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Finding a financial advisor

Financial advisors introduction

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 first."

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 needed.

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.

Taking 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 used
  • training and certification
  • time to be allocated to you
  • final product to be produced for you
  • 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.

"Investigate" 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 warning light.

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.

Types of Financial Planners

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 topics.
  • 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 conduct.
  • 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 exam.
  • 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).

How Are 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 both sources.

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 product promotions.

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.

What to 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 your progress.


Disclaimer:  These pages are created to inform and educate the public only.  They are not and should not be considered legal opinions or advice.  You do not and cannot have any client-attorney relationship with SeniorMag or any of its employees.  You should not act upon legal advice found on SeniorMag and are advised to seek professional counsel before taking any action based upon information found on this site. 

Source: AOA

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