Selecting a financial advisor is just as important to your financial future as choosing your investments. Your financial advisor will guide you through up and down markets and help you make sense of your investment choices as you pursue your goals. And just as some doctors and lawyers are specialists, so too are some financial advisors. Knowing what you want, and knowing what questions to ask, will help you find the person who can guide your financial planning.
Know your investment goals
You should first review your financial situation, keeping in mind that your needs for financial advice can overlap. For example, retirement planning can be closely tied to investment and tax advice. And you may need to get your budgeting and debt management in line before you can think about saving and investing. Outline your concerns, priorities and goals. Determine what you hope to gain by seeking assistance from a financial advisor. This helps you narrow your search and prepares you to ask the right questions.
Where to start looking
Start out with a referral from another professional, such as a banker, lawyer or tax advisor. Talk to family, friends and business associates. Speak to someone with similar financial issues. You could also get the names of local financial advisors from their professional associations. Try the National Association of Personal Financial Advisors at www.napfa.org or the Financial Planning Association at www.fpanet.org.
What's in a name?
The credentials for financial advisors vary. As you're researching, you'll come across Certified Financial Planners (CFPs), Chartered Financial Consultants (ChFCs), Personal Financial Specialists (PFS), Certified Investment Management Analysts (CIMAs) and Chartered Financial Analysts (CFAs).
Certified is the key word to look for, as this indicates that the financial advisor is licensed. Each certification requires a different set of courses and licensing exams. For most people, a Certified Financial Planner is the best choice. These financial advisors are the general practitioners of the investment world, and they will take an overall look at your financial situation. Chartered Financial Consultants tend to specialize in insurance, and Personal Financial Specialists are CPAs who are also licensed to provide investment advice.
There are no dumb questions
Once you narrow down your choices, set up interviews with each of your financial advisor candidates. Come prepared for your initial consultation, which should be free. Have a summary of your financial situation, including a current listing of your assets and liabilities, an outline of your goals and an income statement or your most recent tax return.
Ask questions to find out what you can expect from the financial advisor. Pay close attention to the questions the financial advisor asks you, to get a feel for the person's thoroughness and expertise. Is your potential financial advisor concerned about how to help you, or more interested in selling you a product?
Paying a financial advisor
Be sure to ask how a financial advisor is paid. A financial advisor may work for a commission on products such as securities, annuity contracts and insurance policies. Alternately, a financial advisor may charge a fee-an hourly rate, a lump sum fee or a fee based on assets under management.
In general, it's best to choose a fee-only financial advisor, as this offers the lowest risk of a conflict of interests. Don't confuse fee-only with fee-based-this term often means that the financial advisor can earn commissions on product sales as well as fees.
Qualifications and experience
Ideally you want a financial advisor who works with people in a financial situation similar to yours. Ask financial planners how long they have been in practice and how they keep current with changes and developments in financial planning. You can check on a financial advisor's background with state licensing boards or professional organizations, such as the Certified Financial Planner Board of Standards Inc. at www.cfp-board.org. The Securities and Exchange Commission can tell you if a financial advisor is registered at www.sec.gov/investor/brokers.htm. For investment advisors, check with the Financial Industry Regulatory Authority at www.finra.org.
You should also ask for a Copy of the ADV form. This is a form any financial advisor who manages investment assets of $25 million or more must file with the SEC to disclose educational and business background, compensation and investment methodology. A financial advisor who manages less than that amount must register with state securities agencies.
Large firms vs. independents
You want a professional and competent financial advisor you can trust, and who can clearly explain the financial planning process. Your financial advisor may work independently or may be part of a firm. In all cases, you should know who will be directly working on your behalf.
One advantage of a large firm is access to a broad range of expertise and experience within the firm. A team approach to financial planning, with each person contributing specialized knowledge and experience, can benefit you. But big companies can be impersonal and smaller clients can sometimes get lost in the shuffle. There may also be conflicts of interest in a large firm where the staff is pressured to sell financial products.
An independent financial advisor may provide a more personalized service while still providing you with a range of expertise by consulting with specialists in different fields. An independent advisor is not encumbered by corporate policies and will have the flexibility and freedom to recommend the financial products you need.
Measuring a financial advisor's performance
Since the work of a financial advisor involves money, you should be able to use some financial indicators to measure performance. Tie these indicators to your original goals. If you wanted to reduce your debt level, have you? If you wanted to save more for retirement, is the balance in your 401(k) account growing?
Some changes will take time, and some things, like the return on your investments, depend on overall economic and market conditions. But besides the feel-good effect of helping you take positive action to improve your finances, your financial advisor should yield concrete, measurable results.
In the wake of all the accounting scandals, you might be looking at your financial advisor in a whole new way. However, any time is the right time to evaluate your financial advisor to make sure she is earning her fee.
If you worked for several years and have saved some money, you need to know how best to invest that money. If you are retired, and have a pension and / or 401K plan, you need to be sure your savings and pension are invested wisely to guarantee a worry-free future.