Reader’s Question: I need help! The world of personal finances and investing has become so complex that I feel there is no way to stay abreast of all the different types of investments and investment/financial planning strategies. I know the best athletes all have coaches so it seems logical to hire an investment and financial planning ‘coach’ but I’m not sure how to select the best one for me. What do you recommend?
Answer: I can think of few decisions more important than whom you choose to help you manage your money and personal finances. Here are the 5 main criteria I recommend that you consider:
· Experience. In the area of investing and personal finance, there is simply no substitute for experience. You’ve heard the saying, “You don’t know what you don’t know” and what you don’t know about investing can cause lots of problems. And this ‘knowing’ comes from both observing and living through the various market cycles which can last for three to ten years. Personal financial planning has a similar learning curve. I feel no one should be investing other people’s money or giving financial advice until they have been mentored by a seasoned professional for a minimum of three to five years. Ideally, you should insist in a minimum of ten years’ experience from your professional advisor because over that period of time the advisor will have lived through a full boom to bust to boom market cycle and gathered a wealth of knowledge and experience.
· Credentials. Having an advanced degree or designation is certainly no guarantee of good advice but it does indicate that the advisor has taken definitive steps to enhance his or her knowledge in the field of their choosing.
o CFP. For financial planning, the ‘gold standard’ is the Certified Financial Planner Designation (or CFP®). CFP®’s must pass a national competency exam, have a minimum of three years of qualified experience and complete thirty hours of continuing education every two years.
o CPA. For tax planning, the Certified Public Accountant is the gold standard. In addition to expertise in income tax matters, many CPA’s also have a depth of knowledge in personal financial planning.
o CFA. The Chartered Financial Analyst designation is one of the most challenging designations to achieve and focuses on securities analysis.
Ideally, the advisor you choose will have at least one of the above credentials.
· Fiduciary. As a legal fiduciary, an advisor is required to put your interest ahead of his or her own. Of the hundreds of thousands of advisors in America, most are not legal fiduciaries. Advisors registered with the Securities & Exchange Commission (SEC) are legal fiduciaries under the 1940 Securities Act. All Certified Financial Planners sign a biannual oath acknowledging a fiduciary relationship with each client. CPA’s, trust officers and CFA’s all also act in a fiduciary capacity with their clients. Ask your advisor if their relationship with you is one of a fiduciary…then get it in writing.
· Compensation. I visited with a prospective client recently and when I asked how her current advisor was being paid for his services and her response was, “I have absolutely no idea!” This is all too often the case yet compensation is one of the most important criteria for evaluating your advisor. A recent study by the Securities & Exchange Commission stated that customers and clients want to know if an advisor stands to profit from recommending a particular product or if they will benefit more from recommending one product over a similar product. As a consumer you have a right to know and an obligation to ask for it is in the compensation that you’ll most likely uncover an advisor’s potential conflict of interest. Don’t accept vague, generalized answers. In the financial advisor’s world, compensation typically falls into one of three areas:
o Commission only- the advisor sells the customer a product and receives a commission;
o Fee only- the advisor receives a fee for investment management, typically expressed as a percentage of the money he or she is managing for the client or a fee for financial planning work expressed as an hourly rate or set fee based on scope of work;
o Fee plus commissions- the advisor charges fees as well as receives commissions for selling products.
Whether you’re hiring a financial advisor, attorney, CPA, insurance agent, stock broker or banker, insist on full disclosure of all compensation (both dollar amount and percentage) so that you can assess where a conflict of interest may arise.
· Chemistry. In most cases you’ll want to choose a team of advisors to work with for your lifetime so it’s important to choose people that you enjoy working with. The best way to accomplish this is to ‘interview’ several under each category and find the one who you think is best for you based on all the criteria we’ve discussed. Most advisors will meet with you for an initial meeting free of charge.