Find The Right Financial Advisor

By Steven Merkel AAA

When many people think of the term "financial advisor", they picture a stressed out Wall Street type sitting behind a computer or telephone placing buy and sell orders and attempting to make their clients as much money as possible. While many advisors may still fit this mold, some are evolving their practice into a more comprehensive approach that takes a look at not just investments, but also insurance, budgeting, taxes, retirement, education funding and estate planning.

As you test the waters to find the right financial advisor for you, you'll need to have a grasp on the areas in which you are seeking help. You'll then be able to examine your potential financial advisor before you hire them and determine exactly how skilled they are in the areas for which you are seeking assistance.

Knowledge, Qualifications and Regulatory Record
Unfortunately for the general public, the education standards for financial advisors are very minimal. One could drop out of high school, rent some office space, pass a FINRA general securities exam and be selling you stocks all within a couple of weeks. While exams such as the Series 6, 7 and 63 satisfy the industry regulatory requirements, they really offer the advisor no experience when it comes to real-life situations. Don't be afraid to quiz your prospective financial advisor on his or her education and experience. How many years of experience in the industry does he or she have? Is a college degree important to you?

The financial industry has also been bombarded with professional designations, many of which can be obtained with little or no effort. The industry has three leading designations that have strict education and ethical requirements: Certified Financial Planner® (CFP®), chartered financial analyst (CFA) and chartered financial consultant (ChFC). The certified public accountant (CPA) designation is also a valuable designation for professionals that handle the tax portion of your plan. (To learn more about these designations, see The Alphabet Soup Of Financial Certifications and Is A Career In Financial Planning In Your Future?)

If you're looking for someone a little different than the everyday stock jockey, it may be wise to hire a registered investment advisor (RIA) to represent you. They are held to a higher standard than most advisors, and you'll typically the most knowledgeable. They are also required to provide a Form ADV Part II to all potential investors upon request; this is your opportunity to learn about your advisor, so make sure you use it. This will allow you to determine whether your advisor has applied for personal bankruptcy. If you'd rather not have someone who struggles to manage his or her own finances manage your money, you had better do your advisor homework! (To continue reading about RIAs, see What Is A Registered Investment Advisor?)

Fiduciary Responsibility - Acting in your best Interests
Seek out an advisor that is held to fiduciary standards. A fiduciary is someone who occupies a position of special trust and confidence with the responsibility of acting in the best interests of an investor. In the investment world, RIAs are required to abide by a fiduciary standard - stockbrokers are not. Registered investment advisors are either registered with their state of residence or the Securities and Exchange Commission (SEC). They are regulated under the Investment Advisors Act of 1940, which requires them to act in the best interests of the investor. Stockbrokers and large wire-house firms are currently exempt from the fiduciary standards under the act. If you can find an independent RIA, you also won't have to worry about paying high commissions on proprietary products (investment products that are owned and marketed by the investment firm).

Be cautious with stockbrokers. They can be "over-glorified salesmen" hired by large wire houses to sell proprietary mutual funds and stocks that the investment bank firm has promised corporations they will sell to investors. Proprietary products are those owned by the investment firm, and the brokers that sell these products get paid top commissions. The more buying and selling that a broker does in an investor's account, the higher their commission payouts. If a broker does excessive buying and selling in an account to generate more commissions this is an illegal process known as churning. In some cases, the investment may not be the most appropriate for the investor, but a lack of fiduciary standards does not hold brokers to always do the right thing. With some wire houses, it's all about quantity, not quality. (Find out more about churning, in Understanding Dishonest Broker Tactics and Is Your Broker Acting In Your Best Interest?)

The Logistics
When you've found a financial advisor that you trust, you'll need to dig a little deeper to iron out some of the more one-to-one issues. For starters, you'll need to agree on how your advisor will be paid. Will it be a fee-only agreement, fee-based or commissions? Each year, more investors are shifting from the traditional commission setup and moving towards the modern fee-only approach. Because set fees are new to many investors, some common questions have risen, such as: "What is a fair fee?" and, "How will I be billed?" With the average mutual fund still charging an expense fee of approximately 1.40%, it's safe to say that a total fee of 1.80% or less is fair. (To learn more about fees, read Paying Your Investment Advisor - Fees Or Commissions?)

If you can find an advisor that can package an investment program that includes the cost of the investments, trading, custody and the advisor's professional services for 1.80% or less, you're getting a sweet deal. Most fees are now billed quarterly, so you'll need to know whether they will be pulled in advance or in arrears. Then discuss with your advisor how frequently you would like to meet with him or her each year to review your portfolio.

True Comprehensive Financial Planning
You need to have a general idea of your weaknesses prior to selecting your professional help. If you just need your taxes done, seek the help of a CPA. If you want someone to look at your entire financial situation, seek the help of a comprehensive financial planning firm. These firms typically have a professional staff that includes an insurance agent, tax professional, estate planner and financial advisor.

Understand all of the services that are available with the firm that you have chosen. Do they have a narrow focus? At a minimum, consider the following:

  1. Will it track your investment cost basis for you?
  2. Can it file your tax return and help you with other tax related questions?
  3. Does it look at risk management? (i.e. life insurance, long-term care, etc…)
  4. Can it help you plan your estate?
  5. Will it refer you to another professional if the firm cannot provide the service itself?

What's Next?
Good financial advisors are compared to "life coaches", because they can help you with many of your complex financial decisions throughout your life. A financial advisor can offer tips on buying a car, saving for college and refinancing your home mortgage, just to name a few. They deal with other financial professionals on a daily basis, and they typically know if you're paying too much for something or not getting a competitive rate. Great financial advisors will not only help you make money on your investments, but will also help you reach your goals and save money on insurance and other major decisions throughout your lifetime. To maximize your experience with your advisor, you should meet with the person quarterly, share your concerns and goals, and allow your advisor to review all of your financial and legal documents. After all, it's all about trust.

To continue reading on this subject, see Making The Most Out Of Your Day.

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