It takes a lifetime of planning and investing to prepare for retirement. Even in the best of times, it’s confusing to navigate the many investment choices available. Creating the right mix of assets and knowing when to buy and sell can be challenging. Throw in a little economic uncertainty and some emotion, and the process can be downright scary.
In today’s environment, picking the right financial advisor is extremely important.
Even though picking the right financial advisor may seem challenging, you can start by understanding the choices available.
Many advisors who are affiliated with brokers, dealers or banks claim to be independent. It gets complicated when you add financial planners, insurance agents and stockbrokers to the mix. When comparing the various advisors in the marketplace, you need to look at a number of different factors to find the right advisor for you. Services, fees and compensation options can vary greatly. You need to do your due diligence to understand the choices available to make an informed decision.
Understand Your Choices
If you’re looking for someone to help you navigate the investment landscape, it’s important to first determine your own investment needs. Ultimately you need to make sure the advisor you choose can offer professional, unbiased, comprehensive advice. The advisor needs to be independent to be able to offer investment products from across the asset spectrum.
Conflicts of interest and bias are common in the investment industry. By working with an independent advisor, you can begin to protect yourself from these potential pitfalls. Make sure one of the first questions you ask in picking the right financial advisor is how is your advisor compensated.
Commission Based Versus a Fee-Only Advisor
The two basic compensation models are commissions and fee-only. A commissioned advisor is paid a commission for every transaction. Many times they receive higher commissions to steer clients towards a particular investment or asset class. While it may be a perfectly sound investment vehicle, it might not be right for you.
The second compensation model is fee-based. A fee-only advisor is a registered investment advisor with a regulatory and fiduciary obligation to always act in their client’s best interests. They do not accept fees or commissions based on sales. Fee-only advisors have far fewer inherent conflicts of interest and they’ll generally provide more comprehensive advice. Brokers and dealers do not have this obligation.
What to Look for in a Fee-Only Advisor
Comparing fee-only advisors by cost alone is often not enough to select the best advisor for your needs. A low fee quote from an advisor can signal less thorough advice, a lower level of experience, or less personal service.
Good advisors will take into account your age, tolerance for risk and other factors before putting together a comprehensive strategy. They’ll work with you to tailor a plan to fit your specific needs. They should have experience with all investment options and asset classes including the use of alternative investments as a strategy to reduce risk and optimize returns.
Ask any potential advisor about their credentials. They should include respected professional designations such as Accredited Investment Fiduciary (AIF), Certified Financial Planner (CFP) and Certified Investment Management Analyst (CIMA). In addition, make sure they offer investment options that are not limited to certain product providers.
You should cover these additional points and question in your initial meetings when picking the right financial advisor:
Ask your advisor to explain and disclose all fees and compensation. Look for an advisor who charges one fee for comprehensive advice and service with no additional or hidden fees.
Will they perform a comprehensive cash flow assessment and clarify your investment goals? Your advisor should perform a comprehensive financial risk assessment and provide recommendations.
Do they draft a formal investment policy statement to guide investment decisions?
Will they offer an appropriate plan (based on your specific situation) for asset allocation and investment options to manage risk?
How often will you receive reports on your portfolio? Look for quarterly performance reports and evaluations incorporating all investments held across multiple custodians. Also make sure you receive a comprehensive annual investment review in a face-to-face meeting.
Picking the right financial advisor does not have to be an overwhelming process if you ask the right questions. A good advisor will get to know your financial situation and base their recommendations on your specific financial goals and needs. Using a fee-only financial advisor will help ensure you receive professional, experienced, unbiased and comprehensive advice and recommendations at a fair price without conflicts of interest.
Are you ready to hire an investment advisor? What other factors have you considered in picking the right financial advisor?
Russ is a Certified Divorce Financial Analyst and fee-only financial advisor based in Atlanta, GA, and has provided personal financial advice to individuals and families for 20 years. His focus in on serving women, especially widows and divorcees. You can learn more about Russ and the work he does by visiting WealthcareForWomen.com. Find him also on Twitter, LinkedIn, and Google+.