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What to Look for in a Financial Advisor

Engaging the assistance of a financial advisor has a broad range of dimensions, typically more than most folks might expect. Often, what prompts a search for assistance is a significant life event. Why? Because all of us are faced with the key question about our financial lives: Will we have enough in our later years to ensure that we will be able to maintain our chosen lifestyle?

Start Financial Planning Early

Although the optimal time for seeking assistance is shortly after people begin their careers, that's rarely when it happens. More often than not, financial assistance is sought by people in their 50s and 60s, as the prospect of retirement draws near. That's when decades of earned income are approaching the end of the line and concern grows about how to make ends meet when cash flow from saved assets, retirement funds, Social Security and (maybe) pensions will be all that's available to answer the call. If proper planning is not done, it can be a difficult transition. (For related reading, see: Financial Planning Asks, Will You Have Enough Money?)

So when embarking on a search for an advisor, it's essential to think carefully about the areas in which help will be needed. That will mean properly positioning taxable assets as well as retirement funds (which are tax-deferred) with allocation among stocks, bonds, and other asset classes. It may also mean planning to fund home purchases and education for the children. Along with this will be essential risk protections provided by insurance and efforts to explore whatever opportunities there may be for increased tax efficiency.

There's more. But the point is that it's essential to consider the full range of one's financial situation to ensure that all key issues are considered.  For most folks, this will be a daunting task best left to a professional, preferably a certified financial planner who will help evaluate all the available data and then assemble that information in a plan that will be the road map to the future.

Yes, we all know that the only constant is change, but that's why a proper financial plan is a dynamic instrument that needs regular review and modification as new information becomes available. The good news is that once a plan has been developed, it's relatively easy to update.

Find a Ringleader, Not a One-Task Specialist

The critical thing is to focus on the whole, not just the individual pieces. Just hiring a stockbroker to handle investments is not enough. Nor is it sufficient just to work with an insurance broker. Quite often the insurance representative will present insurance as an investment solution (which it isn't) and end up with a sizable commission for the privilege of working with you. In many cases, you'd be better off dealing directly with the insurance companies.

You need a ringleader who will put your best interest first, not a one-task "specialist" whose main concern is the fat commission that comes with a sale. (For more from this author, see: Why Investors Need Advisors Who Are Fiduciaries.)

What Will a Plan Cost?

How much will this cost? With reasonable due diligence on your part, you'll end up paying less and getting more. Some financial planners will even manage your investments and develop a plan for you at no additional cost.

Typical fees for investment management run about 1% of assets annually, sometimes less if there's a sizable share in bonds. With most of the major online brokers, transaction fees (for buying and selling) will add no more than a modest amount. The goal here is not to outperform the market averages, but rather to generate worthwhile returns while substantially reducing the fluctuations along the way. In other words, above average risk-adjusted returns.

If, on the other hand, you're just looking for a financial plan, $1,000 or so should cover many of the key areas that need attention. Once a year thereafter, it would be a good idea to meet with the planner and discuss issues that may require revision. (For related reading, see: Investors: Don't Let Fees Reduce Your Returns.)

To find a financial advisor, go to findanadvisor.napfa.org.

(For more from this author, see: Finding the Right Financial Advisor Is Important.)