Personal Finance in Your 20s & 30s For Dummies
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The main question you have to ask yourself is whether you even want to use a financial advisor. The following discussion helps you answer that question, locate quality professionals, and figure out what to ask before you hire.

Preparing to hire a financial advisor

You're your own best financial advisor. However, some people don't want to make financial decisions without getting assistance. Perhaps you're busy or you simply can't stand making money decisions. And if you shy away from numbers, a good planner can help you.

Before you hire a financial advisor, you need to understand the following points:

  • Educate yourself. You need to know enough about the topic so you can at least tell whether the financial advisor you may hire knows his stuff. For starters, how can you possibly hope to evaluate the expertise of a particular financial advisor if you're not at least modestly educated on the topic yourself? Most personal financial decisions aren't that complex, so the more you know, the more responsibility you can take for making the best decisions for your situation.
  • Understand how compensation creates conflicts of interest. When financial consultants/advisors sell products that earn them sales commissions (for example, investments, insurance, and so on), that arrangement can easily bias their recommendations. Financial planners who perform ongoing money management have a conflict of interest as well, because anything that takes away money for them to manage (for example, paying down debt, buying a home or other real estate, and so on) is of less interest to them.
  • Ask questions before hiring an advisor. Take referrals as leads to check on. Never take a referral from anyone as gospel. Do your homework before hiring any advisor.

A quality financial planner doesn't come cheaply, so make sure you want and need to hire an advisor before searching for a competent one. If you have a specific tax or legal matter, you may be better off hiring a good professional who specializes in that specific field rather than hiring a financial planner.

Recognize that you have a lot at stake when you hire a financial advisor. You're placing a lot of trust in his recommendations. The more you know, the better the advisor you end up working with, and the fewer services you need to buy.

Finding good financial advisors

So where and how can you find the best financial advisors? Here are three places to start searching:
  • The American Institute of Certified Public Accountants Personal Financial Specialists: The AICPA (888-777-7077) is a professional association of CPAs. The organization compiles a list of its members who have completed its Personal Financial Specialist (PFS) program, many of whom provide financial advice on a fee basis. Competent CPAs understand the tax consequences of different choices, which are important components of any financial plan. On the other hand, keeping current in two broad fields can be hard for some professionals.
  • The National Association of Personal Financial Advisors: The NAPFA (888-333-6659) consists of fee-only planners. Its members aren't supposed to earn commissions from products they sell or recommend. However, most planners in this association earn their living by providing money-management services and charging a fee that's a percentage of assets under management. Most have minimums, which can put them out of reach for some people.
  • Personal referrals: Getting a personal referral from a satisfied customer you trust is one of the best ways to find a good financial planner. Obtaining a referral from an accountant or attorney whose judgment you've tested can help as well. Remember, though, that regardless of who makes the referral, you should do your own investigation. Ask the planner the questions I list in the next section, "Interviewing advisors." Remember that the person who makes the recommendation is (probably) not a financial expert, and the person may simply be returning the favor of business referrals from the financial advisor.

Interviewing advisors

Take your time and fully interview any prospective advisor you may hire with the following important questions:
  • What percentage of your income comes from commissions, hourly client fees, and client money-management fees? If you want objective and specific financial planning recommendations, give preference to advisors who derive their income from hourly fees. Many counselors and advisors call themselves fee-based, which usually means that they make their living managing money for a percentage. If you want a money manager, you can hire the best quite inexpensively through mutual and exchange-traded funds. If you have substantial assets, you can hire an established money manager.

Advisors who provide investment advice and manage at least $100 million must register with the U.S. Securities and Exchange Commission (SEC). (Advisors who manage smaller amounts are often required to register at the state level.) You can find out whether the advisor is registered and whether he has a track record of problems by calling the SEC at 800-732-0330 or by visiting its website. Otherwise, advisors generally must register with the state in which they make their principal place of business. They must file Form ADV, otherwise known as the Uniform Application for Investment Adviser Registration. You can ask the advisor to send you a copy of Form ADV, which includes such juicy details as a breakdown of where the advisor's income comes from, the advisor's relationships and affiliations with other companies, the advisor's education and employment history, and the advisor's fee schedule.

  • What work and educational experience qualify you to be a financial planner? A planner should have experience in the business or financial services field and should also be good with numbers, speak in plain English, and have good interpersonal skills. Common designations of educational training among professional money managers are MBA (master of business administration) and CFA (chartered financial analyst). Some tax advisors who work on an hourly basis have the PFS (personal financial specialist) credential. The CFP (certified financial planning) degree is common among those focusing their practice on financial planning.
  • What is your hourly fee? The rates for financial advisors range from as low as $75 per hour all the way up to several hundred dollars per hour. If you shop around, you can find fine planners who charge around $100 to $150 per hour. Focus on the total cost you can expect to pay for the services you're seeking.
  • In addition to financial advisory services, what other services do you perform (such as tax or legal services)? Tread carefully with someone who claims to be an expert beyond one area. The tax, legal, and financial fields are vast in and of themselves, and they're difficult for even the best and brightest advisor to cover simultaneously. An exception is the tax advisor/preparer who performs basic financial planning by the hour. Likewise, a good financial advisor should have a solid grounding in the basic tax and legal issues that relate to your personal finances. Large firms may have specialists available in different areas.
  • Do you carry professional liability insurance? If the advisor doesn't have liability insurance, she has missed one of the fundamental concepts of planning: Insure against risk. After all, you want an advisor who carries protection in case she makes a major mistake for which she's liable.
  • Can you provide references from clients with needs similar to mine? Interview others who've used the planner. Ask what the planner did for them, and find out what the advisor's strengths and weaknesses are. You can find out a bit about the planner's track record and style.
  • Will you provide specific strategies and product recommendations that I can implement if I choose? This question is crucial because some advisors may indicate that you can hire them by the hour but provide only generic advice. Ideally, find an advisor who lets you choose whether you want to hire her to help implement her recommendations after she presents them. If you know you're going to follow through on the advice and you can do so without further discussions and questions, don't hire the planner to help you implement her recommendations. On the other hand, if you hire the counselor because you lack the time, desire, and/or expertise to manage your financial life, building implementation into the planning work makes good sense.

About This Article

This article is from the book:

About the book author:

Eric Tyson, MBA, is a renowned finance counselor, syndicated columnist, and author of numerous bestselling financial titles.

Tony Martin, B.Comm, is a nationally-recognized personal finance, speaker, commentator, columnist, management trainer, and communications consultant. He is the co-author of Personal Finance For Canadians For Dummies.

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