We live in a do-it-yourself society. Many of us do our own home improvements, repair our cars, sew our clothes, and even sell our homes without professional help. But when you do it yourself, you do it at your own risk.
When it comes to planning your financial future, there’s plenty of risk. You don’t hear much about day traders anymore—those would-be millionaires who quit their jobs to trade stock online full time—because most of them have discovered the hard way that they lack the professional training and experience to trade stocks for a living.
Likewise, individuals who invest without the professional guidance of a financial advisor are unlikely to meet their financial goals—and by the time they realize that they are falling short, it may be too late to do anything about it.
Like a business, an individual is highly unlikely to meet his or her financial goals without a plan. One role of the financial advisor is to develop a strategically sound financial plan that is designed to meet the client’s financial goals. The advisor should help the client identify financial goals, such as saving for college or retirement, and develop a plan based on the client’s tolerance for risk and the client’s timeline for meeting each goal.
Once the plan is developed and reviewed, the advisor should work with the client to implement the plan, then review it periodically and update it regularly as the client’s needs change.
Choosing an Advisor
If you’ve determined that you need a financial advisor, you need to find someone who is reputable, who will spend enough time with you, and who is accustomed to working with individuals with a net worth similar to yours. Many financial advisors, for example, only accept investors who meet a minimum amount to invest or who have a high net worth.
Start the process by asking friends, relatives, and co-workers for referrals. Who do they use and what kind of experience have they had? Ask your accountant, attorney, or banker for referrals. They typically work closely with financial advisors and are likely to know who to recommend.
Next, consider contacting a professional association (see list), such as the Massachusetts Society of Certified Professional Accountants, which has a Personal Financial Planning Committee. Ask for names of financial advisors who live fairly close to you, because you will want to meet at least annually to review your financial plan.
You may also want to consider the advisor’s professional designations. Many competent advisors do not have initials after their names, but designations provide evidence of significant training and experience. To become a Certified Financial PlannerTM, or CFP®, the advisor must complete a six-course curriculum and pass a 10-hour comprehensive exam. To be named a Chartered Financial Consultant, or ChFC, the advisor must complete an eight-course curriculum. Courses for both designations concentrate on the knowledge needed to develop a financial plan. CFP®s and ChFCs are required to study insurance, investments, tax planning, asset management, retirement planning, employee benefits, and estate planning.
Fee vs. Commission
Another important decision to make is whether to choose a fee-based advisor or a commission-based advisor. Most advisors work on a straight commission, but an increasing number charge a straight fee and do not accept commissions, because they believe commissions create a conflict of interest. Still other advisors charge both fees and commissions.
Once you have narrowed your choices to three advisors, meet with them in person. You want to make certain you feel comfortable with your advisor. If you feel uncomfortable sharing your most personal financial information with an individual, that person should not be your advisor.
Be certain to ask for a sample financial plan. The plan should appear to be tailored to the individual's needs, rather than providing boilerplate information. It should also appear to be addressing the individual's goals, rather than simply selling products. Review the plan thoroughly. Substance is more important than style.
Keep in mind that you are paying for a service, not a product. The plan should have a thorough outline for achieving your goals, but it is most important that the advisor provide you the personal guidance you need to succeed.
Finally, be certain to ask lots of questions. In addition to having a thorough understanding of how the advisor will be paid, ask the advisor about his or her past experience. Find out whether the advisor is affiliated with a specific company and provides only that company’s products. Ask whether you can buy products recommended in the financial plan from other companies.
By Darrell J. Canby, CPA, CFP®