How to Choose a Financial Advisor
Finding a reliable source for investment advice has always been a challenge. It’s especially difficult in today’s investment environment. There’s no shortage of places to turn for advice. The shelves at the bookstores are filled with “experts” offering their perspectives on how and where to invest. The financial pages of the newspapers and magazines are crowded with articles and advertising hype. Not to mention the family members and friends with their own particular brand of wisdom.
Where should you turn for professional, trustworthy guidance? The choice to put part of your financial future in someone else’s hands should not be made hastily or without gathering some crucial information. Here are several suggestions to help you in your quest to find the financial advisor that’s right for you.
Parents who hire a nanny for the children talk to many applicants and are scrupulous about checking references. You should be no less careful when entrusting your money to a stranger. You should expect that the financial advisor that you choose will undergo a thorough study of your financial picture, your tax situation and your long-term goals. Develop a custom-tailored investment strategy based upon these factors. Select the investments to implement that strategy. Monitor your holdings, making changes or new recommendations whenever new developments appear to make changes desirable.
Look for Depth
You will want to look for someone with considerable experience, with a solid theoretical background as well as real-world practice in investment management. Your advisor should be able to draw upon a wide variety of investment choices, not just a family of investment products. You should feel comfortable talking to your advisor. Make sure that he or she listens to you. A successful investment management relationship is based upon clear and consistent communication. Test the advisor with a few questions. For instance, ask the advisor about his or her approach to investing. Is that approach plainly expressed and clearly articulated? Does that philosophy match your own?
Understand the Compensation Structure
Having a firm grasp on how your financial advisor is compensated may well be the single most important issue for you to understand. Stockbrokers, for instance, are typically paid commissions based upon the number of trades executed for clients. So brokers are transaction driven; the greater the number of trades that they make, the greater their compensation.
Brokerage firms also may offer wrap accounts—which combine professional money management, securities trading and periodic performance reports, all wrapped up in a package for which the investor pays a single annual fee, in place of per transaction fees. Fees are based upon the assets in the account and can vary widely based upon the broker and the size of the account.
Financial planners have sprung up as a source of investment advice in recent years. Their recommendations may carry a fee, or they may earn commissions when the products that they recommend are purchased. Some financial planners earn fees both ways.
Many institutions charge annual fees for investment services, and the fees are based upon the amount of assets under management. A graduated fee schedule is normally employed, which means that larger accounts pay lower fees, on a percentage basis, than smaller accounts. Similarly, investment counselors or advisory firms impose a percentage fee, based upon the amount and type of assets being managed.
Look for someone who offers personalized service. Wrap accounts, for example, generally, require an investor to review an assortment of model portfolios created by different money managers and to choose the one that’s closest to his or her needs. A financial advisor should be available to review your needs and preferences in detail, then tailor our investment selections accordingly. As your situation changes, appropriate adjustments to your portfolio can be made.
Consider, too, what the advisor has to offer in terms of experience, quick access to research and technological support. It’s a combination unlikely to be available at small brokerage houses or through financial planners.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
The consultants of Key Financial Group, LLC are financial advisors with LPL Financial LLC.
Investment products are: NOT FDIC / NCUA Insured, NOT Bank / Credit Union Guaranteed, May lose value, Not Guaranteed by any Government Agency, and NOT a Bank / Credit Union Deposit. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availabilty and change in price. There is no guarantee dividends will be paid on a stock in the future. Distributions from retirement plans and IRAs taken prior to 59 1/2 may be subject to a 10% early distribution penalty. Past performance does not guarantee future results.
© 2006 M.A. Co. All rights reserved.