Before starting your search for a financial advisor, you should make a preliminary list of the specific services that you think you need. This could include things like personal budgeting, retirement planning and stock investing. Once you have your list, find an advisor who is fully qualified to provide the guidance and counsel you are seeking.
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Types of Advisors
Financial professionals can be classified within more than 50 different specialties, but there are a few that are most familiar. A chartered financial analyst (CFA) has specific expertise in securities financial analysis, investing, portfolio management and banking. A certified financial planner (CFP) must have at least three years experience and pass a series of comprehensive tests.
A chartered retirement planning counselor (CRPC) has completed intensive training in retirement planning through the College of Financial Planning. A certified public accountant (CPA) normally specializes in tax preparation and planning. A personal financial specialist (PFS) is a CPA who has undergone additional education and testing to demonstrate financial planning expertise. Here are five questions you should ask before committing to a financial advisor. (Learn more about all the different designations in The Alphabet Soup Of Financial Certifications.)
1. What Services do you Provide?
Based on your personal needs, you want an advisor who can style services to meet those needs, such as:
- Creating a savings and financial plan
- Tax advice and preparation
- Managing a stock and equity portfolio
- Personal budgeting and getting out of debt
- Developing investment strategies
- Retirement and estate planning
- Insurance reviews and advice
If a financial plan is created, find out what actions are taken to maintain, update and implement the plan. Ask to review sample reports and other correspondence that you can expect to receive. Find out how frequently you should meet to review the results.
2. Education, Certifications and Experience?
Find out where they went to college and if they have advanced degrees or certifications for areas of specialization. Make sure the type of experience is relevant to the type of help you are seeking, and that they have several years in the industry. Find out where they've worked and why they left one job for another. Ask if they've navigated clients through a recession or down market. You want to find someone who can succeed in any market. Make sure your advisor is licensed and otherwise qualified to provide the services you require.
3. What do your Clients Say About You?
In addition to getting this feedback from the advisor, ask if you can talk directly to some of the clients. Compare the objectives and goals of these clients to your own. If all the clients are young professionals and you are getting ready to retire, your goals and objectives may not mesh with that advisor's primary focus.
Ask for references beyond the clients, and talk to them personally. Ask tough questions and do some real digging. If possible, obtain third-party names of people that weren't initially provided to you and talk to them.
Find out how often the advisor communicates with clients, and through what methods. How long does it take for your advisor to respond? How often are the clients' goals and objectives reviewed in detail? Have they ever questioned the honesty or ethics of their advisor? Are mistakes and errors in judgment admitted and discussed openly? What are the advisor's best and worst qualities?
4. What is Your Track Record?
Don't take the advisor's word for it. Ask for documents that prove past performance, both short- and long- term. Find out how often the books are independently audited, and who does the audit. If appropriate, talk directly to the auditors.
Check public records to determine if the advisor has had any discipline proceedings or ethics violations. Examples of the most serious would be fraud, excessive "churning" of securities, misrepresentation, formal customer disputes and any legal action that resulted in compensatory damages.
5. How are You Paid?
You want your financial advisor to support your best interests, and you want to ensure there are no conflicts of interest when it comes to compensating him. The fee structure will usually fall into one of these categories:
- Hourly rate
- Flat fee per month
- Percentage of the assets managed (usually no more than 2%)
- Commission on securities and financial products sold
- Combination of the above methods
Ask for the rates, fee structure and commission schedule. Be wary of a compensation plan that is motivated by numbers of trades or purchasing a number of different products. You want independent advice that is not unduly persuaded by a personal profit motive.
If you don't like the fee structure that's presented, take the initiative to suggest changes. If that doesn't work, search for another advisor and get the compensation agreement in writing.
The Bottom Line
Start your search with referrals from people you trust: family members, close acquaintances, accountant, attorney, clergy or business associates. There is no substitute for personal experience and a solid list of references. Conduct an in-depth, personal interview, and get a sense of the person to whom you will be entrusting your money. Make sure you understand their investing philosophy and how they go about making decisions with your money. Most of all, be diligent, patient and very selective. (For related reading, take a look at Use A Money Manager Or Go It Alone?)
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