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How to Choose a Financial Advisor
Selecting Your Next Financial Advisor
By Allen Taylor
President, Wealth Strategies LLC
Whether you are searching for your first financial advisor, considering changing advisors or merely have questions you would like to ask your current financial advisor, here are a few things to think about.
The first and most important thing for you to start with is to ask questions of the perspective advisor. Understanding the services and benefits you will receive comes from gathering information and matching that information with your particular needs and desires. Becoming familiar with a few terms and processes will help you feel more comfortable with the choices you are about to make and the answers to your questions.
The question of whether to hire or change advisors is one in which many investors continually struggle. This turmoil will in fact cause them to make no decision and no change, thereby subjecting themselves to more of the same account performance or service issues as they have already experienced. Indecisiveness on the part of the individual investors in making these changes may sometimes come from a lack of overall understanding of the types of advisors and services offered and more over from a lack of determining what they want and need.
Advisors, financial planners, brokers and a number of other terms used to describe those of us in business to guide, manage or direct the financial futures of clients come in a variety of different flavors, all offering a wide range of services and advice at varying levels of competence and results. As a client, one must decide what are they looking for and what do they expect to be the result of this new relationship. The answer to this question should lead you in one of three very different directions.
If you are more of a do it yourself type individual and simply need someone to bounce ideas off of and place the trades then you might not want or need a true advisor or planner. This client simply needs to look for a broker that is available for you when you need him and provides assistance for a reasonable price. A word of caution: make sure these individuals do not sell you into something you really do not want or need in your portfolio, as their income is transaction driven and they do not get paid unless you either buy or sell. This is not to say that this type of business is not useful or needed. There are a great number of individual investors that are truly do it yourself people and require only a limited service. You can do this through “full-service” brokers, “discount” brokers or simply go through an on-line trading system. All this is dependent on your individual wants and needs.
Another type of advisor is the one that functions primarily as an asset gatherer, rather than a manager. These advisors spend their time working with individuals, building a client base and discussing asset management. They, in fact, function as the liaison between the client and the money manager. I have known a great many advisors that operate this way for a number of reasons. Access to good money managers that are typically limited to very high net worth individuals and that specialize in specific asset classes such as small cap stocks or income investing is certainly one of the advantages. This process has many pros and cons associated with it. Caution: be aware that the advisor is not the money manager. As long as you understand what you receive for the price you pay and are not sold something that is not quite what it seems, it can be a good arrangement for many individuals.
The last style of advisor is one that does most everything in house including, comprehensive planning and actual money management. These can be full service brokers or financial planners or just investment advisors, but they typically manage the portfolios themselves. Instead of hiring the planning out to a management company, they do the planning and analysis themselves. These advisors typically are relationship oriented and offer a wide range of planning and analytic tools to the client. The planning process starts with an in-depth analysis of the current situation and with an equally in-depth analysis of the changes needed to solve the problem(s) at hand. Once the analysis and strategy is established, then the asset management process begins.
This type of advisor may be exactly what you are looking for or; it may be that it is too much of a process for you and more in-depth than what you require. The right answer lays with you the investor and needs to match your specific needs and desires.
Advisors come and go on a regular basis. Many of them are still very much transaction oriented and only make money by moving your money around or using commissionable products. Understanding the full compensation structure of the individual you are using, making sure that you have a clear picture of how they are paid and how it may or may not influence some of their recommendations is key to a good working relationship.
If you look at your current portfolio statement and see a great deal of proprietary funds, those funds only offered by the brokerage house in which your advisor works, or a portfolio full of loaded (commissioned) funds then you have a transaction driven advisor and the quality of the advise, may or may not be driven by the commission paid.
Credentials for advisors are an important issue to consider but should not put an extreme amount of weight on the overall decision to select one advisor over another. The CFP, CFA, CIMC, and many other financial designations are important and require a great deal of work and study to achieve along with annual continuing education requirements. But, quite honestly, that does not mean that the particular advisor is any better or worse than anyone else. There are a great number of advisors with these designations that are very good at what they do but there are also a large number of credentialed advisors that are less adept at asset management with regard to planning and asset allocation. Do not let the credentials be the sole determinate for you to choose your next advisor as it may leave you feeling very disappointed in the long run.
One of the most important issues to consider is the regulatory compliance issue associated with every advisor. If an advisor has a complaint or suit filed against them then it will show in their regulatory file. You can check on any prospective advisor by going to the NASD web site at www.nasdr.com and searching on the advisor in question. This site will show you his or her current registrations, licenses and employment status as well as all previous employers and any regulatory issues that currently or historically exist with the advisor.
Treat this important decision in the same manner as you would if you were interviewing a surgeon for your bypass surgery. You are literally placing your financial life in the hands of someone else and the survival of that financial life is dependent upon your decision. If your advisor communicates well but cannot manage or analyze a portfolio there is not much need for this individual. In contrast, an advisor who manages a portfolio well but does not do a good job keeping you informed of what is happening within the markets or economy may not be the best answer either. The overall quality of the total relationship may be the most important factor to consider. Regardless or what your goals are, the most important part of your relationship with your advisor is communication. Don’t hesitate to ask questions.
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