If you are thinking of using the services of a financial advisor, here are some things that you should keep in mind to avoid trouble down the road.
The following is a post by MPFJ staff writer, Toi Williams, who is a professional finance blogger for MarketBeat. She has backgrounds in personal finance, sales, and real estate.
You can certainly go it alone when it comes to managing your money, but if you do not have a lot of experience in the world of finance, you could do more harm than good. Mastering personal finance requires many hours of research and learning. This is why many people choose to pay for financial advice.
If you prefer to use the services of a financial advisor, there are some things that you should keep in mind.
Why Pay For Financial Advice?
A good financial advisor can help you navigate through the different financial strategies available and keep you on track to realizing your financial goals. If you do not have a lot of time to devote to financial management, your financial advisor will make the necessary moves for you and detail their actions in a comprehensive financial report issued quarterly. As you get older, your financial needs will become more complicated. In all of these cases, paying for financial advice can be invaluable.
Most financial advisors begin by having you fill out an extensive written questionnaire that helps the advisor understand your financial situation. Included in the questionnaire will be questions about your assets and liabilities, your current and future income sources, and any long-term financial obligations. Accuracy on this questionnaire is important, as it will guide the advisor in managing your finances.
The questionnaire will also cover topics such as your risk tolerance and risk capacity. This will help the advisor determine your investment asset allocation for your portfolio and how that should change over time. The answers from this questionnaire will be used to develop a plan to meet your life and financial goals.
Finding A Financial Advisor
There are many different types of financial advisors available to provide you with financial advice. Some focus on retirement or estate planning, while some others focus on investing and the best ways to help your money grow. Nearly anyone can call themselves a financial advisor, but this does not make them the best person to handle your money.
The most significant credential for a financial advisor is being a CFP (short for certified financial planner). To be accredited as a CFP, the advisor must pass a rigorous test administered by the Certified Financial Planner Board of Standards. This test focuses on the specifics of personal finance and the ethics of being a financial advisor. To maintain their designation, they must commit to continuing education on finance and ethics.
There are a variety of ways available for finding a good financial advisor. Some people choose to ask others in the same stage of life that they trust to recommend an advisor that they have used for themselves. Others choose from a list curated by the National Association of Personal Financial Advisors (NAPFA), which only lists advisors that have pledged to act in their clients’ best interests at all times and do not accept commissions. Another good resource is the Garrett Planning Network, a group of certified financial planners who make themselves available for smaller projects for an hourly fee.
Paying For Financial Advice
Most people choose one of two ways of paying for financial advice. Some choose to pay commissions for the advice. A commission is a fee paid whenever someone buys or sells a stock or other investment. However, if they profit from steering you into particular products, there is a chance that their advice may not be unbiased or in your best interests.
Other financial advisors charge an hourly or flat rate for their services. For example, you might pay them a flat fee of $1,500 for creating an individualized financial plan for you. In other cases, you could pay an annual fee, typically about 1 percent of assets under management, for them to manage your finances. If your financial planning needs are minimal, you could save money by choosing an advisor that charges by the hour.
Questions To Ask A Financial Advisor
Have you taken a fiduciary pledge? - Financial advisors who aren’t fiduciaries are not necessarily required to act in a client’s best interests at all times. Many are held to a lesser standard, called the sustainability standard, which means that anything they sell you merely has to be suitable for you.
What are your credentials? – It is fairly easy to verify credentials for a financial planner. A simple Google search can show you who administers the credentials claimed and you can contact the administrator to verify that the credential is valid.
How are you paid? - Most financial advisors charge a management fee based on the total investment amount they are managing for you. Make sure there are no hidden fees that you may be hit with unaware. If your advisor's answer about his or her business model is vague or takes a long time to explain, that's a major red flag that they are not the right advisor for you.
Has any regulatory body or investment-industry group ever put you under investigation? – If the answer to this question is yes, that is another red flag that should not be ignored. Even if the advisor has not been convicted of a crime, if there has been an investigation started, then there is a chance that the advisor did something questionable.
How will your advice help me with taxes? - A good financial advisor will optimize your portfolio for tax purposes. There are many financial products available with different tax obligations and knowing what these are is instrumental to saving money when it’s time to pay the taxes.
You can protect yourself and your portfolio by asking the right questions.
***Photo courtesy of https://flic.kr/p/Ym24FC​
