How to Choose a Financial Advisor

Your goal is to find a capable person in the financial world who shares and respects your ideas for handling your money. You're forming a financial relationship. Just remember that you're the party in control: This person is working for you.

Ask yourself why you want a financial advisor. You may want to hire a financial planner to draw up a financial plan; then you can choose whether to implement the plan yourself, or ask your financial planner to help you by coordinating the efforts of other professional advisors in putting your plan into action.

Make sure you know the difference between a “broker” and an “investment advisor!” It's easy to get them mixed up and wind up with the former instead of the latter.

A broker is a licensed professional who monitors investments and gives advice on stock purchases, for a fee. The fee can be either a percentage of your portfolio or a “per transaction fee.”

Brokers may also make commissions on some of the investments they sell. Which means that the more they sell you, the more they make. Brokers, like everyone else, want to make money. And their making money is much more important to them than your financial future. This person tells you what stocks or bonds will probably be profitable to buy or sell; he's not necessarily interested in your retirement or your kid's college tuition.

A financial advisor, on the other hand, is someone who sits down with you and PLANS what to do with your money. It may be in your best interests to sock it away in a mattress – if so, your advisor will tell you to do this. Financial advisors get paid for giving advice, not for making the sale (for the most part, anyway; we'll get to that in a minute).

Your financial advisor can also help you select qualified professionals who can assist you in selecting mutual funds or annuities, buying stocks and bonds, or implementing other savings and investment choices. Make sure you do the following before you get too far into your search:

• Know your investment goals.
   
• Examine your personal and financial situation.
   
• Acquire some basic knowledge about investments.
   
• Think about what type of advice, information and services you want and need.
   
• Learn about the various types of financial advisors and the services they offer.
   
• Assemble the facts about your financial situation. The more prepared you are, the better an advisor you'll find. This will also lessen your costs while looking.

Good - now you're ready. You'll need to gather up some names of advisors and begin the whittling-down process. Unless you absolutely have to, don't pick financial advisors randomly through the phone book.

Instead, ask for referrals from those you trust: family members and friends, an accountant, lawyer, banker, or insurance agent. But remember: you want to get financial advice from a financially savvy person. Your neighbor may be a good friend and great with a grill, but if he's lost a bundle, you may not want to sidle up to his financial advisors.

Also, financial planning associations can provide you with the names of financial planners in your area. A good local service is:

National Association of Personal Financial Advisors
355 W. Dundee Rd. Suite 200
Buffalo Grove, IL 60089
1-800-366-2732

So now you have a list of names, and you're starting to go through them. Good work. There are certain things you should keep your eyes peeled for when looking over potential financial advisors:

• Education
  Don't be overly concerned if a financial advisor has a degree in something other than finance or accounting, as long as the candidate has additional training in financial planning. Many advisors work there way into financial planning from other fields. Remember, Einstein flunked math as a youngster.
   
• State Registration
  Many states require that financial planners be registered and have passed certain proficiency exams. State insurance or securities licensing will also be needed if your advisor is going to sell certain products. The state securities office can tell you if a financial professional is licensed to trade securities and whether any complaints have been filed against any securities trader. Make the call! This is the person that will be advising you on big financial decisions, a.k.a. your future and that of your family. It isn't snooping, it's being thorough. The number for the North American Securities Administrators Association is 202-737-0900.

Along with education and state registration, investment advisers may have a few letters after their names — other than those associated with formal college or university degrees — such as CFP, AFC, or ChFC. These are professional designations established by self-regulated membership organizations (not by state or federal regulatory agencies). They basically mean that an advisor has studied specifically in a certain area. The following are definitions of those organizations.

• Accredited Financial Counselor (AFC)
  These designations are given by the Association for Financial Counseling and Planning Education. These advisors have to pass examinations in personal finance and financial counseling, as well as follow the AFC code of ethics.
   
• Certified Financial Planner (CFP)
  Those with CFP accreditation are required to complete study and pass examinations in risk management, investments, tax planning, retirement planning, and estate planning. They also need at least three years of work experience, and have to continue to update their knowledge in the field. They also must adhere to a prescribed code of ethics. CFP licensees are certified by the Certified Financial Planner Board of Standards, Inc. (CFP Board).
   
