Having a good financial adviser in tune with your specific situation is vital. But, like any business or professional relationship, you should be diligent about with whom you chose to work. Here are steps for both finding the right fit as well as verifying the adviser's record and fees.
Find the right fit. Your lawyer, accountant, friends or family can recommend financial advisers, but you still should ask a lot of questions to be sure the person you hire is a good match.
- The fiduciary standard. Not every advisor has your best interests at heart. Many advisors may suggest investments that are merely suitable for you. But fiduciaries, such as a registered investment advisers those who are paid to advise you rather than just make recommendations are legally bound to put their clients first. If your adviser isn't professional certified to meet a fiduciary standard, ask for a commitment in writing that your interests will be put first.
- Credential creep. Certified financial planners and certified public accountants must take extensive coursework and pass lengthy exams. But many other credentials, such as master financial planner and certified retirement financial adviser, require far less study and simpler or no exams. Ask about your adviser's credentials and what they mean, and if they require continuing education.
- Cost differences. Many financial advisers make their money on commissions from selling you investment products or insurance. You'll be better off with a fee-only adviser, who charges a retainer, by the hour for services or based on a percent of assets.
Track records. Advisers tend to have their own approaches and strategic world views, and you'll want to understand your adviser's approach to be sure you're working with the right person. That means doing some background work.
- Background checks. You can check whether an adviser has ever been disciplined through the Securities and Exchange Commission or the Financial Industry Regulatory Authority.
- Reference points. Ask to talk to some of the adviser's clients. Financial advisers should readily provide names of people they already work with.
- Range of service. Some advisors only manage investments. But a good financial planner will review your entire financial life, including insurance policies and work benefits, and then help you with budgeting, taxes and your estate, as well as your investments.
Money matters. Advisers approach investing in many different ways: Some tailor financial plans to each individual and others put all their clients in the same investments. You'll want to be sure the adviser's method fits you.
- Managing details. If the adviser takes over management of your money, you'll probably pay about 1% to 1.5% of your assets' value for the service, depending on how much is managed and how much is invested in stocks. You should fully understand the adviser's investment philosophy.
- Down markets. Given that no one escaped 2000-2010 unscathed, ask your adviser how his or her portfolios did and what adjustments were made, as well as what would be done differently in retrospect. (Read more on building an investment portfolio.)
- Attention, please. How much hands-on attention you want is up to you. You should sit down with your planner at least once a year to thoroughly review your financial situation. Check in for updates at least every six months, or quarterly if your situation is complex. You should also get a call when the market is volatile or dropping sharply.
What not to do. Don't go on autopilot. Working with an adviser can be incredibly valuable for your financial life, but you still have to pay attention.
- Don't go with the first person you meet. Given the many types of advisers and responsibilities, you should interview a few different candidates before what style works best for you.
- Don't leave everything to the adviser. You need to be comfortable with the investments and decisions being made even if you don't feel particularly savvy. No one else cares as much about your finances as you do.
- Don't write investment checks to your adviser. Checks that are to be deposited to your investment account should be written to the account's custodian, not to an individual. Know the name of the custodian, how to contact it and your account numbers.
For more to read: You may find advisor names from various professional websites, such as the National Association of Personal Financial Advisors, the Certified Financial Planner Board of Standards or the Financial Planning Association.
Adapted from The Wall Street Journal Guide to the New Rules of Personal Finance, by Dave Kansas, (HarperCollins, 2011) and The Wall Street Journal. Guide to a Fresh Start, by Karen Blumenthal (Three Rivers Press, Dec. 2011).