Making financial decisions isn’t easy. Finding someone to help you make those decisions can help make your life a little easier, but how do you go about picking someone you trust?
This isn’t hiring a plumber. Trusting someone with your finances will impact your immediate future, your retirement and even whether or not your kids can go to college.
One factor to consider is certifications. There’s an alphabet soup of certificates and licenses financial professionals can acquire, but some of them mean different things. A stock broker may be able to enter trades on your behalf, but there’s much more to taking care of your finances than just buying and selling stocks. Investment advisors can recommend and help you with the purchase of securities, but may not be trained in financial planning.
While brokers and investment advisors are regulated and licensed by the government, financial planners are not. A good financial planner should have a private certification, such as Certified Financial Planner (CFP). Planners can be brokers, accountants or in some cases insurance agents, but regardless of background, a good financial planner should be prepared to discuss your entire financial picture and help you develop a plan for achieving your goals.
It is important to understand each candidate’s background and position. An insurance agent who also does financial-planning work may spend a lot of time trying to sell you insurance or annuities, and someone from a securities firm may be more interested in trying to sell you his or her company’s products than addressing some of your other needs.
A good first step in the selection process is to talk to your friends and neighbors to see if they have any recommendations. This will help narrow down the list of names in the phone book to a more manageable number, and you may also get advice on advisors who may be untrustworthy or didn’t meet someone’s needs.
Pay particular attention to recommendations from people who are at a similar place in life to where you are now. Some advisors who may excel at retirement planning may not be as proficient in college planning, or other areas. This can also help you find an advisor who wants customers like you. Some advisors focus only on clients with a high net worth. You want your business to be important to your advisor, so try to find someone whose clients are predominantly in the same financial position as you are.
Once you have some candidates, you can check into their backgrounds on the websites of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). This should let you know if any of your prospective advisors have ever been convicted of a crime, or if there are cases pending against them or the firms they work for.
Once you have some leads on prospective advisors, set up some meetings. The first round of meetings shouldn’t be about you though, this is your chance to ask the investment professionals questions. Some questions you should ask include:
- How much experience do you have working with people like me?
- What licenses and other professional designations do you hold?
- What do you consider your areas of expertise?
- How long have you been in this business? How long have you been with your current firm?
- What products and services do you recommend and why? What products and services do you advise against and why?
- Do you have minimum balances? What are they? What happens if my account falls below the minimum?
- How often would you meet me with to discuss my portfolio and my investing goals?
- Can I get in touch with you between those meetings? Will you contact me between those meetings if you think it is necessary?
- How can I monitor the status of my investments?
- Will anyone else in your office be able to access or make changes to my account?
- How do I pay for your services?
- Do you receive any other compensation for handling my account?
You may also want to ask for references. Perhaps a few existing clients you can get reviews from. Be advised however that advisors are not required to share this information with you and in some case may not be allowed to for privacy reasons.
The last two questions on that list should get careful attention. There are a number of ways that financial advisors can be compensated. There is no right way or wrong way, but some compensation plans do a better job of aligning the advisor’s interests with the investor’s interests, which can be important.
Some financial advisors get paid a percentage of the assets that they manage. This gives the advisor an incentive to grow your assets and work hard to keep your business. The downside of this arrangement is that investors with small accounts may be less important to an advisor than clients with larger accounts. Some advisors who get paid this way, often called Wealth Managers, only take clients with accounts over a certain threshold. These advisors provide a lot of personalized service, but usually only to what the industry calls High Net Worth Individuals.
Another set of advisors gets paid both fees and commissions. Like the first group they get a percentage of your invested assets, but they will also get paid a commission for selling certain products. Unscrupulous advisors may suggest products based on which ones pay them the highest commissions, or even suggest a lot of buying and selling of different products to generate more commissions.
There is also a group of financial professionals who get paid flat fees. These can range from hourly fees to a specific fee for a specific service. This can be an attractive option for beginning investors, but those fees can start to add up if you need regular consultations.
Once you’ve thoroughly vetted your candidates, the last questions you need to ask are of yourself. Can you see yourself working together with this advisor? How do you feel about their claims in regard to performance? If the investing community learned anything from Bernie Madoff’s Ponzi scheme, it should be that results that seem too good to be true probably are. If you’re going to trust someone with your hard-earned money, it should be someone who acknowledges the risks inherent to investing. Anyone who promises big returns without acknowledging the potential downside shouldn’t be trusted.
Finally, reassess your situation on a regular basis, the right advisor for a young person just starting a family may not be the right advisor for the same person several years later. Financial advisors should be professionals, you shouldn’t feel like you’re going to hurt someone’s feelings if you think you can get better performance elsewhere. Don’t forget, it’s your money. Your financial advisor works for you.
Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at firstname.lastname@example.org.