Selection of a financial advisor is a project that should be taken seriously. There can be great benefits from a long-term working relationship with a good advisor….and potential for disappointment when working with a poor one.


First, define your objectives.
Before talking to any financial advisors, financial planners, or stock brokers, take some time to really think through your needs. Review your financial situation. Define your financial objectives. Having a clear sense of what you’re trying to achieve will help in assessing which advisor might be of greatest value to you.

Decide what kinds of services you might need and how they relate to your financial situation and investments. Then, determine whether you want to work with a money manager, a financial planner, or an advisor who offers both financial planning and investment management services.

Round up the suspects.
Make a list of candidates, including any advisors recommended by friends and associates. Ask each advisor on the list to provide materials regarding professional qualifications, experience, and services. Try to review as much information as possible in advance and then schedule meetings with the most promising candidates.

Schedule some meetings.
Personal discussion with an advisor will allow you to assess personal chemistry and other intangibles that written materials can't convey. This meeting is an opportunity to ask questions, learn more about available services, and discuss your situation.

 

Ask a few good questions.  

How long have you been active as a financial advisor?
Anyone can call himself a financial advisor or financial planner, so be sure to ask about education and professional credentials. Financial advisors meeting certain education, experience, and ethics standards may have professional designations, such as being a Certified Financial Planner (CFP).

What are your credentials?
In addition to a university degree and professional designation, a financial advisor should also have several years of active business experience. Ask what he or she did before becoming a financial advisor. Knowing what an advisor did previously can often be a tip-off to strengths and biases.

Are you a Registered Investment Advisor?
Most financial advisors must be registered with the SEC or state regulators. Ask for a copy of the advisor's SEC registration document (Form ADV), or an "ADV brochure" with the information contained in Form ADV.

Do you disclose up front, in writing, the nature and estimated amount of all compensation you may receive?
Ask for a specific schedule of all fees and commissions which may be received by the advisor. Attorneys must provide such disclosure, a good CPA does, even your car mechanic lets you know what charges are expected. However, many financial planners and insurance agents are hesitant to discuss compensation because, when advising you to buy insurance or investment products, the personal payoff to them can be surprisingly large.

How would you handle my situation?
Try to gauge an advisor's creative abilities. Each client's situation is unique and a significant portion of an advisor's services must relate to your specific financial situation, preferences, and objectives. Consequently, in addition to technical knowledge and objectivity, a financial advisor should also be highly creative in dealing with unique circumstances and situations.

What is your financial philosophy?
A financial advisor should be able to provide a clear explanation of how decisions about money and investments are made. As a client, you should understand and be comfortable with your advisor’s approach to helping people reach their goals.


How does the financial advisor get paid?

What to know if the answer is "commissions"
Consumers are increasingly aware of the difference between rendering objective advice and selling investment products. Financial advisors, financial planners, and stock brokers compensated by commissions are, by definition, transaction-oriented. The only way they get paid is if a client buys investments or insurance. Herein lies the potential for conflicts of interest and the possibility of being sold inappropriate investments or insurance products.

If the answer is "fees and commissions"
Many commission-based advisors have begun providing services on a fee basis, calling themselves "fee-based" advisors.  Despite the name change, most fee-based advisors still rely on commissions. As a result, conflicts of interest may remain.....and may be even more difficult to recognize.

If the answer is "fee-only"
Fee-only advisors believe a significant conflict of interest may exist if an advisor stands to personally gain when financial recommendations are implemented. Fee-only advisors don't receive sales commissions from recommendations made to clients. They don't "sell" investment products; instead, they utilize commission-free investment vehicles, such as no-load mutual funds, often resulting in significantly lower costs to their clients. Reduced potential for conflicts of interest means you’re getting financial advice from a consultant, not a salesperson.



The Financial Advisor Litmus Test

What do you think I should do with my money?
This is a classic test question. If you tell a financial advisor that you have money to invest and the advisor starts telling you how it should be invested before finding out about your financial situation, the advisor fails the test.

However, if the advisor declines to answer until obtaining more information about you, it's a good sign. In fact, it may be a red flag if an advisor starts talking about specific investment and insurance products in the first 60 minutes of your conversation. An advisor should first spend at least that much time to discuss your financial situation and objectives.

How to Select a Financial Advisor
Fee-Only Fee-Only Difference Fiduciary Difference Selecting a Financial Advisor Profile of an Ideal Advisor Fee-Only Fee-Only Difference Fiduciary Difference Selecting a Financial Advisor Profile of an Excellent Advisor
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