How to Hire a Financial Adviser (Part 1 of 4)
(This is the first of four excerpts from
"The nature of any human being, certainly anyone on
Remember the Bo Diddley song "Who Do You Love?" When it comes to financial advice, a better question might be, "Who do you trust?"
At the same time, as boomers confront the challenge of retirement planning, increasing numbers of us see that we need advice--lots of it! Even before the economic crash, the knowledge gap about retirement was large, and the need for smart planning has only become more acute in hard times. Do-it-yourself planning certainly is an option, but a little help from a professional adviser can be well worth the time and money.
The rationale for hiring an adviser is simple: Money spent now could make a big difference in helping you achieve a secure, happy future retirement lasting two decades or more.
The field of financial-planning services is growing quickly, and finding the right person is a big challenge. Almost anyone can hang out a shingle and dispense advice; planners may have any number of certifications or titles attached to their names, but none are required. So let's break down the various types of advisory services that are available and talk about how to interview and select an adviser.
There really are only two types of financial advisers: those who--by law--work for clients and those who really don't. The legal litmus test is fiduciary duty, which means that the adviser is obligated to put the best interest of the client ahead of all else.
Stockbrokers and broker-dealer representatives are not fiduciaries.
Neither are financial products salespeople working at banks or insurance companies. They are self-regulated by the
None of which is to say that you can't get perfectly sound advice from a non-fiduciary adviser. Just be mindful of the possibility of divided loyalty and conflict of interest.
Advisers who have fiduciary responsibility to you as a client are registered investment advisers (RIAs) (the one exception being in
Many people don't understand--or don't care--about the difference.
The current structure of the financial services industry has also tended to blur the lines, with the emergence of financial superstores that offer both advisory and portfolio-management services through different divisions.
Compensation is another major dividing line. Planners are typically paid in one of three ways: commission and fees, salary plus bonus, or fee only.
-- Commission and fees.
This is the most common approach and usually is referred to as fee-based. The adviser receives a fee for developing a plan but also receives commissions for selling insurance or investment products.
-- Salary plus bonus.
Discount brokerage firms and banks will compensate employees with a base salary plus incentive pay for bringing in new clients' accounts. Advisers may also get higher bonuses by recommending or selling certain products over other options.
-- Fee only.
Typically, these advisers aren't registered reps for any financial services company. Usually, they are self-employed RIAs or work for a firm of independent planners. You pay all the fees, but the planner has no bias toward any one product or solution. You'll find fee-only advisers working in three ways: hourly, through a flat fee, and by retainer.
While we're on the subject of writing checks, the only ones you should write directly to an adviser are those that cover fees. Investment checks should always be written to a third-party custodian, typically a big financial-services firm such as
NEXT WEEK: How working longer helps build retirement security.
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Personal Finance - How to Hire a Financial Adviser (Part 1 of 4)
(c) 2010 Mark Miller