Financial Advisors | 6 Critical Keys To Choosing A Financial Advisor

Roughly 80% of people think they're an above average driver. Clearly 30% of the driving population is misguided, but it's human nature to feel more confident in our own abilities that we sometimes should be.

Unfortunately, overconfidence can lead to disaster when planning your own financial future. Most of us make investment decisions based on the very dominant emotions of fear and greed. Because fear and greed are so powerful, when it comes to financial planning and investment management the majority of us simply aren't wired right to be successful on our own.

Look at the astronomical amount of mutual fund inflows in 2005, 2006, and 2007 as the market peaked (investors buying high/greed). Subsequently mutual fund outflows exploded as the markets bottomed in early 2009 (selling low/fear) leaving most investors bewildered as the markets soared in 2009 and 2010.

Most investors make the wrong financial decisions at the wrong times.

Buying low and selling high is the mantra of successful long-term investing, yet it doesn't happen consistently in the real world on an individual level. Many academics would argue we're actually wired more for financial disaster due to overconfidence than we are for financial success.

Turning over your financial and investment management to a professional presents an entirely new set of challenges and problems. The financial services industry is riddled with it's own set of complications such as confusing compensation structures, advisor/client conflicts of interest, lack of independence, unskilled and inexperienced advisors to name a few.

So how does one go about choosing a financial advisor?

When it comes to professional financial advice many factors influence the ultimate success or failure of your personal financial planning . Your financial advisor's experience level, their knowledge, personal integrity and breadth of advice are key among other things.

To help sort through the myriad of choices in investment and financial advisors, here's a simple checklist to get you started down the right path to financial prosperity with the guidance of a professional.

Competence - An easy way to spot competence is through an advisors professional certifications. While any financial advisor can sell an insurance or investment product, not all take the time required to deliver highly skilled financial advice. The most highly respected certifications are NAPFA Registered Financial Advisor (National Association of Personal Financial Advisors), CFP (CERTIFIED FINANCIAL PLANNER), and ChFC (Chartered Financial Consultant) . Earning these designations takes multiple years of study, dozens of hours of yearly continuing education, and embracing a code of financial advisor ethics.

The Financial Advisor/Client Relationship - Does your advisor have too many clients which will limit your personal attention? Do they have too few clients to be experienced? Many quality financial advisors with excellent support staff can manage 100 clients or more with no problems. Yet others may struggle with 50 clients. If you feel the number of client relationships the advisor manages is excessive, don't hesitate to ask how it will affect your relationship. Also, when choosing a financial advisor, ask whether you will be working with that person directly or with another qualified professional as part of a team.

Fiduciary Responsibility - A fiduciary responsibility is the highest standard of care in any profession . Attorneys and doctors have a fiduciary responsibility to always act with your best interests in mind. The financial services industry is held generally to a "suitability standard". A suitability standard means a financial advisor must reasonably believe an investment is suitable for your situation. This means little if anything as it's highly subjective. A fiduciary obligation is far more restrictive in the financial advice provided to you. A fiduciary responsibility means your financial advisor must act with the utmost care in your best interests only (and not their own) . Make sure your advisor is willing to agree to their fiduciary responsibility in writing. Many financial advisors may verbally agree to this, but legally you want them to embrace their fiduciary obligations in writing.

Compensation - It's shocking but most investors have absolutely no idea how their financial advisor is paid. Are they receiving commissions, fees, or some other form of backdoor perk's or kickbacks? The truth is roughly 94% of all "financial advisors" are registered with broker-dealers in some capacity (rather than as an independent registered investment advisor). Most are compensated through a mix of commissions and fees (fee based financial advisor). Only 6% or so of all financial advisors hold themselves to a pure fee only business model. Fees only clearly has the advantage when it comes to your financial advisor's compensation. Just think of it this way - should your financial advisor be paid like a car salesman (commission), or your attorney or accountant (hourly based fees)? Since "fee-based" is simply a slick marketing term created by Wall Street to illustrate a fee and commission model, "fees only" is the way to go!

Comprehensive Planning - Many advisors will loosely use the term "comprehensive" to describe their financial planning services, when in fact they're more geared to sell you insurance and investment products. A good financial advisor should understand all aspects of your planning, because your estate situation ties in with your insurance needs, and your tax situation ties in with your investment planning, and in reality all aspects of your financial situation tie into each other to some extent. A comprehensive advisor as the skills to ensure nothing is being overlooked in your entire financial picture.

Experience - While unfortunately not the case, every financial advisor should have some minimal length of experience requirement before they're turned loose to help manage your finances. After all, these may be some of the most important decisions in your financial life. Yet there is no set standard in the industry for credentials or experience . While there are highly competent and skilled advisors with CFP or ChFC designations and less than 5 years in the industry, for the most part real experience comes with advising clients through multiple economic bull and bear cycles (generally 5 to 10 years minimum).

Credentials, Experience, Compensation, Fiduciary Responsibility and the Financial Advisor/Client Relationship are just a start to choosing the right financial advisor. This checklist will help you can weed out some of the less qualified financial advisors.

Once you've researched potential financial advisors, schedule a one-on-one interview. This will give you a sense for who they are as a person, and how well they can manage you financial planning needs. There's a lot to be said for "clicking" with your financial advisor. If there's no "click", follow your gut instinct, there are plenty of qualified advisors out there whom you will click with.

A bad financial advisor can destroy a lifetime of hard work and savings . A good advisor may be worth their weight in gold to your financial future. In fact, a good advisor will add substantial value to your financial future well above their fees.

If you're ready to outsource your financial planning and investment management, here's a great start to finding a qualified NAPFA Registered Financial Advisor . Remember to take your time during the interview process. Make sure you ask thorough questions and get solid answers, because it is after all your financial future.