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Contrary to the misconceptions of some, the selection of a financial advisor does not require a Wall Street background or several years spent studying stocks and mutual funds. What it does require, however, is that you, as a prospective client, be willing to familiarize yourself with the functions and responsibilities of financial advisors, what they can do for you, and how they are compensated by those who hire them. Before beginning your search for the financial advisor that is right for you, it's necessary to determine what your financial goals are. Are you interested in saving and investing for your retirement years? Are you trying to save for a major purchase, like a home? Are you engaged, newly married, recently widowed or divorced? Is your child preparing to enter college in the next few years? Take a few minutes to write down your goals and prioritize them if you have more than three. Once you have created a list of your financial goals, decide whether your needs can best be met by an independent fee-based advisor, a financial advisor employed by a large firm, or a certified financial manager.
Fees or Commission?
Higher-net worth clients have traditionally relied on financial planners for whom they pay an annual retainer's fee for the privilege of unlimited access to financial advice, products, and services throughout the year. Today, many other options are available to the average consumer. The most common payment structures are fee-only financial planning and commission-based financial planning. Larger firms often use the commission-based model in which the advisor handling your portfolio earns income based on financial products that they sell to you.
The fee-only financial planner is usually an independent contractor, although companies do exist that hire independent financial planners who may operate separate franchises under the parent company's logo. A fee-based financial planner may charge an hourly rate (generally $100 to $300 or more per hour), a flat fee for advice or services rendered (i.e.- a personalized retirement plan may cost you $300 to $500), or a fee based only on the amount of your total assets under management (1% of your total assets is common).
Pros and Cons
Commission-based advisors and their clients are covered by the corporation's liability insurance, and are usually part of a larger team of experienced professionals who are able to combine knowledge and experience in order to meet client needs. They earn their income solely by being licensed to sell stocks, mutual funds, insurance, or variable annuities. These financial advisors have also been well educated on which products and services are best suited to your goals and level of desired risk (as any planner should be).
Although most commission-based advisors strive to adhere to high ethical standards, they can at times be swayed by company incentives and high commissions to recommend one product over another, thereby leading you to buy into something which may not be in your best interests. Nonetheless, they cannot charge for financial advice or guidance.
Most people prefer independent fee-based financial advisors. These professionals do not earn a commission from products you buy from them, so there's little chance of a conflict of interest. They are also free to advise you on any financial product throughout the entire industry, so you have a better opportunity of finding the investment vehicle tailored to best suit your needs.
Almost as popular are the fee-based financial advisors who charge approximately 1% of your assets under management. The more they are able to grow the assets in your portfolio over time, the more money they can earn. These financial advisors have a built-in incentive to not only make as much money for you as possible, but to protect your assets as they are accrued.
Sometimes a retirement financial planner may charge for advice, planning, and also earn commissions from selling you products under the chosen plan. This is known as a combination payment structure. Although such a planner might reduce the cost of fees to the client (reimbursing you with a portion of their commissions), this is by no means mandatory, and is subject to their sole discretion. It is essential that you fully understand the income, incentives, bonuses, and awards of any financial planner you choose.
The Selection Process
Now that you have identified your financial goals, decided on whether you need an independent financial advisor (IFA) or a large firm, and have chosen which fee structure you can live with, it's time to select your advisor. You should start with referrals. Ask family members, friends, or colleagues about those whom they trust for financial advice. Your goal is to compile at least three to five names. Once you have the names of several candidates, check their qualifications and schedule interviews.
Among the numerous professional designations, the most common are: Certified Financial Planners (CFPs), Chartered Financial Consultants (ChFCs), and Certified Financial Managers (CFMs). Additionally, many states maintain their own licensing and exam standards. A ChFC is a financial advisor who holds a certificate for completing a personal finance program from the American College. A Cerified Financial Planner has worked at least three years in finance, holds a Bachelor's degree, has passed a two-day exam, and has signed a sworn agreement to abide by the CFP Board's “Code of Ethics and Professional Responsibility and Financial Planning Practice Standards”. CFPs are the most sought-after type of financial advisor among consumers. A Certified Public
Accountant (CPA) who has earned the Personal Finance Specialist (PFS) certificate may be considered a Certified Financial Manager, or a CFM.
The Interview
Arrange an interview with each advisor candidate on your list before making a final decision. In addition to their qualifications, he or she should be someone that you feel able to both trust and respect. Understand that some financial advisors may have minimum-investment requirements, or may charge fees you might consider exorbitant.
No matter whether you interview a fee-only or commission-based advisor, your initial consultation should be free, and you should not expect to be treated like a sales prospect.
Be prepared to ask the following questions:
What is your investing strategy?
Can you show me a sample financial plan?
What are your licenses and qualifications?
How would you handle any real or potential conflicts of interest?
Have you received any complaints or disciplinary action?
Can you give me referrals to at least five of your current clients?
Do you carry liability insurance?
If you receive references from any prospective advisor, be sure to check them. Ideally, most of them should have profiles that resemble your own. Once you have selected your financial advisor, you should agree to meet no less than once every three months to review your portfolio's performance. Three quarters (nine months) of disappointing progress is usually an indication that a new advisor may be needed to achieve your goals.
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