CHOOSING A FINANCIAL ADVISOR

There are many important areas in our lives where we turn to the experts for professional advice.  When it comes to our health, our homes, and even our lawns and vehicles, we often reach out to professionals to point us in the right direction.  Financial planning should be no less important.  Financial advisors specialize in helping you pursue your financial goals and secure your future.

DO YOU NEED A FINANCIAL ADVISOR?

Whether you are a first time investor or an experienced hand, you may benefit by working with a professional financial planner or investment advisor. Selecting an advisor who is knowledgeable about the specific issues you want to discuss and who is also affordable and trustworthy is a lot tougher than choosing a dentist or plumber.  The consequences of making a poor selection can be even more costly.  

 

If you live in a major metropolitan area, you'll have thousands of financial professionals who are eager to help you.  Even in smaller cities and towns, you're likely to have multiple options - traditional stockbrokers affiliated with national investment companies; independent financial planners; or employees of banks, law firms and accounting firms.  You may work exclusively with one person or with a team.

 

As far as fees are concerned, you can expect to pay anywhere from $100 to $300 an hour, or an annual fee of 1% to 2% of your financial assets, which can add up to thousands of dollars a year.  You may want to pay someone a one-time fee to help solve a single unusual problem or you may prefer an ongoing arrangement that involves all areas of your family's personal finances, starting with a detailed plan for the future and perhaps authorizing the advisor to take custody of your investments and decide how and where to invest the money.  

Before you start looking for an advisor, ask yourself what you need in the way of professional advice.  If you're fairly confident in your ability to make financial decisions or if your questions are relatively simple, you may need only to consult with your neighborhood banker or your employer's human resources department.  The following situations often call for an outside professional:

 

  • You've changed jobs and want guidance on how to transfer your retirement savings from your old employer's plan to your new employer.

  • You're getting married and you want to make sure that you and your new spouse are both on the same page about how to mesh your savings, investments, debts, and other obligations.

  • A family member has died and left you an inheritance.  You need direction on how to invest it.

  • You've lost serious money on the investments in your retirement accounts and feel you need advice on how to make better choices.

  • You're thinking of buying a new house and wonder if it makes sense to keep the old one and rent it out as an investment.

  • You want to learn more about how the stock market works and to reorganize your investments so that you're in a better position to save for your children's education or your retirement.

UNDERSTANDING DIFFERENT TYPES OF FINANCIAL PROFESSIONALS

Registered Representatives, Financial Advisors, Stock Brokers, what are they and how do I choose?  In the investment field, there are two primary parties who are able to offer investment advice.  These parties are investment or financial advisors and investment brokers.  Many clients may consider the investment advice they receive from each party as similar, but there is  a key difference that may not be completely understood by the investing public.  The difference pertains to two competing standards that advisors and brokers must adhere to, and the distinction has important implications for individuals who hire outside financial assistance.  Below is an overview of both parties, the standards each must follow and how the standards that brokers follow can create conflicts between themselves and their underlying customer base.

 

Investment Advisors

According to the Securities and Exchange Commission (SEC), investment advisors provide many services, including assisting individuals and institutions in making financial decisions pertaining to planning for retirement, saving up for a child's college education, or planning and developing investment strategies to manage assets and portfolios.  They can charge fees for their services, which can be on an hourly basis or a percentage of the assets they manage for clients.  Instead, some advisors charge commissions on trades they make for their customers.

 

The Fiduciary Standard

Investment advisors are bound to a fiduciary standard that was established as part of the Investment Advisors Act of 1940.  They can be regulated by the SEC or state securities regulators, both of which hold advisors to a fiduciary standard that requires them to put their client's interests above their own.  The act is pretty specific in defining what a fiduciary means, and it stipulates that an advisor must place his or her interests below that of the client.  It consists of a duty of loyalty and care, and simply means that the advisor must act in the best interest of his or her client.  For example, the advisor cannot buy securities for his or her account prior to buying them for a client, and is prohibited from making trades that may result in higher commissions for the advisor or his or her investment firm.

 

It also means that the advisor must do his or her best to make sure investment advice is made using accurate and complete information, or basically, that the analysis is thorough and as accurate as possible.  Avoiding conflicts of interest is important when acting as a fiduciary, and it means that an advisor must disclose any potential conflicts to placing the client's interests ahead of the advisor's.

