Time to Hire a Financial Advisor?

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By Karin Price Mueller |   April 15, 2010   |   Comment

Saving for your future is smart, but saving alone won't answer this pressing question: Will I have enough money to retire when I'm ready?

You've played with helpful online calculators, and you've projected savings rates and future income levels. A good start. You've started to create a retirement budget. Also good.

But even the most capable do-it-yourselfer can benefit from an objective overview from a competent financial advisor. It could be the best investment you ever make.

What Kind of Advisor Do You Need?
Advisors come in many shapes and sizes. Some specialize in insurance, others in taxes or investments. Titles can be deceiving and often are meaningless, says Andrew Gardener, a certified financial planner with Tanglewood Legacy Advisors in Houston, Texas.

"The last 20 years we've seen what I call 'title inflation' to the point where the teller at the bank now calls herself a wealth manager,'' he says. "'Financial consultant,' 'investment advisor,' 'wealth planner,' and every derivation of each tells the consumer nothing.''

Rather than focusing on titles, start with your needs. If you're like most people, you have questions about retirement planning, investments, taxes, estate planning and life insurance. You need an advisor who is well-versed in all of these areas.

I prefer an advisor who has the background and expertise to analyze a client's overall financial picture (and then can call in specialists if needed). If that's what you need, look for someone with a broad education rather than someone who only specializes in insurance or divorce or investments.

Start with professionals who have the Certified Financial Planner (CFP) or Certified Public Accountant/Personal Financial Specialist (CPA/PFS) designations. (See the "Advisor Who's Who: Alphabet Soup" box for more on what different professional designations mean.)

Finding Your Advisor
Skip the phone book as you start your search. Instead, ask friends and family for recommendations, but proceed with caution. Your best friend may love her advisor, and your brother-in-law may swear by another. If they've had good experiences, your circle's advisors are worth a look. But your needs and goals are different from anyone else's. Even if your friend/brother-in-law is your age, at your income level and shares your family status, you probably differ in terms of time horizon, risk tolerance and other significant considerations. As such, there is no one-size-fits-all advisor.

The next step is to consult respected professional organizations for referrals of advisors in your area. Some starting points:

• Financial Planning Association: The FPA is the preferred membership organization of many Certified Financial Planners.
• National Association of Personal Financial Advisors: NAPFA is an organization of fee-only financial planners.
• American Institute of Certified Public Accountants: The AICPA is where you can find CPAs who have the PFS credential.

Plan to interview at least three advisors. Once you have a list of names, you should check them out before scheduling any meetings:

• You can learn a lot from your state securities regulators. Every state's listing varies, but you can usually verify if an advisor holds certain licenses, if there have been complaints against the advisor, and how those complaints were resolved.
• If the advisor is a broker, you can search for similar information on the FINRA website.
• To see if an investment advisor is properly registered, whether they've had conflicts with clients or regulators, and how they're paid, read their Form ADV.

Not every advisor is registered with these organizations (it depends on the licenses they hold and the kinds of services provided), so it never hurts to check the Better Business Bureau and to Google the advisor's name.

If he or she checks out, arrange your first meeting.

The First Meeting
The advisors on your list may have impressive credentials and sparkling referrals, but that's not enough. You need to find an advisor with whom you feel comfortable talking about your hopes, your dreams and your money.

"Like travel partners going cross-country, it's important to pick someone that you can relate to, respect, and get along with for a long time,'' says Andrew Samalin, a certified financial planner with Samalin Investment Counsel in New York.

You need to feel at ease so you can share your innermost money fantasies and sometimes the ugly realities. If you can't be honest with the advisor--like admitting you went hog wild on holiday spending so it's either your credit card bill or your IRA contribution--it doesn't matter what advice he or she gives. The relationship will be doomed to fail before you even get started.

Think of it this way: Advisors are like prom dresses. You may see your dream dress and want to buy it immediately, but it's always smart to try on a few more just in case.

The first meeting should be free of charge. A good advisor will ask you to fill out a detailed questionnaire. The advisor will want to compile a snapshot of your money life: assets, liabilities, goals (such as when you want to retire or if you plan to pursue a bridge job to continue working past 65), insurance coverage, your spending and saving habits, and more.

At the meeting, the advisor should ask you a lot of questions about what you'd like to accomplish.

"Very often, the questions you are asked are more important than the answers you are given,'' says Gardener. "At the beginning, you don't yet know how good their answers will be, so pick the advisor that asks the best questions.''

Those questions should go beyond the numbers and should touch on your feelings, your wishes, your dreams, your fears and other intangibles.

You should ask a lot of questions, too. "Not only should you ask them about what they do well professionally, ask them what areas they don't feel as proficient in,'' Samalin says.

For a list of questions you should ask an advisor, peruse this listing by the Certified Financial Planner Board of Standards. Also check out the Financial Planning Association's suggestions.

At this meeting, the advisor should be forthcoming about how he or she is compensated for services. Some work only on commission, which means the advisor will only earn money if you buy products through the advisor. There's not necessarily anything wrong with commission--advisors should be paid for their services--but an unethical advisor may steer you toward products that are not necessarily in your best interest because they'll earn a bigger commission.

Advisors who work on a fee-only structure are paid solely for their time. You're essentially hiring them for advice, either by the hour or for a flat fee for certain services, or by a percentage of your assets if they manage your portfolio. Some advisors work for a combination of fees and commissions.

There's no right way to pay an advisor. What's important is that you clearly understand that part of your relationship.

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