How do you choose a financial advisor?

Is every financial advisor a fiduciary?

No. "Financial advisor" is a general job title, not a license, and the standard that applies depends on the role the person is acting in. An investment adviser owes clients a fiduciary duty. A broker recommending securities is held to a best-interest standard under SEC Regulation Best Interest. Many professionals act in both roles, account by account.

• Investment advisers owe a fiduciary duty under the Investment Advisers Act of 1940: a duty of care and a duty of loyalty that cover the whole advisory relationship, within the scope the client agrees to.
• Brokers making a recommendation to a retail customer must act in that customer's best interest at the time of the recommendation, without putting their own or their firm's interests ahead, under Regulation Best Interest (compliance required since June 30, 2020). It applies recommendation by recommendation and does not by itself include ongoing monitoring of the account.
• Insurance agents selling insurance and annuities are regulated by the states, under standards that differ from both.
• Dual registrants are firms, and professionals, registered both as a broker and as an investment adviser. For them the standard depends on the capacity they act in for each account or recommendation, and their Form CRS has to explain which applies.

So the most useful version of the question is not "Are you a fiduciary?" but "In which of my accounts and recommendations do you act as a fiduciary, and in which do you not?"

Is a CFP® professional a fiduciary?

Under CFP Board's standards, yes, whenever a CFP® professional provides financial advice to a client. That duty is a condition of the certification, enforced by CFP Board, which is a certifying organization rather than a government regulator. It sits alongside, and does not replace, the legal standard that applies to each account.

CFP Board's Code of Ethics and Standards of Conduct describes the duty in three parts:

• Loyalty: place the client's interests above the professional's own and those of the professional's firm.
• Care: act with the care, skill, prudence, and diligence of a prudent professional, given the client's goals, risk tolerance, and circumstances.
• Following client instructions: comply with the terms of the engagement and the client's reasonable and lawful directions.

CFP Board can publicly discipline a professional who breaks its standards or take away the right to use the certification. Its standards treat financial advice as a communication that would reasonably be viewed as a recommendation to act or not act. General education, such as this page, is not financial advice under that definition. Certification and any public discipline can be confirmed on CFP Board's Verify a CFP® Professional page.

How can someone check a financial advisor's background?

Three free public databases cover most of it. FINRA's BrokerCheck shows a professional's registrations, employment history, exams passed, and disclosures such as customer complaints and regulatory actions. The SEC's Investment Adviser Public Disclosure site shows the same for advisers, plus the firm's Form ADV. CFP Board's site confirms CFP® certification and any public discipline.

• FINRA BrokerCheck covers brokers and brokerage firms, and links to adviser records for people registered in both roles. FINRA notes that some disclosures are allegations that may be contested or unresolved, so a disclosure is a reason to ask questions, not proof of wrongdoing.
• SEC Investment Adviser Public Disclosure covers investment advisers. A firm's Form ADV Part 2A brochure describes its services, fees, and conflicts of interest in more detail than Form CRS.
• CFP Board's verification search shows who currently holds CFP® certification and lists anyone CFP Board has publicly disciplined.
• Other letters after a name can be looked up in FINRA's professional designations database, which lists what each designation requires to earn and keep.
• State securities regulators oversee smaller advisory firms and can answer questions about a local professional. NASAA lists every state's regulator.

What is Form CRS?

Form CRS, the client relationship summary, is a short plain-English document that SEC-registered brokerage firms and investment advisers must give retail investors. It summarizes the services offered, fees and costs, conflicts of interest, the standard of conduct that applies, and whether the firm or its professionals have legal or disciplinary history.

It is limited to two pages, or four for a firm that is both a broker and an investment adviser and combines the two into one summary. It is delivered at or before the start of a relationship and must be posted on the firm's website if it has one. Most sections end with suggested "conversation starter" questions that the firm's professionals are expected to be ready to answer, which makes it a good script for a first meeting.

What is the difference between financial planning and investment management?

Investment management is choosing and overseeing a portfolio: what to own, in what mix, and when to rebalance. Financial planning is broader. It covers the decisions around the money, such as cash flow, retirement timing, taxes, Social Security, insurance, and estate documents, and it decides what the portfolio needs to do. Some advisors offer one, some offer both.

The two are easy to blur because both are often sold under the same title. Questions that separate them: Does the fee include a written plan, or only the portfolio? How often is the plan updated? Who handles the tax and estate pieces, and are they coordinated with the investments? A well-run portfolio is only as useful as the plan it serves.

