Financial Planning 101: Part 10
Choosing and Using Financial Advisors
by Gerald Townsend, Financial Editor
October 2009
Our "Financial Planning 101" Series has discussed basic issues such as goal setting, budgeting and taxes, plus insurance and investment concepts. This month, we focus on how to choose and utilize the services of financial advisors.
Advice for What? — The first question to ask yourself is, "What do I need advice about?" If you strictly need tax advice, perhaps a CPA is the appropriate advisor. If you just need to make a change to your estate plan, an attorney may be the only professional you need to speak with. On the other hand, if you are seeking help on a broad range of issues — from investments to insurance to tax and estate strategies — you are talking about a financial advisor.
Interaction — Next, think about how you want to interact with your advisor. Do you want or need in-person meetings or just a phone consultation? Do you want to get together frequently, or just meet on an as-needed basis?
Cost and Type of Compensation — While a free service would no doubt sound attractive, the reality is that nothing is free, so how do you want to pay your advisor? Do you prefer having your advisor’s compensation imbedded in a financial product you might purchase, so that you do not make a separate payment for the advice? In that case, a "commission-based" advisor would be your choice. The advantage of this approach is that you don’t incur a separate cost for the advice. The disadvantage is that you may wonder about the objectivity of the advice. If you want your advisor’s compensation to be independent from any financial product you might acquire, then you should be looking for a "fee-only" or "fee-based" advisor. The fee-only advisor charges a fee and receives no commissions, while a fee-based advisor may receive both a fee (for advice) and a commission (if you purchase a financial product).
Even with a fee-for-service advisor there are different fee structures. For example, some advisors may offer planning and consultations for an hourly fee or quote you a flat fee for a group of services. If a fee-for-service advisor is helping to manage your investments, they may charge a fee that is determined by the value of the investments being managed.
Which is better approach? There are valid reasons to justify different types of advisors and compensation arrangements. Therefore, it depends on the kind of relationship you desire and what you are most comfortable with. Discuss this with your advisor in the very first meeting and understand it thoroughly.
Licensing — While it is true that anyone could call themselves a financial advisor, in order to legally provide financial advice to others, there are many licensing or registration requirements that must be met. If an advisor is selling financial products they must hold a securities and/or insurance license and be affiliated with a securities firm or insurance company. If the advisor charges fees for their advice or for managing investments they must be affiliated with a registered investment advisory firm.
Credentials — Beyond the basic licensing or registration requirements, advisors often obtain professional designations. While a designation does not guarantee that an advisor is intelligent or ethical, it does say they have spent time obtaining and maintaining a level of knowledge. The most common designations to look for among advisors are Certified Financial Planner (CFP®); Chartered Financial Consultant (ChFC®); and for advisors who are CPAs, the Personal Financial Specialist (PFS) designation.
Locating Your Advisor — How do you find the right advisor? Professional organizations may provide you with a list of advisors in your area. For example, you can search for an advisor on the Web sites of the Financial Planning Association (fpanet.org) as well as the American Institute of CPAs (pfp.aicpa.org).
For many, the best resource for finding an advisor is a referral from a friend, family member or a CPA, attorney or other professional.
Once you have located one or more potential advisors, you should have an introductory meeting with them (often this is a no cost meeting), ask them to describe what services they provide, how they are compensated, and consider asking for references of other clients.
Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com