federal securities law and regulation with nothing on product knowledge or portfolio structure or asset management). While on the surface RIAs may seem to be the better choice because of their fiduciary standard, just remember that Bernie Madoff was an RIA!


Perhaps the best way to choose an advisor is to get a recommendation from a friend or family member. There are many on-line resources that can help you find contact information for professionals in your area. FINRA is also a good resource — their Broker Check site provides extremely helpful information about brokers past and experience. When you do start meeting potential Advisors, asks lots of questions — their experience, how their fees work, the types of clients they work with and they kind and frequency of communications you can expect. Like hiring a lawyer, a doctor, a CPA or any professional, make sure you feel comfortable with this person. After all, he or she will provide advice about your money, your retirement plans and your dreams.

2020 by NelsonWells, LLC

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