Making the Best Possible Decision When Selecting a Financial Advisor
When it comes to investing, there are many options to choose from. If you decide to invest in the stock market, you could do it yourself, talk to a financial planner or let a wealth manager manage your money.
Most people think wealth managers, financial planners, money managers, brokers, etc. are all the same. Part of the problem is that titles for financial sales reps are completely unregulated. This means that brokers, annuity salesmen and insurance agents are all free to call themselves advisers, financial consultants, financial planners or whatever strikes their fancy.
Here is the difference:
Financial Planners. This term is used very loosely, and almost anyone can call themselves a financial planner. They usually gather your information and then try to sell you products, because their pay is based on commissions. It makes more sense to talk to a Certified Financial Planner (CFP), because they typically have more training and experience.
Wealth Managers. Advisers who are wealth managers usually have more training, and they actually manage assets, such as a mutual fund or a hedge fund. Wealth managers make investment decisions, build portfolios and create investment strategies. If you need to meet with a wealth manager, it's best to talk with a Chartered Financial Analyst (CFA), because they have more training and expertise.
How to Decide
To make sure you don’t get stuck with a salesperson when you are really looking for someone to manage your money, make sure you ask these five questions before making a decision:
Does this advisor have fiduciary responsiblity? Fiduciary advisors have a legal obligation to put your interests ahead of their own. Sales reps selling insurance, mutual funds or other financial products are most likely not fiduciaries. A minority of all financial advisers actually meet the fiduciary requirement. Registered Investment Advisors and Investment Advisor Representatives are fiduciaries.
How many years have they been managing money? Markets change constantly and are notoriously difficult to navigate. Ideally, your fiancial advisor should have experience investing in both good markets and bad markets. In the final analysis, you are paying an advisor for their experience.
Can your financial advisor show you their track record or performance history? Legitimate advisors will be able to produce a clear report that shows exactly what they’ve done for their clients over the years. Showing you the track record of a mutual fund, a hypothetical model, or anything else that they have recently started selling does not count. They need to show you their own track record, which is a composite of the results of their previous clients’ investments. Any advisor who refuses to show you at least a five year track record of their performance should be crossed off your list.
Are they paid on commissions? Many commission-based salespeople are honest individuals. However, in the financial services industry, the worse the product, the higher the commission. The easiest way to avoid those “bad products” and eliminate potential conflicts of interest is to avoid salespeople who receive commissions. By working only with advisers who are paid through management fees and not commissions, you can make sure their interests are aligned with yours.
Do they charge a surrender charge if you decide to leave? If there is a surrender charge, there was almost certainly a commission. If there was a commission, you are not dealing with a fiduciary advisor. You should be free to move your money out of an investment if you are dissatisfied. This means you should never own a product with a surrender charge.
Following these basic tips will help you keep your money and find a great financial advisor.
