Money is serious business, and choosing a financial advisor is an incredibly difficult decision to make, especially for someone who has very little grasp of all the dollars-and-cents lingo (that’s why you seek help, right?). As a writer, I work with words, not numbers, so when it comes to handling my money, I need someone else to take charge. But how do I find someone I can trust?
Make a Plan for Life
In general, a financial advisor or financial planner is a professional who will help you manage your money in both the short and the long term. Whether you want to buy a house, plan for retirement, provide for your children’s education, or simply get things in order, guidance from an experienced person whose emotions aren’t wrapped up in the decision-making process can be invaluable. Even if you don’t have a lot of money to invest, a financial advisor can ensure that what you do have is safe and positioned to grow, and that you are on the right track to maximize your yield potential.
Questions, Questions, and More Questions
Your financial advisor is really the person who determines your future. Will you be able to afford a house? Retirement? Your children’s education? You can’t ask enough questions to make sure that the right person will address these concerns responsibly.
What experience/qualifications do you have, and what services do you offer?
The terms “advisor” and “planner” are vague and don’t adhere to any industry standard. Pretty much any financial professional can use them if he or she wants, so make sure to ask if the person you’re considering hiring is a certified financial planner (CFP), a certified public accountant–personal financial specialist (CPA–PFS), or a chartered financial consultant (ChFC) to make sure you’re hiring someone with integrity and experience.
Financial advisors also vary in terms of the specific services they offer, according to their credentials, licenses, and areas of specialty. According to the CFP Board of Standards, advisors must be licensed to sell insurance or securities products (like mutual funds or stocks) and must register with state or federal authorities to give investment advice. Some cover a wide range of topics, while others specialize in specific areas, like estate planning or tax issues.
If you have a particular concern, such as retirement planning, you may want to find an advisor with experience in that area. When interviewing potential advisors, ask how long they have been in the field, and for a brief overview of their records and a summary of how their past experiences relate to their current practices. Check their certifications and ask them what they do to stay current with changes and developments in their fields. It’s also a good idea to seek references from another professional you trust, like your attorney.
What is your approach to financial planning?
This is a lifelong relationship, so you want it to be a good fit. Ask questions: What kinds of clients and situations do these potential advisors prefer? Do they prefer to develop one plan that brings together all of their clients’ goals, or to advise on specific goals on an as-needed basis? Will they carry out their own financial recommendations for you themselves or refer you to others who will do so? Also, do they require you to have a certain net worth before they will consider working for you?
Most important, you don’t want your financial planner to be a risk taker if you’re a nervous Nelly about your money. Conversely, you don’t want someone slow and steady if you’re looking for high yields. Ask a lot of questions, and listen carefully (cutting through the BS) to answers about different investment styles to find one that really meshes with your own.
Will you be the only person working with me?
Advisors and planners can work independently or as part of a team composed of attorneys, insurance agents, and tax specialists. Make sure you’re aware of your advisor’s particular arrangement before you sign any agreements, or many more people could wind up handling your personal information than you’d like.
How will I pay for your services, and how much do you charge?
There is no standard compensation for financial planners. Those who work for a company receive a salary, which comes from the fees or commissions you pay. Others charge fees based on an hourly rate, a flat rate, or a percentage of your assets and income. Some planners receive commissions from third parties for the products you purchase as a result of their recommendations, and most work for a combination of fees and commissions.
You should know what the situation is from the start, especially if your advisor is receiving commissions for the recommendations he’s giving you, because that creates a potential conflict of interest.
And even though the amount you pay will vary according to your specific needs, your planner should provide you with a cost estimate before starting to work with you. This should include hourly rates, flat fees, or the percentage he would receive as commission on products you may purchase because of his advice.
Who else besides me will benefit from your recommendations?
In addition to the issue of commissions, there are other sketchy areas of the financial advisor relationship. Ask all potential advisors to describe these potential conflicts of interest in writing, including all business they receive for referring you to insurance agents, accountants, or attorneys to implement their planning recommendations. Make sure you keep a copy of this statement.
Is your record clean?
Don’t be afraid to ask, or at least to do some digging on your own. If he’s gotten his hand caught in the cookie jar once, chances are, it’ll happen again. Check with organizations like the Financial Industry Regulatory Authority (FINRA), your state insurance and securities departments, and the CFP Board, all of which keep records on the disciplinary history of financial professionals. And all financial planners who are registered with the Securities and Exchange Commission (SEC) or state securities agencies, or who are associated with a company that is registered, must be able to provide you with a disclosure form called Form ADV Part II or its state equivalent as proof of their registration.
Sharks in the Water
Unfortunately, not all financial planners are held to the fiduciary standard, which requires them to place your interests above their own at all times. Rather, they’re held to a suitability standard, which means that they must act in good faith that their recommendations to you are appropriate—not necessarily the best, just appropriate.
Actually, advisors can switch between fiduciary and non-fiduciary rules, thanks to a 2005 SEC ruling that allowed them to play multiple roles with one client. According to MSN Money’s Liz Pullam Weston, this means that an advisor can agree to a fiduciary duty in order to create a financial plan, then switch back to being non-fiduciary and act as a broker to buy investments and execute that plan.
This freedom is supposed to work in the client’s best interests—and often does—but you should know what you’re getting. Barbara Roper, director of investor protection for the Consumer Federation of America, is appalled by some people’s blind faith in their advisors, who have no real obligation to remain completely loyal to their clients in return.
“Two-thirds of investors aren’t second-guessing the recommendations they’re getting from their [financial] advisors,” Roper is quoted as saying in MSN Money. “Outside of a situation where a person is committed to putting your interests first, [that’s] pretty risky business.”
Put Your Money Where Your Trust Is
After interviewing a diverse group of professionals, choose one whom you trust to be responsible, who puts you at ease, and whose investment philosophy corresponds with your own. Once you’ve laid the groundwork, maintain an active interest in where all your money is going, and you’ll look forward to a secure financial future.