 

Investment Brokers

The SEC defines a broker as someone who acts as an agent for someone else, and a dealer as someone who acts as a principal for their own account.  An example of an activity a dealer may carry out is selling a bond out of his or her firm's inventory of fixed income securities.  The primary income for a broker-dealer are commissions earned from making transactions for the underlying customer.  

 

The Suitability Rule

Broker-dealers only have to fulfill a suitability obligation, which is defined as making recommendations that are consistent with the best interests of the underlying customer.  Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA) under standards that require them to make suitable recommendations to their clients.  Instead of having to place his or her interests below that of the client, the suitability standard only details that the broker-dealer has to reasonably believe that any recommendations made are suitable for clients, in terms of the client's financial needs, objectives, and unique circumstances.  A key distinction in terms of loyalty is also important, in that a broker's duty is to the broker-dealer he or she works for, not neccessarily the client served.

 

The Last Word

With cost being one of the primary determinants of investment performance over the long term, the fiduciary standard appears to have the upper hand in terms of providing a benefit for underlying clients.  Given the more stringent stipulations for investment fiduciaries , there is little question that the fiduciary standard better protects individual and institutional investors, than the suitability standard.  Federal securities laws consider investment advisors fiduciaries, but this does not apply to broker-dealers across the board.  Overall, it is best for individuals to find an advisor who will place his or her interests below that of the client.  An investment advisor has no choice to fulfill this fiduciary stipulation, and the client may also be able to find brokers willing to adhere to this higher standard.

 

QUESTIONS TO ASK A FINANCIAL ADVISOR

Your first meeting with an advisor should be used to see if they are the right fit for you and your family or business.  Many times clients will let the advisor do all the talking because they don't know what questions to ask.  This is a critical conversation, and here are some things you will want to know.  After the conversation, consider your perceptions of the meeting.  Did the advisor show a genuine interest in you and answering you questions?  Was the conversation balanced or did the advisor do more talking than listening.  Here are some questions that you should ask your potential advisors:

  • How long have you been a financial advisor?

  • What certifications do you have?

  • What is your training and experience?

  • How many firms have you worked with?

  • How many clients do you have?

  • Do you focus on managing any specific types of investments?

  • How and when are you compensated for your services?

  • What is your approach with new clients?

  • How often do you meet with new clients?

  • What do you think are the most critical components to reaching a client's goals?

  • What are your typical thoughts on managing risk versus seeking reward in a client's portfolio?

CHECKING UP ON AN ADVISOR

The various organizations and government agencies that regulate financial professionals also offer websites that allow investors to check into advisors they are considering doing business with.  Here are some places to check into the advisors you are meeting with:

 

Your state securities regulator - www.nasaa.org

 

FINRA BrokerCheck tool - www.finra.org

 

Certified Financial Planning Board of Standards (if the advisor is a CFP) - www.cfp.net

 

 

WORKING WITH YOUR ADVISOR

It is important that you maintain a positive relationship with your advisor.  Here are some tips to help you establish and maintain mutually beneficial guidelines that will promote a positive relationship throughout your time with your advisor.

 

Be clear with all of your goals and objectives.  Disclosing your financial goals will aide in making certain your financial advisor has all of the information needed to best help you plan for you future the way you see it.  Be as detailed as possible with your hope for you financial future and the timeline that you expect to acheive your goals as well as the risks you are and are not willing to take in order to reach those goals.  You should also communicate any potential obstacles or financial changes that you anticipate that may impact your ability to reach your goals.

 

Establish expectations.  In order for an advisor-client relationship to be successful each party must agree to really listen to one another.  You need to keep an open line of communication about how often you expect to meet, the best way to stay in touch with one another (email, phone, in person, etc.).  All of these expectations need to be addressed at the very start of the working relationship.

 

At the end of each communication, agree on the next step.  Set dates and times for future meetings.  Be sure that there are no questions or concerns left unaddressed.

 

Understand the fee schedule.  Whether your advisor charges a flat rate based on a percentage of your assests under management, a commission from financial products they buy on your behalf, or a fee based on both a percentage of assests managed and products traded.

 

Keep your advisor informed.  Many life changes, both planned and unexpected, impact your finances.  Changes in employment, divorce, marriage, illness, death is information that your advisor needs to know as quickly as possible so the advisor can update your financial plan and give you advice based on updated information.