Financial Advisors
There are several kinds of financial advisors. If you have a million dollars or more you can get “Private Wealth” services from your bank, “Private Wealth Management” firms to pay attention to you, engage with various types of hedge funds or even explore specialty investment firms. In short, you wouldn’t need to be reading my little blog for advice.
If your funds are a tad more modest then there are basically two services of which you can avail yourself of: Personal Financial Consultant and Investment Manager; those are my terms as I don’t think there are any industry standard terms for them. If you’re not comfortable managing your own money then perhaps a financial advisor is the way to go.
Let’s talk about references, bona-fides and responsibilities.
If you’re lucky enough to have a friend or colleague that you trust who is happy with their advisor then by all means explore that opportunity. Not all advisors are appropriate (or appeal) to all people but that’s a really good place to start. If you’re not lucky enough to get a referral, or a referral that worked for you, then you should interview several advisors and see which one you feel will be most appropriate. Before you engage any advisor require them to give you references. You may have to press them on this point as they may be hesitant to disclose their customers or they may refuse outright. If you can’t get them to give you any references then you should seek advice elsewhere.
Next, your advisor should be accredited. The most prestigious certification is “Charted Financial Analyst” or CFA; most of them will have this. If not, make sure that they have some other, well recognized or appropriate certification. Don’t be afraid to look them up in their organization and confirm their credentials and/or any complaints against them.
Lastly, let’s talk about responsibilities. The keyword here is Fiduciary. Financial advisors are not always required to act in your best interests. You may find yourself in a situation where they must act in your best interests for part of your portfolio (perhaps retirement accounts) but not all of it (perhaps college savings accounts).
If you read that last paragraph and are shocked and horrified then you understood it correctly!
Make sure you have a conversation with any prospective advisor about their Fiduciary responsibilities. If they say that they act as a Fiduciary then that statement will also appear somewhere in their firm’s literature; make sure that it does. If they tell you that they are not a Fiduciary but that it is merely a technical distinction or that it is actually better because it gives them more freedom, or some other such nonsense you should run, Run, RUN as fast as you can and never look back. Why would you invest with someone you can’t trust?
Personal Financial Consultant
Personal Financial Consultants usually offers a large array of services such as wills, living wills, powers of attorney, trusts, insurance, estate planning, tax services and, of course, financial planning. They charge a fee for their services. They never invest your money directly. They will give you recommendations and expect you to execute the appropriate orders in your own account with your own brokerage. That way there is no conflict of interest. Typically you will wind up with a large number of mutual funds that will give you exposure to a number of different asset classes and provide some form of diversity.
There is normally a substantial fee for the initial set of consultations and after that a smaller fee for periodic follow up visits (annual and semi-annual are common).
Investment Manager
Investment Managers usually offer fewer services than Personal Financial Consultants. They normally concentrate on the investment portion of your portfolio. You don’t pay them directly; they get paid from the companies and funds that they represent based on the amount of money that you invest.
Typically you will wind up with a large number of mutual funds that will give you exposure to a number of different asset classes and provide some form of diversity. If they invest your money in low cost funds, like index funds (we’ll talk about them later), they will charge you a fee of around 1% – 1.5%. Hey, they’re not doing this for free; someone’s gotta foot the bill and it’s going to be you!
In the case of both the Personal Financial Consultant and the Investment Manager you typically wind up with mutual funds. With modest sums of money to invest mutual funds can give you exposure to many different asset classes and provide some measure of diversity. If, however, you read my previous articles on Retirement Planning you will know that mutual funds have their downside too; namely their costs and the associated affect on your portfolio.
Next up, let’s talk about a modern investment strategy that is low cost, easy to implement, requires little/no financial expertise and will give you good return on your investment.
(It’s really true; I am not a professional financial planner. This article is meant only for illustrative purposes. You should check with your own financial advisor before embarking on any retirement plan.)