Selecting a good financial adviser is one of the most important financial decisions life requires you to make. If you blow this one, it can cost you and your family lots of money and require you to work well into your golden years. Getting this decision right will help you live happily ever after.
At the beginning of the process, be introspective. Honestly evaluate yourself, your abilities and the time you are willing to devote to financial affairs. Then decide how much advice you need. If you are a somewhat knowledgeable financial person, lawyer or CPA, perhaps all you need is to consult with an adviser periodically on an hourly basis to fill in the gaps of your knowledge (like estate or tax planning) or to use as a sounding board for your own investment ideas. If you go this route, you will need to be very attentive to your financial affairs and make notes of questions to be asked at your next consultation. Be prepared to spend $250 to $500 per hour for this type of relationship.
Perhaps you are someone who doesn’t want to know much about investing and doesn’t have time to devote to watching your investments every week. You need an asset manager. There are lots of names for potential asset managers, including stockbrokers, investment advisers, financial planners and insurance agents.
It is important to understand the types of professional licenses and designations held by your prospective adviser. For example, someone who is only an insurance agent can only sell you insurance products. In many investment situations, you don’t need another insurance product but that is all the agent can sell. Investment advisers and stockbrokers usually can sell you a wider variety of investment products and advice that, in theory, should be more appropriate.
The biggest sin regularly committed in the business is not being totally honest with the investor as to how the adviser is compensated. Why the mystery? Perhaps someone is concerned that, if the investor is told how an adviser is paid, the investor will question whether a recommendation is more in the interest of the adviser than the investor. If you are doing your job as a careful investor, you will ask about compensation in your first meeting with a prospective adviser (and almost every subsequent meeting) and keep an eye on it to confirm what you have been told.
Here are the options: If you are a somewhat sophisticated person and need only the hourly advice discussed above, then you pay the agreed-to hourly fees. If you have sought a comprehensive financial plan from an adviser, you might pay a fixed fee of $2,500 to $10,000 for such a plan. If you are buying one or more investment products from an adviser, you might pay a commission for each transaction.
Commissions vary widely and can be as low as $10 per trade at a discount brokerage to as high as 10 percent of the principal dollars invested. Know what you are paying on each transaction! Many investors have experienced severe heartburn as a result of advisers making recommendations to line their own pockets with commissions at the expense of the investor.
Finally, the industry trend for many years is to manage assets on a fee-based model. Depending upon the total dollars you have to invest, this annual fixed fee can be as low as 0.5 percent up to 2 percent of assets under management. The fee-based approach usually puts the investor and adviser on the same side of the table and results in much less funny business perpetrated by advisers. This approach should be seriously considered by most investors with significant assets.
Before doing business with a prospective financial adviser, you must check him or her out. First, go to the website www.brokercheck.com and look for any negative signs. Red flags should arise if you see a history of customer complaints, personal bankruptcies filed by the adviser, or various liens or judgments. Prior regulatory actions should also cause you to look elsewhere for advice. You should also check the adviser out on the internet. Go to your favorite search engine and see what comes up.
Finally, you must feel like you have a good fit. Listen to your gut. If there is something in an initial or subsequent meeting that causes you to wonder if this is the right person, go somewhere else. Someone who talks way over your head and doesn’t connect shouldn’t be your adviser. There are too many other fine choices in this industry. I hope you find one.•
Maddox is managing partner of Maddox Hargett & Caruso, a Fishers law firm representing investors in stockbroker arbitration and securities litigation.