Financial Advisors - Before we discuss seeking outside
help, there is a crucial point you need to understand. One of the
most important steps you can take to secure your financial future
is to save regularly and continually (sooner rather than later).
That’s one of the first pieces of advice any financial advisor
will give you.
But to be a good financial
advisor to yourself, you have to figure out how to accomplish that
task. As you know, this is difficult for most people. Most people
feel that it takes every dollar that comes in just to get by.
David Chilton is author of a
best-selling book on financial planning. He argues that the best
way to make sure you save regularly is to "pay yourself
The secret of
successful saving is to make the decision to have about 10 percent
of your income automatically deducted and invested before you ever
see your paycheck. Experience shows that for most
people, what you never had you will never miss.
Chilton argues that setting up
budgets to limit consumption and then saving what is left over
just doesn’t work. But setting up some sort of automatic,
compulsory savings mechanism does.
If you follow this advice, you
will become your own best financial advisor. You will be astounded at how
fast money will accumulate. And you will have taken a giant step
toward achieving adequate income in retirement. Once you
launch your financial planning by committing to the accumulation
process, you can turn to the next big question: how do I best
invest the money I am saving? Here is where outside help is often
If you take the time to educate
yourself about investing through books, seminars, etc., assistance
for making basic financial decisions may not be necessary. But
most people don’t have the time or inclination to become
knowledgeable and sophisticated investors. They would rather find
someone else to suggest what to do.
Beware of taking shortcuts,
however. A financial advisor can save you time, but finding the
right person takes time.
Shortcuts Puts You at Great Risk
The first rule about selecting a
financial advisor is that you must spend an adequate amount of
time looking for and assessing their qualifications.
Shortcuts—like following the suggestion of a friend, selecting a
name from a "top 100" list of recommended planners, or
choosing someone who is conveniently located—are risky. These
and other shortcuts may seem to be a reasonable place to be gin.
But they are no substitute for an in-depth investigation of your
options. Remember, large amounts of money are often at stake—not
to mention your financial future.
Interview more than one
advisor. As Boston Globe financial columnist Charles A.
Jaffe puts it: "The first person you talk to is almost
guaranteed to sound good. You have no basis for comparison."
Prepare a set of questions about such things as the planner's:
- investment philosophy
- planning approach and methods
- training and certification
- time to be allocated to you
- final product to be produced
- fees you will have to pay
Do some preliminary
organization of your financial situation and think about your
financial goals. To have the most useful discussions
with someone you are considering as your advisor, you will need to
have some facts at hand. Planners will need to know something
about your current situation and what you want to achieve.
Organizing your financial affairs will also help you ask the right
questions and help to clarify issues you want to see addressed in
the planning process. A list of the current value of your assets
and liabilities (a "financial statement") is a must.
Assess a planner's
prior work. Ask the financial planner you are
interviewing for copies of plans she (or he) has done for people
in situations similar to yours (with names deleted, of course).
Ask her what the plan will cost. Also, ask for the names of people
you can talk with who recently used her services. Although the
planner is not going to refer you to dissatisfied clients, you
will find it useful to learn what prior clients see as the
planner’s strong and weak points.
advisors thoroughly. When you have narrowed down your
choice, be sure to take the time to do a relatively formal
background check. Ask for a copy of both parts of Form ADV,
the back-ground materials that most advisors file with the
Security and Exchange Commission.
Part One includes detailed
information about the advisor’s business history (including
civil and criminal actions and disciplinary action taken by
federal, state, or accreditation regulatory agencies). If a
planner refuses to give you Part One, take that as a great big red
Part Two includes extensive
information on her education, various industry affiliations,
compensation, and types of services offered.
Also, contact your state
department that regulates securities or the National Association
of Securities Dealers (800-289-9999) to ask if they know of any
past problems or complaints with the planner. If the planner lists
credentials after her name (discussed in the next section), check
with the credentialing organization to be sure that the person is
a member in good standing.
In recent years, there has been a
great deal of discussion about regulation of financial planners by
state or federal governments. However, you should be warned that
there has been very little concrete action on this matter to date.
It is still possible for someone with little or no specialized
training in this area to call herself a "financial planner."
And some professionals are licensed by a state or the federal
government with regard to only one particular financial instrument
(such as insurance policies).
While there is limited government
regulation of the financial planning industry, there are many
private organizations that "credential" individuals
meeting certain requirements. Here are some of the most important
types of certification:
- CFP - Certified Financial
Planner. A CFP is a planner who has met certain
educational and experience requirements of the Certified
Financial Planner Board of Standards. They also have agreed to
abide by a code of ethics and have passed a national test
administered by the CFP Board of Standards.
- ChFC or CLU - Chartered
Financial Consultant and Chartered Life Under writer.
These designations are awarded by the American College at Bryn
Mawr, an institution sponsored by the insurance industry. The
ChFC designation is the industry’s designation for financial
planning, and the CLU indicates expertise in insurance and
related subjects. In both cases, recipients must meet
specified experience requirements and pass exams on designated
- CFA - Chartered Financial
Analyst. This designation is awarded by the Institute of
Chartered Financial Analysts to experienced financial analysts
who have passed exams in economics, financial accounting,
portfolio management, security analysis, and standards of
- AICPAPFP - American
Institute of Certified Public Accountants/ Personal Financial
Planning Specialist. Certified Public Accountants who are
members of the AICPA and have sufficient experience receive
this title after passing the institute's financial planning
- RIA - Registered Investment
Advisor. An RIA is an individual who has registered with
the Securities & Exchange Commission as an investment
advisor. This individual need not have special training in
financial training (but often does).
Financial Planners Compensated?
There are two main sources of
income for financial planners. First are the fees charged clients
for services. Second are the commissions given by companies
(insurance, some mutual funds, etc.) whose products are purchased
for clients. It is very common for a planner to get revenue from
A financial planner who collects
commissions is open to the criticism that she has an incentive to
select or recommend investments partly on the basis of the
commission offered—not solely on the quality of the investment.
While competence and performance should be the primary
considerations in selecting a planner, compensation should also be
considered—especially in cases where commissions are involved.
For example, financial planners
compensated solely by commissions may tell you that their services
will not cost you money. However, they might choose investments
with higher administrative costs or lower returns in comparison to
investments that do not pay commissions. If so, the planner's
services are indeed costing you money.
In addition to commissions
received, you should also ask whether the planner ever receives
any incentive or bonus payments associated with certain financial
Of course, the fact that
commissions or other payments are made does not necessarily mean
the investment is a bad one. Rather, it indicates that your
planner may be faced with choosing between what is best for her
and what is best for you.
Expect from a Good Planner
- A comprehensive assessment of
your current financial situation;
- Assistance in helping you
determine your financial needs and goals;
- An explanation of the
available financial products (bonds, mutual funds, IRAs,
etc.), including their income potential and associated risks;
- Development of a written
financial plan and assistance in its implementation;
- Creation of a timetable for
implementing the plan and helping you periodically re view