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How To Pick a Financial Advisor: 9 Questions

There are far more people who can create their own financial plans than there are those who can implement them. The reason is simple: almost anyone can take the steps necessary to complete a software program that helps to determine how much money is needed for retirement or college savings, but after that, people run into emotional stumbling blocks.

If you realize that you don't have the time, energy or temperament to manage your finances where do you turn? There are a variety of sources to consider for advice. The best solution depends on who you are and what your needs are. This process requires that you know the right questions to ask.

Here are the 9 questions to ask any potential financial advisor, broker or insurance salesman:

  1. What experience do you have?: Find out how long the professional has been in practice and the number and types of companies with which she has been associated. Ask the planner to briefly describe her work experience and how it relates to her current practice.
  2. What are your qualifications? The term "financial consultant" is used far too frequently and casually. Ask the planner what qualifies him to offer financial planning advice and whether he she is recognized as a Certified Financial Planner professional or CFP practitioner, a Certified Public Accountant-Personal Financial Specialist (CPA-PFS), or a Chartered Financial Consultant (ChFC). While these designations are signals of credibility, they certainly don't guarantee a successful relationship. You should also find out if the professional is licensed to sell insurance, securities (like stocks and bonds) and/or mutual funds.
  3. What services do you offer? The services a financial planner offers depend on a number of factors including credentials, licenses and areas of expertise (see #2). Some planners offer financial planning advice on a range of topics but do not sell financial products. Others may provide advice only in specific areas such as estate planning or on tax matters.
  4. Who are your typical Clients? Many advisors specialize in types of clients-those with lots of money, small business owners, employees of a large local firm. Make sure that your advisor likes to work with people like you!
  5. Can you provide 3 references? Ask for two current clients whose goals and finances match your own, as well as a professional reference, like an accountant or estate attorney.
  6. What is your approach to financial planning and investing? Some planners prefer to develop a holistic plan that brings together all of your financial goals. Others provide advice on specific areas, as needed. Find out if the planner will carry out the financial recommendations developed for you or refer you to others who will do so. For investing, make sure the planner's viewpoint on investing is not too cautious or overly aggressive for you. Also ask whether the planner makes investment decisions himself or whether there is someone else in the firm that makes decisions. Ask about the advisor's performance both in good and bad markets. A great follow up question: what were the three worst investment decisions you made over the past two years and how did you correct them?
  7. Will you be the only person working with me; how often will we meet; how often will we communicate? The financial planner may work with you himself or have others in the office assist him. You may want to meet everyone who will be working with you. You also want to define your working relationship-what should the expected frequency of verbal, written and in-person communication be?
  8. Are you registered as an investment advisor and do you have a fiduciary duty to me? (In other words, do you have to put my needs before your needs or your company's needs? The rule making part of Dodd-Frank may force all investment professionals to register as Investment Advisors, but until that occurs, seek a professional that is a "fiduciary". In short, this means the planner has pledged to act in a client's best interests at all times. Investment professionals who aren't fiduciaries are often held to a lesser standard, the so-called suitability standard. That means that anything they sell you merely has to be suitable for you, not necessarily ideal or in your best interest.
  9. How will I pay for your services? As part of your agreement, the financial planner should clearly state in writing how she will be paid for the services to be provided. Planners can be paid in several ways:
  • Fees based on an hourly rate or a flat rate
  • Fees based on a percentage of your portfolio value, often called "Assets Under Management" or "AUM" (be sure to ask if cash is included in the calculation)
  • Commissions paid by a third party from the products sold to. Commissions are usually a percentage of the amount you invest in a product.
  • A combination of fees and commissions. Some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations.
Some things to keep in mind about fees:
  • Planners who earn money based on commission rather than a flat or asset-based rate could have an incentive to steer you in a particular direction. When considering how you will actually buy or sell, you should determine whether you need a salesperson or an advice-giver.
  • If you simply need a way to buy and sell securities, then you have two basic options: open an on-line account with a discount brokerage firm (pretty much the cheapest option), where you will not receive any advice. Otherwise, you would enter into a relationship with a brokerage firm that provides you with a person who can talk to you. That person is called everything from a stockbroker, an account executive, financial consultant or some permutation of these themes. These folks will talk to you about investments, sell you a mutual fund and/or provide general financial advice that is "incidental" to the sales process. Most are commission-based, which is best suited for someone who wants to park stocks in an account and not trade them often.
  • If you want someone to actually manage your money, meaning that he or she will make investment decisions for you, based on your investor profile and risk tolerance, than you are likely to pay via a fee, usually an asset-under-management model. But fee-based advisers aren't perfect. Advisers earning 1 percent of your annual assets might be disinclined to encourage you to liquidate your investments or buy a big house, even if those are the right moves at a particular point in your life, because their fee would shrink as a result of that advice.
More on MoneyWatch:

How to Make Sure your Advisors Have no Conflicts of Interest

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