Seven things to look for in a financial advisor

Selecting a financial advisor is a lot like choosing a physician.

The person who cares for your wealth should have many of the same qualities as the professional who looks after your health: good diagnostic skills, prudence to avoid financial harm, vigilance for emerging problems and a proactive approach to preventing them.

Unless you live in the Mojave Desert, a Google search will probably show that there is no shortage of advisors in your area. Choosing from among the various types of advisors practicing today can be confusing, as they go by different titles, have different backgrounds and use different approaches.

To be fruitful, a search must cut through the marketing language to determine what these professionals would actually do for you, how they would do it and how well.

Here are seven key things to look for:

Proper registration and a clean regulatory history

Look for an advisor affiliated with a properly registered investment advisory firm, and review both the advisor’s and their firm’s regulatory history. Depending on the firm’s size and circumstances, it may be registered with the federal Securities and Exchange Commission or with one or more state securities regulators.

Registration alone does not guarantee skill or integrity, but it gives consumers access to important disclosures about the firm’s services, fees, conflicts, ownership and disciplinary history.

Both investment advisors and brokers may make investment recommendations, but their services, compensation models and legal obligations may differ. And some financial professionals are registered in both capacities. In these instances, it’s a good idea to ask which role the professional is fulfilling along the way through the relationship.

Consumers can research advisory firms and their representatives through the SEC’s online investment advisor database. On this website, it’s a good idea for prospective clients to review the firm’s Form ADV and Form CRS. These documents describe the services offered, types of clients served, fees, conflicts of interest, and disciplinary actions and outcomes.

Brokers are registered with the Financial Industry Regulatory Authority. Their registrations and histories can be found on the FINRA BrokerCheck website.

Transparency regarding fees and conflicts

It’s important to understand exactly how the advisor and his/her firm are paid. Compensation may come from an asset-based advisory fee, a flat fee, an hourly fee, commissions or a combination of these. No compensation model is completely free of potential conflicts, so it’s a good idea to get the advisor to explain not just the way fees are calculated, but also the incentives the arrangement creates.

Ask for the expected annual cost in both percentage and dollar terms. That should include advisory fees, underlying fund expenses, trading or custody costs, commissions, referral payments, revenue sharing and any product-related compensation. The goal is to understand potential conflicts and determine whether they are being managed sufficiently and transparently.

Clarity about what the advisor will do

The advisor should clearly explain what services are included and what responsibilities remain with the client. Also, does the advisor provide advice tailored to your circumstances? Or would they use a standardized approach that may not fit your needs?

Will they focus primarily on short-term trading, or will they act on your behalf as long-term investors? Will their recommendations be driven by today’s events and headlines, or will they follow a disciplined process designed for your goals, time horizon, cash-flow needs and tolerance for risk?

A comprehensive advisor should also explain how investment management connects with retirement planning, tax strategy, insurance, estate planning and charitable goals, among other considerations.

A fiduciary commitment

A fiduciary is a legal and financial term meaning that the investment advisor owes clients the duty of care and loyalty within the relationship.

In practical terms, the advisor should provide advice in your best interest, seek to avoid or fully and fairly disclose conflicts and monitor the relationship according to the agreed scope of services.

Your job as a consumer is to determine the limits of the advisor’s commitment to fiduciary status. Ask direct questions about compensation, conflicts and the kinds of products or strategies they may recommend.

Be cautious if an advisor makes prospective recommendations before understanding your goals, tax situation, risk tolerance, liquidity needs and broader financial picture. And read the advisory agreement the advisor presents carefully, along with their Form ADV and Form CRS (on the SEC registration database). Then ask the advisor to explain — in plain language — how the fiduciary duty applies to the services they’ll provide.

A verifiable record of professionalism and client service

Online ratings and reviews can provide useful clues about communication, responsiveness and the overall client experience, but they should be regarded as only one data point among many.

Look beyond the average number of stars to see how many reviews are represented. Read both positive and negative comments and consider the underlying criteria the writers are using. And remember that reviews generally cannot verify an advisor’s technical ability, investment results, regulatory record or suitability for your particular needs.

Combine online research with regulatory databases, professional credentials verification and a careful interview process.

Relevant knowledge, experience and resources

Look for a knowledgeable, well-rounded professional whose training, credentials, experience and resources match the complexity of your situation. The advisor should understand how investments, retirement income, taxes, insurance, estate planning, cash flow needs and family goals intersect.

The advisor should also understand the various investment markets, what drives them and how current conditions may affect your plan.

That doesn’t mean predicting every market move. It means providing perspective, recognizing genuine risks and helping you make disciplined decisions when market volatility and emotions are running high.

For more complex households, the advisor should know when to bring in tax, estate, insurance and other specialists, and should be willing to coordinate with them.

A good fit and a disciplined approach during difficult markets

A good fit is someone with whom you have a strong rapport, but there’s a caveat: It’s common for consumers to feel an immediate connection because many advisors are skilled communicators.

Look beyond the polished presentation of the first meeting to get an idea of what the person will be like to work with—especially when the chips are down.

Ask probing questions, such as: What are you likely to say to me when the market falls sharply? How do you determine an appropriate level of risk, and how will my spending needs be protected during a market downturn?

A strong advisor shouldn’t promise to eliminate market declines. Instead, the advisor should build a portfolio consistent with your goals and help you avoid turning temporary volatility into permanent losses through emotion-driven selling.

When markets become challenging, the advisor should be able to explain what’s driving the volatility, revisit the assumptions in your financial plan and identify tax or rebalancing opportunities—all the while adhering to the principle that time in the market is generally more important than attempting to time the market.

A good fit also means regular communication about how things are going, why and what changes may be needed. The advisor should establish a communication schedule appropriate to your needs, and should be available when major life, tax or market events occur.

If the advisor cannot clearly explain the services, fees, conflicts, process and responsibilities involved, continue your search. Hiring the wrong advisor can produce more suboptimal outcomes than just disappointing investment results. It can lead to missed planning opportunities, unnecessary costs and misguided decisions at critical moments.

The right advisor will diagnose before prescribing, coordinate different aspects of your financial picture and help you remain disciplined through both favorable and challenging markets.

Jared Lee is an Advisor in the Indianapolis office of Allworth Financial LP, a national investment advisory firm registered with the SEC.