What to Look For If you’re new to investing you may be wondering where to turn for reliable advice in planning for your financial future. With so much turmoil in the financial markets, investors are reluctant to trust anybody with their money regardless of how much experience they claim to have.
That’s understandable, but the fact remains, the more complex and confusing the financial situation becomes the more professional guidance is needed. Now more than ever, a well-chosen advisor can be an important ally in creating and carrying out a long-term financial plan. Fortunately, there are experienced investment professionals that can help you navigate the maze of options, explain the risks involved, and help you understand the best choices to fit your goals.
While no one can accurately predict which way the market is going, opportunities have always existed in the worst of economic downturns—if you know where to find them. Let’s assume that you don’t have the time or incentive to look for those opportunities, but are open to having a financial advisor help you get started. Where do you begin?
Referrals are a good place to start, whether from family, friends, business colleagues, or professional associations like attorneys or accountants. To pick the best financial planner, it’s important to interview several before you make a decision. Referrals might lead you to a one-on-one meeting, but be prepared to ask a lot of questions once you get there.
You’ll want to know how they pick investments, how they plan to manage your account, what their background and education is, and what their fee structure looks like. Once you’re satisfied with their answers, take a minute to check your personal comfort level. This is someone you expect to put in charge of your hard-earned money. How do you feel about working with them?
Look for Professional Designations There is minimal government regulation of the financial planning industry, but private organizations give professional certification credentials to those who meet stringent requirements. Credentials from one of these organizations, while not required before “hanging out a shingle” and calling yourself a financial planner, is a good indicator of the expertise you need. Ask what professional memberships and affiliations, financial planning licenses or other designations your prospective planner holds.
Here are major credentials to look for:
• CFP - Certified Financial Planner. This designates that a planner has met the education and experience requirements, and has passed the tests administered by the Certified Financial Planner Board of Standards.
• ChFC or CLU - Chartered Financial Consultant and Chartered Life Underwriter. The ChFC designation applies to personal financial planning, and the CLU indicates expertise in insurance and related subjects.
• CFA - Chartered Financial Analyst. This designation is awarded to those who have passed exams in economics, portfolio management, financial accounting, security analysis, and standards of conduct.
• RIA - Registered Investment Advisor. An RIA is registered with the Securities & Exchange Commission as an investment advisor. They may or may not have special training in financial planning. Continued on next tab ... Fees Fees - How Do Financial Planners Charge? When you buy or sell stocks through a broker, you pay the broker a commission for making the trade. Likewise, some financial planners receive sales commissions when you purchase the products they recommend. This may affect their objectivity, and create an incentive to push investments that generate high commissions, whether or not the investments are right for your situation.
That’s why, before entering into a relationship with an advisor, you need a clear understanding of how they will be compensated. Here are examples of compensation methods:
• Fee Only - Fees are charged for consultation, plan development, or investment management on an hourly or project basis, depending on your needs. Some planners charge fees based on a percentage of assets under management. This can be a win-win situation. There is an incentive to work on your behalf, because the rate of compensation depends on the level of wealth being created for you.
• Commission Only - There is no charge for advice or preparation of a financial plan, but commissions are paid based on your purchases of recommended products. We’ve already mentioned the shortcomings of this arrangement.
• Combination Fee/Commission - This compensation structure is, as the name implies, a combination of both methods. Ask what fees cover and when commissions apply.
• Fee-Offset - Commissions received from the sale of financial products are offset against fees charged for the overall planning process.
• Salary - Some planners work on a straight salary plus a bonus paid by the financial services firms that employ them. Most often such planners focus on products their company offers.
Regardless of the compensation arrangement you agree to, you should also request information on any potential conflicts of interest, including business relationships, which may affect the planner’s recommendations. Example: A planner may be working closely with executives of a local public company, and recommend its stock. It may well be a worthy investment, but such a relationship should be disclosed up front.
You might also find it useful to inquire about the following:
• Other services that the planner provides
• Major areas of specialization
• Minimum net worth or income requirements
• How frequently the planner contacts clients
• Names of a few clients for references
• Discretionary actions taken on the part of planner Continued on next tab ... What To Expect You’ve Chosen. Now What? Once you’ve started a professional relationship your financial advisor, what should you expect from them? Here are a few basics:
• The advisor should make recommendations that demonstrate a clear understanding of your risk tolerance and investment goals, both short-term and long-term.
• They should rebalance your portfolio periodically. If assets are not performing in a way that meet your goals, the advisor should either buy or sell assets in order to make the appropriate adjustments.
• You should receive a quarterly assessment of the portfolio’s performance and market values. The advisor should consult with you regarding any adjustments that need to be made.
A good financial plan is all about identifying and acquiring sound assets that build wealth over time. The financial markets are going through tremendous upheavals and changes, with potentially more surprises to come.
If you find an advisor that you feel comfortable with—one who is reliable and readily accessible, who makes consistently wise recommendations and keeps you informed of new developments as they arise or even before they arise—you may have found the most valuable asset you could possibly have for your portfolio.
© 2008 Jose D. Roncal |
