Finding a Qualified Financial Advisor

• Financial advisors introduction

• Taking shortcuts puts you at great risk
• Types of financial planners
• How are financial planners compensated?
• What to expect from a good planner

Financial advisors introduction

Start saving regularly and as early as you can. This is the first piece of advice most financial advisors offer. Before you think about outside help, understand this: everything else depends on it.

Most people struggle to make their money work. They live paycheck to paycheck, convinced there's nothing left to save.

David Chilton, author of "The Wealthy Barber," recommends a simple approach: "pay yourself first."

Set up automatic transfers to move about 10 percent of your paycheck into savings or investments before you see it. Most people don't miss money they never had.

Budgets that rely on willpower—cutting spending and saving what's left—rarely work. Automatic, mandatory saving does.

This approach makes you your own best financial advisor. You'll watch your money grow and see how much closer you are to retirement. Once you've built a habit of saving, the next question becomes: where should this money go? That's when you might need help.

If you educate yourself through books and seminars, you may not need an advisor for basic decisions. Most people don't have the time or desire to become sophisticated investors. They'd rather have someone else handle it.

But don't rush. A good advisor saves time, but finding the right one takes time.

Taking shortcuts puts you at great risk

Spend time evaluating any advisor's qualifications before you choose one.

Shortcuts—taking a friend's recommendation, picking from a "best of" list, or choosing someone nearby—are tempting but risky. They might feel like a reasonable start, but they're not enough. Your money and your future are at stake.

Interview more than one advisor. Charles A. Jaffe, a financial columnist, notes: "The first person you talk to is almost guaranteed to sound good. You have no basis for comparison." Prepare questions about:

• investment philosophy
• planning approach and methods used
• training and certification
• time the planner will spend on your account
• what the final plan will look like
• fees charged

Get your finances organized and clarify your goals. Before meeting with advisors, gather basic facts: your current assets and liabilities (a financial statement), income, expenses, and what you want to achieve. This preparation helps you ask better questions and understand what issues matter most to you.

Review past work. Ask the advisor for sample plans (with names removed) from clients in situations similar to yours. Ask what the plan costs. Request names of recent clients you can contact. The advisor won't refer you to unhappy clients, but you'll learn what they see as strengths and weaknesses.

Check the advisor's background. Once you've narrowed your choices, do a background check. Request both parts of Form ADV, which most advisors file with the Securities and Exchange Commission.

Part One shows the advisor's business history, including any civil, criminal, or disciplinary actions from federal, state, or professional agencies. If an advisor won't provide this, that's a red flag.

Part Two covers education, professional affiliations, compensation structure, and services offered.

Also contact your state's securities regulator or the National Association of Securities Dealers (800-289-9999) to check for past complaints. If the advisor lists credentials, verify with the issuing organization that they're in good standing.

Types of financial planners

Government regulation of financial planners is minimal. Someone with little training can legally call themselves a financial planner. Some are licensed only for specific products like insurance. However, private organizations set standards and certify planners who meet their requirements. Here are the main certifications:

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• CFP (Certified Financial Planner): The CFP Board of Standards requires specific education and experience, a code of ethics agreement, and passing a national exam.
• ChFC (Chartered Financial Consultant) or CLU (Chartered Life Underwriter): Awarded by The American College, these show expertise in financial planning and insurance. Both require specific experience and exam passage.
• CFA (Chartered Financial Analyst): The Institute of Chartered Financial Analysts awards this to experienced analysts who pass exams covering economics, accounting, portfolio management, and security analysis.
• AICPA/PFS (American Institute of Certified Public Accountants, Personal Financial Specialist): CPAs with this credential have relevant experience and pass the institute's financial planning exam.
• RIA (Registered Investment Advisor): An individual registered with the Securities and Exchange Commission. No special financial training is required, though many have it.

How are financial planners compensated?

Financial planners earn income in two ways: fees paid by clients for planning services, and commissions from companies (insurance firms, mutual funds, etc.) when clients purchase their products. Most planners use both.

A planner earning commissions may recommend investments partly based on commission size, not just quality. When choosing a planner, consider compensation structure carefully, especially if commissions are involved.

A commission-only planner might claim services are free, but they may steer you toward investments with higher costs or lower returns compared to those that don't pay commissions. You end up paying through lower performance.

Ask whether the planner receives incentive bonuses or other payments tied to promoting specific financial products.

Commissions aren't automatically bad, but they create a conflict: your planner's interests may not align with yours.

What to expect from a good planner

• A detailed review of your current finances
• Help determining your financial needs and goals
• Explanation of available financial products (bonds, mutual funds, IRAs, etc.), including income potential and risks
• A written financial plan with help putting it into action
• A timeline for the plan and regular progress reviews