Finding the right financial advisor is an important decision—one that can make a real difference in your long-term financial well-being. However, with so many different types of advisors offering different services at different rates, it can be difficult to figure out the best path forward.
A recent Forbes Insights report, “Financial Planning: Which Persona You Are and Why It Matters,” sponsored by Charles Schwab, is based on a survey of more than 300 individual investors. It finds that 78% of investors do not understand the distinctions among types of financial advisors — such as independent registered investment advisors, financial planners, registered representatives and money managers — to name a few. Additionally, more than a third of investors don’t know if their advisor is a fiduciary — someone who is legally required to act in their clients’ best interests at all times — and 29% are unclear about how their advisors charge for services.
This lack of knowledge is unsettling, especially since our survey also found that investors who are the most financially literate are the most satisfied with their advisor. So what can you do to become better informed and get the most from this important relationship? After reviewing the survey data, we identified three unique personas of financial literacy — Novices, Apprentices and Experts — and then analyzed their differences to identify four steps you can take to make a difference.
Novice: These investors are unsure what fees they are paying when using an advisor, don’t know if their advisor is a fiduciary or not, and have a limited understanding of the differences among types of advisors.
Apprentice: These investors fall somewhere in the middle on industry knowledge. They are unsure of the differences among types of advisors, but are clear on what they’re being charged and if their advisor is or isn’t a fiduciary.
Expert: These investors are able to correctly identify the different types and affiliations of financial advisors, know what they’re being charged for and know if their advisor is a fiduciary.
No matter which persona you fall into, there are four steps you can take to become a more knowledgeable investor and improve your satisfaction with your advisor.
Step 1: Understand and Outline Your Goals
Spend some time thinking about your life goals and priorities, then outline your financial goals.
Novices, who have the least assets of all three groups, are disproportionately focused on retirement (71%). They may be best served by an advisor with deep experience helping investors with similar asset levels plan for a comfortable retirement. Apprentices, who tend to have slightly higher asset levels, may be more likely to benefit from an advisor who can address retirement planning, as well as a broader range of financial concerns including money management and estate planning. Experts, who are comparatively wealthy, may need an advisor with deep expertise around issues like minimizing tax exposure and charitable giving.
Step 2: Combine Recommendations from Family and Friends With Your Own Due Diligence When Selecting an Advisor
When it comes to choosing an advisor, Novices, Apprentices and Experts all agree on what’s important — honesty, integrity and reasonable fees. However, the personas differ sharply in the process they follow to find an advisor. Novices tend to rely on recommendations from family and friends. While Apprentices and Experts also get recommendations from their family and friends, they are more likely to conduct their own research and tap into their existing relationships with other professionals (such as CPAs, attorneys, etc.) to help identify advisors who might meet their needs.
Step 3: Confirm Fee Structures With Your Advisor Up Front and Ensure You Understand Exactly How They’re Being Paid
There are a number of ways advisors earn money for their services. Some advisors operate on a “fee-only” model, and are paid a flat fee or a fee based on their clients’ portfolio size. Some receive commissions for recommending specific investment products. Others earn a mix of fees and commissions. As an investor, it’s critical to know both what you are paying your advisor and what, if any, compensation they are receiving from other sources.
Step 4: Engage With Your Advisor Often
Working closely with your advisor will improve your satisfaction with the relationship. Highly financially literate investors engage much more frequently with their advisor than other groups do. Experts communicate with their advisor once every month, while Apprentices and Novices do so much less often.
No matter where you fall on the persona spectrum, following these four steps can help you become a more educated investor and get the most from your relationship with your financial advisor.