One of the most critical decisions you can make in your financial planning journey can be whether to retain a financial advisor.  How do you select the right one?

Do you need an advisor?

Financial advisors charge for their services.  It’s important to weigh the benefits against the cost when considering their services.

Here are some factors to consider:

Complexity:  If your financial situation is complicated, you may benefit from using a financial advisor with experience dealing with situations like yours.

Time and Interest: Just because you may be able to manage your financial interests doesn’t mean you should.  Is it the highest and best use of your time?  Is it something you enjoy?  If not, outsourcing this responsibility can be a prudent decision.

Expertise:  A well-qualified financial advisor is trained to provide investment and financial planning guidance.  If you don’t have expertise in this area, you may benefit from their training and experience.

Financial Goals: Most investors have financial goals, like retirement savings or educating their children.  A financial advisor can create a plan to help achieve those goals.

Life Changes: A financial advisor can help you cope with significant life changes, like retirement, the death of a spouse, sudden wealth, and divorce.

Behavioral coaching: Investors are often influenced by their emotions, which can lead to poor investment decisions. A financial advisor can provide objective advice and help you avoid emotional decision-making.

Tax Planning: Financial advisors can provide advice on tax-efficient investing and withdrawals.

Qualifications matter

Not all financial advisors have the same qualifications.

Here are some that reflect extensive study and experience:

Certified Financial Planner (CFP®);

Certified Financial Analyst (CFA);

Certified Public Accountant (CPA)

Financial Advisors holding any of these qualifications are committed to high ethical standards.

RIA or broker?

Another critical factor to consider when choosing a financial advisor is whether they adhere to the fiduciary standard. This standard, mandatory for Registered Investment Advisors (RIAs), requires advisors to put their client’s interests ahead of their own. They must disclose potential conflicts of interest and are typically “fee-only” advisors, meaning they do not earn commissions from selling investment products.

Some financial advisors who are not RIAs operate under the “suitability” standard, which only requires them to recommend suitable investments for their clients. These advisors may be incentivized to recommend products that earn them higher commissions, even if they are not the best choice for the client.

Investment philosophy

When selecting a financial advisor in Tulsa, OK, or anywhere else, consider an “evidence-based advisor.” These advisors (typically RIAs) use a systematic approach to investment management, relying on empirical evidence and academic research. They understand how difficult it is to “beat the market” by engaging in stock picking, market timing, or trying to find the next “hot,” actively managed mutual fund.

Evidence-based advisors typically recommend a “passive” investing strategy.

Passive investing aims to maximize returns over the long term by keeping the amount of buying and selling to a minimum. Instead of attempting to beat the market, passive investors buy index funds, exchange-traded funds, or passively managed funds that track a specific benchmark, like the S&P 500. This approach may offer several benefits, including lower costs, greater diversification, and the potential for better long-term returns.

The SPIVA studies provide compelling evidence in favor of passive investing. According to the 2022 SPIVA U.S. Scorecard, over a 20-year investment horizon (from January 1 2003-December 31, 2022), a stunning 96.85% of all domestic stock funds underperformed their respective benchmarks.

This data underscores the difficulty of “beating the market” and the potential benefit of a passive, evidence-based investment strategy.

The Role of a financial advisor

A financial advisor does more than recommend investments. They can help with all aspects of your financial life, including retirement planning, tax planning, estate planning, insurance, and more. They can help you create a comprehensive financial plan that considers your income, expenses, financial goals, risk tolerance, and time horizon.

A good financial advisor will also help you stay on track. They can provide discipline and help you avoid making emotional decisions about your money. They can also monitor and adjust your portfolio as needed to keep it aligned with your goals.

Ongoing Communication

Communication is a critical component of the advisor-client relationship. Your financial advisor should be willing to meet regularly with you to review your financial situation, discuss your goals, and update your financial plan as needed. They should also be available to answer your questions and advise on financial decisions.

Key takeaways

If your situation warrants retaining a financial advisor, consider a well-qualified, evidence-based financial advisor who is an RIA. Their commitment to empirical evidence and your best interests can serve you well.

If you’re in Tulsa, OK, you’re in luck. We are a fee-only RIA firm and are ready to help you build your financial future.

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