• Chartered Financial Analyst (CFA)
  These designations are awarded by the Association for Investment Management and Research (AIMR) in Charlottesville, Virginia. Three levels of examinations can be taken. For example, the first level includes such areas as understanding investment analysis and management, financial markets, portfolio management, and securities law. Obviously, the third level is the most impressive, but all are a good sign.
   
• Chartered Financial Consultants (ChFC)
  Advisors with this certification have completed courses in economics, investments, insurance, taxation, and related areas from the American College in Bryn Mawr, Pennsylvania. This designation is an outgrowth of the Chartered Life Underwriter (CLU) program, which indicates an extensive study in insurance.
   
• Personal Financial Specialist (PFS)
  Some certified public accountants (CPAs) obtain the PFS designation. It means that they've gone through additional specialized education and other requirements established by the American Institute of CPAs. CPAs with the PFS designation provide a broad range of personal financial services, which can include investment advice.

Now, having learned all that, it's always good to remember one thing: letters after a name do not a great advisor make, nor does the lack of them necessarily mean you're getting a dud. They simply show that the adviser has taken the time and effort to receive education and certification in particular areas of study, which means they've got the drive and interest to know more about his or her field. Which is always a good thing.

OK, so you've tackled the credentials of the advisors you're taking a look at. Are you ready to make a choice? Sorry, no – you've got a little more legwork to do. You'll need to get some of the particulars about your advisors' experience.

Narrow your list to a handful of top candidates and start setting up interviews (but make sure to ask if you'll be charged for this – sometimes you will be). And make sure to let them know from the get-go that you aren't there to get financial advice, but that you're interviewing them to see if they've got what you're looking for to get the job done.

It's a good idea to ask your potential advisors the following questions:

• What kind of advice, information, and services does the advisor (and the advisor's firm) offer? Some firms focus on specific areas, which may or may not fit into what you're looking for.
   
• Does the advisor share (or will the advisor at least abide by) your overall investment philosophy and tolerance for risk? You want your advisor to get the results you want, the WAY YOU WANT TO GET THEM. What type of clientele does the advisor specialize in or usually advise? Are they clients who are similar to you in terms of age, income and objectives? For example, financial advisors who work mainly with those nearing retirement may not be the best choice for younger, aggressive investors.
   
• What is the advisor's questioning technique? That is, will the advisor be able to ascertain what he needs to know? Will the advisors questions to you provide the degree of insight needed into your current financial situation, your goals, and your tolerance for risk in order for the advisor to provide the appropriate advice?
   
• Does the advisor take time to explain investment alternatives and the potential risks associated with each? If research and information reports are available to clients, will the adviser help you understand how to use them and what they mean? It's often a godsend to choose an advisor that knows that you haven't spent years studying this stuff and learning the jargon. If you're not very comfortable with the lingo, try to pick someone that will help you with it.
   
• Do you feel comfortable with the advisor and the answers you've gotten? Even the most qualified might have something missing that you just can't put your finger on. You don't want to wake up in the middle of the night with cold sweats, wondering if you did the right thing.
   
• Is the advisor familiar with recent tax laws and regulations? How does the adviser keep up with the latest financial developments? It's always good to have someone interested in continuing education.
   
• Does the advisor have a broad variety of investment products and companies from which to choose? Does the advisor have any biases, and if so, how do those biases fit with your needs? What are the biases based on? As a potential investor, you need to determine if the range of choices available to you will suit your particular needs.
   
• For advisors who sell investment products, can you get a feel for what sales technique they use? Beware of the 'now-or-never, once-in-a-lifetime' approach (this goes for buying ANYTHING, by the way). Good investments will always be available. Be extremely wary of financial advisors who give you few or no alternatives, or who try to pressure you to invest in certain investments.
   
• Check the performance record of the firm and advisor you are considering - especially for other clients with similar goals. How have their clients' accounts done in the past 5 to 10 years? Does the firm have an audited track record of its investment recommendations? History repeats itself!
   
