Retiree Portfolio How to Choose a Financial Advisor

There may be times when you will seek professional expertise to assist you in various aspects of your financial life. When you do, you want someone who will provide objective advice. To ensure that's what you get, you need to know how the expert you use gets paid and verify that person's educational and business background, confirm the expert's professional credentials, and determine if the person has sufficient experience.

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By David Braze (TMF Pixy)
April 16, 2001

At some point, most people will require the services of a financial expert. You may need those services because you want an expert's opinion about your retirement plans, investments, family finances, estate plans, insurance coverage, or income taxes.

Experts in these areas can guide you through a maze of laws, rules, and regulations. Their suggestions and recommendations can verify that your plans are sound, your assumptions are valid, and the various aspects of your finances are free of conflict with one another.

Today, the financial services industry recognizes that consumers increasingly expect broader-based financial services, so these providers have changed the way they market themselves to the public. Bankers, brokers, accountants, insurance agents, and even con artists now call themselves financial consultants, financial advisors, financial planners, investment consultants, investment advisors, or some similar title. And, as can be expected, many assert they provide the best possible personal financial planning services found anywhere.

Well, maybe they do. Maybe. But there's more to providing personal financial services than selecting a job title that attracts consumers. As that consumer, you need objective advice, and you also need to assure yourself that the financial professional you select possesses the necessary experience, expertise, and integrity. How, then, will you find the person you need?

First, be sure of the service you want. You don't ask a tennis pro how to improve your bowling. Likewise, don't pepper your insurance agent with tax questions, or your investment advisor with highly technical estate-planning questions. Define your problem precisely, and then find the person who may help you solve it.

One way is to seek a referral from another professional. The pros work together, know each other in many cases, and have opinions of one another.

We offer a service called TMF Money Advisor that combines elements of professional advice with online learning and money management tools. Check it out and see how it works.

Alternatively, discuss the issue with your family, friends, and business associates. When at all possible, speak with someone who has similar financial issues. That will help you receive a referral to the type of pro that you're looking for. Your friends aren't generally bashful about praising (or trashing) pros they use or have used.

If those resources don't work, get the names of local professionals from their respective professional associations. Try the National Association of Personal Financial Advisors (NAPFA), the Financial Planning Association (FPA), the American Institute of Certified Public Accountants (AICPA), or the National Association of Enrolled Agents (NAEA). All will give you the names of pros in your area.

If all else fails, go ahead and crack open the yellow pages and look under the heading of the service you desire (e.g., estate planning, insurance, investments, income tax).

Now that you have the name, what's next? Call and make an appointment. The first hour should be free to discuss what you want done. Use that hour to your advantage by preparing in advance. Make sure you have -- in writing -- your net worth statement (i.e., current listing of your assets and liabilities), income statement (current listing of your monthly/annual income and expenses), and your objectives. The pros need that info anyway, so by having it in advance you'll save yourself $60 to $150 per hour (more in some areas).

Take those materials to the interview just in case you need them. During the interview, outline what you need accomplished, and begin asking questions by using our favorite Foolish acronym: FACE.

F = Fees
How much will the expert charge? How does he or she get paid? Know this in advance so there are no surprises. Folks such as estate planning attorneys and tax advisors are generally paid on an hourly basis, but other financial pros may be paid by commission only, fee and commission, fee only, fee offset, or salary plus bonus/commission.

When commissions are involved, you buy something based on the advisor's recommendation and that person will collect a percentage of your purchase price. Be wary of advisors paid by commissions; their incentive is often to gain the commissions, and not necessarily to provide you with the best services and products.

A fee offset means the advisor will charge you an up-front fee, but if you buy a product that the advisor recommends, then any commission the provider earns is subtracted from that fee. Buy enough of the product, and eventually your entire up-front fee will be refunded.

A new twist in today's financial services industry is to describe oneself as a "fee-based" advisor, consultant, or planner. Don't be fooled by the term. It does not mean "fee only." Instead, it's a term used by many who are compensated by both service fees and commissions. In our opinion, "fee-based" is a misleading term and can be used to obscure the fact the service provider receives part of his or her compensation through commissions.

Which person will provide you the most objective advice? All can. But those who have no vested interest in whether you buy something tend to get our nod of approval first. There is far less potential for any overt or latent bias in what that person recommends.

A = ADV Form
This is a document you should request from any person who provides financial planning services and manages investment assets of $25 million or more. It's a form he or she (or the firm principal) files with the Securities and Exchange Commission to disclose educational and business background, compensation, and investment methodology. Those who manage less than $25 million in assets must disclose similar information, but they register with their own state's securities agency. The individual provider or the firm principal is not registered with the SEC or the state securities agency? Leave. Get out of the office. Don't do business with that person or firm under any circumstances.

But if the ADV Form (or the state securities agency equivalent) is available, then look at the information it contains. Part II is particularly informative, and will give you a wealth of information about the provider. Begin with Question 1C, which tells you if the person receives any type of commission as a source of compensation. Then verify the response to that question by reviewing Schedule F. Sometimes a firm will say it provides "fee-only" services, but Schedule F will indicate employees of the firm also earn commissions as insurance agents or as registered representatives of a brokerage firm. You should know that fact in advance.

Along the same lines, any professional who sells securities will have a Central Registration Depository (CRD) file. The CRD will give you a 10-year history of the provider, including any disciplinary actions taken against that person.

You may obtain CRD information through your state securities agency. It's also available in a descriptive form online through the National Association of Security Dealers (NASD). The NASD Regulation Public Disclosure Program provides information derived from the Central Registration Depository system (CRDSM), a registration and licensing database used by regulators throughout the securities industry to collect data about securities firms and their brokers.

C = Credentials
Look for the diplomas on the wall and the initials after the name. You want to see something like Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), or Certified Public Accountant (CPA) with a specialty designation as a Personal Financial Specialist (PFS). These designations don't tell you the person does good work, but they do say the person has extensive training and experience.

The sad fact is anyone can call him- or herself a financial planner in most states. There is no licensing requirement and very little regulation, but the charlatans don't have and can't use these designations, so the credentials become your seal of quality. For more on credentials and what they really mean, check out our feature on the topic.

E = Experience
How long has the financial professional been doing business in this location/town/area? The longer, the better. We like five years. Why? It tells us they must be doing something right because no one has run them out of town on a rail yet.

Have they done similar work in the past? If so, ask for a sample of that work and get the names of three clients you can call for references. The good providers will comply. Review the sample and call the people. As to the latter, we all know the provider is only going to give you the names of folks who think highly of him/her. Call anyway and ask one question: What don't you like about the services you receive(d)? People are basically honest, and they'll tell you.

Use the above comments as your guideline when seeking professional financial services, and we're sure that you'll come up with the expert you need, and one with whom you are comfortable. Will it happen overnight? Not necessarily, unless you have a really productive day. But so what? This isn't something that you want to hurry. When you need expert advice, you want to be certain you've found the right person.

See you next week. In the interim, post your comments on the Retirement Investing or the Retired Fools board.

Best to all... Pixy

Dave Braze is a financial planner. In fact, some of his best friends are also financial planners. Therefore, forewarned is forearmed. The Motley Fool is all about investors writing for investors because now we know what we should ask Dave or his friends before engaging them on a professional basis. Think he or they would pass our test?