Investing your money effectively is a complex business. Do-it-yourself investments may not be a viable option for everyone. Therefore, in most cases, it is advisable to rely on a professional. Just right? Not quite.
The financial advisory industry offers a bewildering variety of titles, names, and compensation systems. Some advisors are trustees (generally understood to mean that the client trusts the adviser or firm to put the client’s interests above their own) while others are not. And while advisors must obtain licenses, pass tests, and gain work experience when selling securities, if they are to acquire certain qualifications (like being called a financial planner), there are no minimum standards for calling yourself a financial advisor.
Choosing the right advisor requires thorough due diligence. No wonder so many investors are taking the time to cut the process and opt for referrals from friends and family with limited financial backgrounds.
The process can be divided into two parts. The first involves taking stock of your needs. The second part is to use what you have just learned about your own needs and goals to find a counselor who can help you meet them.
Here we highlight the top 5 steps – which are likely not complete – to choosing the right financial advisor.
Step 1: understand what you need
Are you looking for someone to take on the management of everything, or just someone to take over portfolio management or invest in stocks? Do you need someone to do a one-time review and financial plan, or do you need a lasting relationship?
You don’t have to determine so much how the process works, but what both sides want from the relationship. Is there a specific problem or a small number of problems that require immediate attention?
Also consider the investment philosophy that you are comfortable with. Are you looking for an advisor who prefers index or active funds or individual stocks? Buy and hold or invest more actively?
Step 2: understand what (and how) you will be paying
Consultant compensation can get chaotic. One of the first questions to ask yourself is whether the advisor is fee-only, fee-based, or commission-based.
- Fee only means that the consultant is compensated by charging for various services and is never compensated with commissions.
- Commission-based advisors accept commissions in order to recommend products (although there is nothing right or wrong with that, remember that some advisors may recommend products that pay the highest commissions, not necessarily the product that works best for you).
- Fee consultants can primarily charge fees for the services they provide, but can also accept commissions.
Some advisors are remunerated through a percentage of the assets under management. Others receive retainer fees or, in some cases, even hourly fees. You need to know what you are paying for and how.
Step 3: Pick List and Shop Around
Start by putting together a shortlist (no more than five possible candidates). When you’ve done this, look for testimonials from trusted professionals you already know and work with, such as an accountant or a lawyer.
Step 4: Winnow it Down
Once you’ve made a shortlist, get in touch with each candidate, let them know that you are considering interviewing them about their services, and ask them to fill out a short questionnaire that will help you narrow down your list. Morningstar has developed a downloadable questionnaire adapted from Sheryl Garrett’s Personal Finance Workbook for Dummies.
Garrett recommends conducting face-to-face interviews with at least two finalists. You should come into the interview with an idea of what you are looking for and be very open (I want that, I need that). Garrett also recommends paying close attention to the prospect’s communication style and overall approach to working with clients.
It’s also worth asking about labels the person has earned. Each country has its own specifics, but in general a certified financial planner is a financial planning expert accredited by the Certified Financial Planner Board of Standards. To use the CFP designation, planners must complete a training program, pass a comprehensive exam, and demonstrate extensive financial planning experience.
Step 5: do the rent (this isn’t the end)
Finally, it’s time to choose one. But the work doesn’t stop there. On the contrary, it is the beginning of a process that involves numerous discussions and planning. But if you’ve made a good choice, it’s worth it.
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