How to Choose a Financial Advisor


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Examining where you are financially and putting together a Financial Preparedness plan requires a bit of time and effort.  Inevitably, the question pops up as to whether to do this on your own or to work with a financial advisor.

The short answer is yes, either way. The long answer is if you choose to go it alone make sure you have reliable sources of information, and that doesn’t mean Googling late into the night and coming up with a mind boggling array of choices and strategies based on the latest 1,000% increase in a sure-fire penny stock.

The reality is your financial health is almost as important as your physical and mental health.  These three aspects are the keys to your ability to have a Safe Retirement.  Without any of the three your retirement will be far different from what you imagined or wanted.

Treat your financial health with just as much care as you would with your physical and mental health. If you’re fine doing your own research and creating your own retirement plans that’s great. Do it. Many people do. But if you want professional help, this can be a fine choice too. Consider both sides of the coin.

Some of the cons of working with a Financial Advisor (FA) are:

Cost. While not always true, when you consider the fees and expenses of investments and investment accounts, the cost of working with a financial advisor can be higher than going it alone. Always be sure to understand what all the fees and expenses are and how your advisor gets compensated.

Bad advice. Really, this can happen as easily online or on the golf course as with a professional.

Always understand the risks and alternatives, just like you would with your health.  Always remember, as well, that you are in control.  It’s your money.  In the end, they’re your decisions.  Not someone else’s.

Incentives. Financial advisors make their money by investing yours. Their incentive is to get your money working so they get paid. Be wary of commission only brokers. Instead consider flat fee or those that get paid on a small percentage basis. The thinking here is that they either have no incentive to “churn and burn” or have a direct incentive to make you more money because they get a small percentage of it.

Selling you what you don’t need. See above. Watch out for big insurance or package deals that you have trouble understanding. Chances are the FA doesn’t understand them either but gets a big chunk for selling them, possibly up to 7%. Ask them how they get compensated for an investment.  They’ll even respect you more.

Good financial advisors retire too. You’re left with either working with their slightly suspicious smelling partner with the white shoes, or with the task of finding another ace FA again.

Some of the pros of working with a Financial Advisor are:

A good one is priceless, and won’t cost any more than doing it on your own. They will spend the time to understand you and your financial needs and work toward your goals; understanding a long term relationship with you will pay them well enough over time. See the section on choosing your financial advisor below for advice on how to find this type of broker.

They’re on top of the latest trends and products. In light of the latest mortgage backed securities carbuncle, this can be a pro or a con but I’ll list it as a pro here.

They can save you time and worry. Retirement planning should be a major part of their job and a good advisor knows how to do it. For some of us, they save us the worry of whether or not we have the right information and are using it correctly. For many people this is a great source of comfort. Talking to a professional informs us and gives us the choices we need to make the right decisions.

They are a single point of contact. They can be the coordinating point for not only all your assets (even if they don’t control the assets they’ll know about them and incorporate them into the plan), but also for your heirs. When the day comes that you’re no longer around, your family won’t have to sort through a jumble to figure out what’s there. The financial adviser can help them through it. Don’t underestimate this value especially during a stressful time such as the death of a loved one.

The fact is, as I said earlier, you can do it either way. Some people feel better having someone make their retirement plan for them, and others want to stay firmly in control. The rest of us lay somewhere in between and need to weigh the pros and cons of whether to hire someone to help us out or not.

If we choose to work with someone rather than going it alone, it leads us to the question of how to pick a financial advisor, Certified Financial Planner™, or other financial professional. Like finding the right doctor or dentist, making the wrong choice could be damaging to your (financial) health. It’s best to proceed cautiously and ask a lot of questions before signing on with anyone.

Referrals. This is often the best way to find any professional, whether it be your mechanic, your brain surgeon, or even your hair stylist. Ask your friends and family but don’t stop there. They may “like” the person just fine, but always do more due diligence, this is your financial health, after all.

Interview several. Give yourself choices. Get second, third, and fourth opinions.

Google them. One of the advantages of the internet is you can find out about people. Do it, you might be amazed at what you dig up. Check out their standing with the National Association of Securities Dealers (NASD). This is the regulatory body for stockbrokers and financial advisors. Try the following websites:

Finra.org

InvestingOnline.org

Ask them how they get paid. If they hem and haw at all, dump them. They’re hiding something.

How are they licensed? Can they sell mutual funds, stocks, bonds, insurance? Are they limited in any way?

Consider the firm they work for. Big names like Merrill Lynch and Morgan Stanley can be high quality but they can be expensive. If the financial advisor you’re considering is working as an independent they still have a trading and product platform they work within. Ask them who the company is and then research it.

Ask them what their ideal client is. How often will they contact you? Do they conduct annual reviews?

Many FAs have letters after their names. Unfortunately, these “qualifications” often mean only that the firm they work for set up an easy class so they could get these letters and impress clients. Major firms are especially notorious for this. The main one you should look for and add as a plus would be Certified Financial Planner™ (CFP©). The training to get this designation is intense and thorough. If nothing else it means the person is dedicated to their job. Also, it gives you one more place to look up the prospective FA’s track record by searching the CFP© website.

 

 

 

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