What does a CFP® professional actually do for clients?

When a CFP® professional provides financial planning, CFP Board's standards require a seven-step process: understand the client's personal and financial circumstances, identify and select goals, analyze the current course of action and alternatives, develop recommendations, present them and, where the engagement includes those responsibilities, implement them and monitor progress and update the plan.

In practice that means looking at the whole household before recommending anything: income and spending, savings and debts, taxes, insurance, retirement and Social Security timing, and estate documents. The recommendations are supposed to follow from the goals, not the other way around.

To earn the certification, a person must hold a bachelor's degree, complete CFP Board-registered coursework (some holders of other credentials qualify for an accelerated path), pass a 170-question exam, complete 6,000 hours of financial planning experience (or 4,000 hours through an apprenticeship), sign an ethics declaration, and pass a background check. Keeping it requires ongoing continuing education, including ethics. The certification describes training and standards. It does not guarantee any outcome.

How do financial advisors get paid?

Advisors are usually paid in one or more of five ways: a percentage of the assets they manage, a flat or retainer fee, an hourly or per-project fee, commissions on products they sell, or a combination. Every method carries some conflict of interest. What matters most is knowing the total cost in dollars and what it pays for.

• A percentage of assets managed. The cost rises and falls with the portfolio. The built-in conflict is an incentive to keep money under management, which can color advice about paying off a mortgage, buying an annuity, or spending down savings.
• A flat or retainer fee. The cost is known in advance and does not change with the portfolio. The question is what the fee covers and how often the work is revisited. The built-in conflict is that a fixed fee can reward doing less work.
• An hourly or per-project fee. The client pays for specific work. Ongoing monitoring is usually not included unless it is bought separately. Billing by the hour can reward more hours, and it can make clients hold back questions.
• Commissions. The product provider pays the professional when a product is sold. There is often no separate bill, but the cost is built into the product, and products that pay more can be more tempting to recommend. For an investor who buys and holds and rarely trades, a one-time commission can cost less than an ongoing fee.
• A combination. "Fee-only" means the advisor is paid only by client fees and takes no commissions. "Fee-based" usually means fees plus commissions on some products. The terms sound alike but are not the same.

The advisor's own fee is separate from the costs inside the investments themselves, such as fund expenses, trading costs, and insurance or annuity charges. Form CRS summarizes all of these, the adviser brochure (Form ADV Part 2A) shows the fee schedule, and a prospectus or contract shows the product costs. A fair request of any advisor is the total yearly cost in dollars, every layer included.

What questions should someone ask before hiring a financial advisor?

The most useful questions are about duty, pay, scope, and custody: in which accounts the advisor acts as a fiduciary, how the advisor and the firm are paid in total dollars, what services the fee includes, and who holds the money. Form CRS also lists suggested conversation starters for exactly this purpose.

• In which of my accounts and recommendations do you act as a fiduciary, and in which do you not?
• How are you and your firm paid, and what would my total yearly cost be in dollars, including the costs inside the investments?
• Would you or your firm earn more if I chose one option you recommend over another?
• What does your fee include: a written plan, tax and estate coordination, ongoing reviews? How often will we meet?
• Who holds my money? Will I receive statements directly from that custodian?
• What are your credentials, and where can I verify them and your disciplinary record?
• Who are your typical clients, and what happens to my account if you leave or retire?

What are the red flags when choosing a financial advisor?

Common red flags include promises of guaranteed or unusually steady high returns, pressure to decide quickly, vague answers about fees, a request to make payments to the advisor personally instead of to a custodian, no record on BrokerCheck or the SEC's adviser site, and disclosures the advisor will not discuss.

• Guarantees or smooth returns. Investments carry risk. Returns that never seem to fall are a warning, not a selling point.
• Urgency. A sound recommendation will still be sound after a night's sleep and a second opinion.
• Fees that cannot be stated in dollars. If the total cost is hard to get, it may be high or layered, and is worth pinning down before signing.
• Money that does not go to a custodian. Client assets are normally held at an independent custodian that sends its own statements. A check made out to the advisor personally is a serious warning sign.
• No public record. Someone selling securities or investment advice should be findable on BrokerCheck or the SEC's adviser site.
• A product before a plan. A recommendation made before the advisor understands the household's situation is closer to a sales pitch than advice.
• Discouraging questions or second opinions. A professional with nothing to hide welcomes both.
• Official-sounding titles that cannot be verified. Check unfamiliar letters in FINRA's designations database.