Finding a Financial Advisor

Certified Financial Planner (CFP) is a recognition of expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement saving. The title is awarded by the Certified Financial Planner Board of Standards to people who have completed the CFP exam and take continuous coursework to sustain the certification.

A fiduciary is a person or organization that acts on behalf of another party, putting their clients’ interests ahead of their own. Fiduciaries are held to the fiduciary standard, meaning that they have a duty to preserve good faith and trust. Therefore, the role of a fiduciary requires being bound both legally and ethically to act in the client’s best interest. Not all financial advisors are fiduciaries, though many are.

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning an individual’s portfolio assets according to their goals, risk tolerance, and investment horizon. The three main asset classes—equities, fixed-income, and cash and equivalents—have different levels of risk and return, so each will behave differently over time.

Risk tolerance is a measure of the degree of loss an investor is willing to endure within their portfolio, so it is a valuable consideration in investment decisions. Stock volatility, market swings, economic or political events, and regulatory, or interest rate changes affect an investor's risk tolerance. Therefore, greater risk tolerance is often synonymous with investment in stocks, equity funds, and exchange-traded funds (ETFs), while lower risk tolerance is often associated with the purchase of bonds, bond funds, and income funds.

Investment horizon is the term used to describe the total length of time that an investor expects to hold a security or a portfolio for an individual or company, and it can span as short as a few days or as long as two decades. The length of an investment horizon will often determine how much risk an investor is exposed to and what their income needs are. Generally, when portfolios have a shorter investment horizon, that means investors are willing to take on less risk.

Risk capacity, unlike tolerance, is the amount of risk that the investor "must" take in order to reach their financial goals. The rate of return necessary to reach these goals can be estimated by examining time frames and income requirements. Then, the rate of return information can be used to help the investor decide upon the types of investments to engage in and the level of risk to take on.

Suitability refers to an ethical, enforceable standard regarding investments that all financial professionals are held to when dealing with clients. Before making a recommendation, brokers, money managers, and other financial advisors have a duty to ensure their advice is appropriate for their clients’ goals, needs, and risk tolerance. In the U.S., the Financial Industry Regulatory Authority (FINRA) oversees and enforces this standard, outlining suitability requirements in its Rule 2111.

The term ‘fee-based' describes a kind of financial advisor who receives some or all of their income from fees paid to the advisor by the client. Many fee-based advisors not only receive pay from clients but also earn commission from brokerage firms, mutual fund companies, or insurance companies when they sell products. Advisors who exclusively earn pay through fees are called ‘fee-only’ advisors.

Commission-based financial advisors receive compensation from clients based on product sales. They receive pay when their clients make a specific financial transaction that they recommend, such as purchasing a stock or other asset.