Financial Advisors: Do You Know Who Runs Your Money?

Posted on Posted in Mutual Funds

The key to finding a good financial advisor is doing your homework. Make sure he has a solid track record and an understandable yet principled approach to investing.

Many people today feel that they’re not qualified to invest their own money; that’s understandable, given how complex the investment world has gotten. But do you really need a financial adviser and will he really help your investment returns in the long run?

As usual, the answer is “that depends”. There are good financial advisers and there are bad financial advisors (they are normally nothing but “salesmen”). A few can probably manage your money much better than you could on your own, while many others can do a lot of damage. The fact of the matter is that by using common sense investing principles, you can really do a better job on your own than with the average financial advisor. Nonetheless, not everyone has the time to do the necessary work involved to become a successful investor on their own. In these cases, you’ll need to find someone who can do your money management for your.

Here are some things to look out for in a potential financial advisor before you sign the contract with him.

You should trust him. Your money should be your lifetime concern, and you should ask the same of your financial advisor. When you’re talking to a potential financial advisor, ask yourself if he seems like the sort of person you can trust with your most valuable assets for the rest of your life. If he seems like a car salesman, then just walk away.

Your adviser should probably work on a fee structure rather than commission. Fee-only advisors avoid a conflict of interest in that they don’t get you to buy bad investments for their benefit. Commission-only financial advisors make money only if you buy something, and that’s not always in your best interests. Unless a commission-only advisor comes highly recommended by someone who’s worked with him for years, you should skip him.

Credentials should not be a series of letters, but rather recommendations and a great track record. There is no standardization of credentials in the financial advising field. You should also look for a federal securities license, state insurance, and registration with the SEC or the state equivalent.

You should never let your finances get tangled with your financial planner’s. He should never accept a check for investments you write to him or his firm, or be listed as a joint owner or beneficiary of any of your financial holdings. He should also never ask for or accept discretionary authority for your finances, especially if he works on any kind of commission structure.

If your prospective financial advisor offers you an exclusive deal that only his firm can provide, you should probably look for a different advisor. A deal like this generally works by providing a fee to the financial advisor for finding investors, and it’s a conflict of interest for the financial advisor to carry it. In general, these advisors aren’t interested in what’s good for you.

When you interview your prospective advisors, find out how long they’ve been financial planners, and ask about their track record. If they haven’t been advising long, find out what in their background makes them competent to invest your money for you. Is the advisor’s office staff small but efficient? Is the office neatly kept, or are there piles of papers everywhere? You want neat and efficient; they’re handling your money!

Check up on their record with the SEC and the NASD. And especially if you’re looking at more than one financial advisor, ask what they think of the others. If anyone is very disparaging of the other advisors, he may be the one to avoid!

When you talk to him, does he make sense to you, and take the time to explain things to you thoroughly? And has he been in the financial advisory business for at least five years? Does he have a large client list, and does he handle assets into the millions?

Whoever you agree to work with, your contract should have a built in cancellation option, so you don’t get stuck with a bad advisor for a prolongued period of time.

Finally, if you want many of the benefits of a financial advisor without most of the fees, consider putting your money in a well-managed mutual fund. While you may lose some of the immediate person-to-person contact, finding a good mutual fund manager is as easy as finding a good mutual fund. And a mutual fund’s long term track record is much easier to track than a run of the mill financial adviser.