• How active are most accounts? A lot of activity with little net gain may indicate that an advisor is 'churning' the portfolio to generate commissions (note that churning and similar abuses are illegal under securities laws).
   
• How accessible is the investment advisor? Will you be able to get in touch with the advisor when you need to? How heavy is the adviser's client load? The most popular advisors might not have a lot of time to work with you, which isn't the greatest.
   
• On the other hand, don't be surprised if you choose a firm and are referred to their most-recently employed advisor. Such an advisor may not have many clients, and the office policy may be that all new customers are referred to the newest employee. Which isn't necessarily a bad thing - the fewer the clients an advisor has, the more time he'll spend on your portfolio.
   
• How often will you be sent statements summarizing your account, confirmations of your trades and other information? You'll want to keep an eye on your accounts too, you know.
   
• What is the fee structure for the various types of advice, information and services provided? Ask about other possible situations where fees may be charged. For example, what if you need your funds in an emergency? How soon can you get them, and is there a fee? Most financial advisors are compensated in one of the following ways:
   
  • Fee only. These professionals charge either an hourly or fixed rate.
     
  • Percentage of assets. A financial advisor in charge of your total investment and insurance portfolio may charge a certain percentage of your assets for his services.
     
  • Commission. These advisors receive commissions on the financial products you buy from them. Such products may include insurance, stocks, bonds, mutual funds, etc.
     
  • Fee/Commission or Fee-Based. These advisors charge you a fee for planning and also receive a commission.

  During your interview, ask for references and a copy of the financial advisor's resume. A less tangible but still significant consideration is the more subjective issue of whether the two of you hit it off. Does the person seem to have time for you, regardless of how much money you have to invest? Does he really listen to you and seem to respect your opinions? Does the advisor use financial jargon or explain investments and insurance to you in clear terms? Remember, besides adding to the confusion, a lot of jargon can be an advisor's way of trying to look like he knows what he's talking about. Buttering himself up, so to say. You want things between you and your advisor to be very clear and comfortable.

  Do a little investigative work regarding the advisor's firm. Some companies frequently rotate personnel. If you choose a firm because of the qualifications of a particular financial professional, always remember that a new person may be put in charge of your file at some future time. Going on a cruise doesn't necessarily mean you'll be sitting at the captain's table.

  Once you've asked all your questions and chosen a financial advisor, the shoe will be on the other foot. Now it's your turn to answer lots of questions. Your financial advisor will need to know what stage of life you're in and what your financial goals are (whether saving for a child's education, planning for retirement, etc.).

  You'll also need to be clear about your tolerance for risk. If you have chosen an advisor who is also an investment sales representative (someone who can buy and sell stocks and bonds) you'll need to indicate whether you want to be personally involved in each financial decision. All firms require an investment sales representative who is going to trade securities on your behalf to get your permission before making a trade, unless you have granted discretionary authority to make trades without contacting you first.

  Generally, you should give such authority only under very limited circumstances and after you have worked with an investment sales representative long enough to feel comfortable with this arrangement. You don't want someone screaming into a phone “Buy! Buy! Buy!…Sell! Sell! Sell!” as he gambles away your financial future. Make sure you know the policy of the individual or firm with which you are dealing.

  And always remember, this is your financial plan, and it's always your right to know where your funds are and the accessibility of those funds. You also have the right to withdraw your money for any reason. Just be aware that this will probably cost you a little something in fees.

  Finally, plan to meet at least yearly with your financial advisor to review your insurance and investments, the market itself, and any changes in your financial goals. As you and your money grow, you may lean toward or away from conservative ideals (or vice versa).

  If there's a major change in your life over the year, such as a new bundle of joy or the loss of a spouse, arrange for a special meeting with your financial advisor. That way you'll be sure your money is invested wisely every step of the way.

  So there you have it, piece of cake, huh? It seems like a lot, but most of these steps go quickly and many are simply common sense. And lets face it – it's worth it to do the work today and find a financial advisor that you trust rather than pay for it (literally) down the road. Happy Hunting!