At this time of life, when we’re looking ahead to retirement while perhaps still juggling college costs, mortgage payments, and other major expenses, our financial situations can get a little complicated.
We may be looking to get more heavily involved in the stock market, or to get rid of some major debt. Basically, we’re all wondering how to make whatever money we have work the hardest for us that it possibly can.
You’ve read a lot of information in previous chapters of this book about stretching your dollars, coping with major expenses, and investing, both in and out of work. All that information, however, can sometimes seem extremely complicated and overwhelming.
If that’s the case, it may be time to consider hiring a financial advisor, which is the focus of this chapter.
Finances are important, to be sure, and when they’re your finances, it’s even more important that you handle them wisely.
If you have a major financial setback when you’re in your 20s, it’s just that—a setback. Let’s say that some 22-year-old gets out of college and lands himself a great, high-paying job. Fueled by the enthusiasm and shortsightedness that often accompanies youth, he goes out and buys a great house. Four bedrooms, oversized garage, Jacuzzi in the master bath . . . you get the picture. He also buys himself a flashy little sports car and develops expensive tastes in wine and women.
He soon finds a woman who loves him—and his lifestyle—and they get married. They take a fabulous honeymoon to some tropical islands you and I never even heard of, and return to live happily ever after.
Six months later, however (you know what’s coming, right?), our friend loses his job. He looks around and realizes that he’s in trouble—serious trouble. There goes the house, the sports car, and the Cabernet. You can decide about the wife. He might even have to declare bankruptcy and start over.
The point, of course, is that at age 22 or 23, he has an opportunity to start over. At age 45, 50, or 55, a major setback turns into a financial crisis that may be impossible to overcome.
Don’t Go There
There’s a ton of information on the Internet about personal finances, investing, and so forth. Unless you’re really financially savvy, however, don’t depend on what you read on the Internet as your sole source of information. Some of the advice that’s out there is good, and some is awful.
Most people have more assets at this stage of life than they did in their 20s and 30s. Knowing how to best manage those assets is very important, but not something with which most folks are really familiar.
The most important reason why you should have a good financial advisor, however, is to help you to prepare for retirement. No one wants to be a burden on his or her family in old age, and most of us hope to have enough money to really enjoy life.
Some people don’t ever consult a financial advisor because they think they can manage their money on their own—and maybe they can. If you’re like most of us, however, you probably can benefit from some professional help.
When you hire a financial advisor, it should not mean that you relinquish any and all responsibility for your money over to that person.
It’s still your money, and it’s vitally important that you stay on top of what’s going on with your finances. A financial advisor is there to assist you—to help you get the most from your money. That doesn’t mean that you don’t need to be involved. Always read over the statements that you get, and feel free to ask any questions you have concerning your accounts. You and your financial advisor should work as a team to make you as financially successful as possible.
Don’t Go There
Don’t ever assume that you’re sailing on smooth financial waters just because you’ve hired a financial advisor. Mistakes happen. If you don’t keep an eye on your statements and take time to understand what’s going on with your money, you risk missing those mistakes and losing some of your hard-earned savings.
If you agree that hiring a financial advisor probably makes sense for you, read on. There are various types of advisors, some of whom may be way more qualified than others.
When you start looking for a financial advisor, you’re likely to come across categories such as the following:
So who’s a mid-lifer to hire? In order to choose the type of advisor who will be able to do the best job for you, it’s important to understand what each of those categories of financial advisors entails. Let’s have a look.
Financial planners can be anyone who offers financial advice or services. Many people use the terms financial planner and financial advisor interchangeably.
A financial planner, as the term implies, will help you come up with a financial plan. And she may or may not implement the plan, depending on your agreement. Some people prefer to execute their financial plans on their own, while others like to work closely with an advisor.
If you hire a financial planner, make sure you’re familiar with her credentials. Qualifications can vary widely within this category of financial advisor, with some advisors having far more expertise and experience than others. The first question you should ask is whether or not the financial advisor is certified.
A certified financial planner, or CFP, has earned the Certified Financial Planning credential, which is a national certification. This is accomplished by completing a home-study course and passing a cumulative, 10-hour exam.
In order to qualify for certification, a person must have worked for three years in a financial area, such as banking, planning, or investments.
Once certified, CFPs are charged with keeping up with what’s happening within the financial industry, and must take 30 hours of continuing education courses every two years. They also must promise to adhere to a prescribed code of ethics.
A certified financial planner (CFP) is, by any other name, still certified. CFPs might be called financial planners, financial consultants, or financial advisors. The important thing is that they’re all certified.
A financial consultant provides an overview of financial information and options in order to help you choose the products that will best meet your financial needs.
He may, for instance, describe to you in detail the advantages and disadvantages of different kinds of IRAs, or how much money you’ll need in order to invest in a particular fund. He generally will not produce a financial plan for you, only offer information and advice.
Many people have a financial advisor, and a separate certified public accountant (CPA). There’s an increasing trend, however, for folks to depend on their CPAs for financial help and advice.
If you want to use your CPA as your financial advisor, that’s fine. CPAs typically keep up-to-date on what’s happening within the industry because they’re responsible for knowing about laws and regulations that change all the time. And your CPA, especially if you’ve had the same one for a long time, is very familiar with your financial situation. Check though, to see if she has been designated by the American Institute of Certified Public Accountants as a personal financial specialist (PFS). Your accountant certainly should be willing to share her credentials with her clients, or, you can check with the American Institute of Certified Public Accountants by calling 212- 596-6200. The fax number is 212-596-6213, and you can access the institute online at www.aicpa.org.
In order to receive the PFS certification, a CPA must have three years of financial planning experience, and pass a six-hour test.
Many people prefer to use the same person as both their CPA and financial advisor because it allows them to deal with only one person. And people tend to use the same accountants for long periods of time, which allows them to develop a relationship with their CPAs.
You might not tend to think of an insurance agent as a financial advisor, but some agents specialize in financial planning.
Those who do, may (although they’re not required to) have a Chartered Life Underwriter (CLU) or a Charter Financial Consultant (ChFC) designation. Some may have both.
These are designations by the American College in Bryn Mawr, Pennsylvania. Agents must successfully complete a 10-course program in order to receive a CLU or ChFC designation, and must complete continuing education courses in order to remain certified.
Typically, people that have a lot of money are those who employ money managers. Money managers will, after reviewing your overall financial situation, handle your funds, make trades on your behalf, and buy and sell stocks and bonds for you.
They consider all aspects of your finances, including factors such as your risk tolerance and personal goals.
As you can see, there are many types of financial advisors. It’s important to understand that not all are alike, and to review each one’s qualifications carefully. So what type do you check out first? A CPA? Insurance agent? Financial consultant? Money manager?
Think carefully about what you want, and expect, a financial advisor to do. If you’re into the big bucks and you want a professional who will get your money to where it needs to be, when it needs to be there, perhaps you should consider a money manager.
We’ve all heard the stories about unscrupulous financial advisors who scam or steal money from clients. While that behavior is not limited to professionals in the financial field, it’s worth your time to be aware that it does occur, and to keep a close watch on your investments and funds.
If you’re fairly adept at handling your own finances, but would like someone around to answer questions and dispense advice from time to time, a CPA or financial consultant may be a wise choice.
Whatever category of advisor you choose from, your most important job is to make sure the person you consider has great qualifications. Talk to friends, relatives, and co-workers to find out who they use, and whether or not they’re satisfied customers.
Don’t Go There
Some financial advisors are far more conservative than others. If you’re a very low-risk investor, don’t match yourself with an advisor who can’t see his way past anything but tech stocks. You and he definitely will not be a match made in heaven.
After you’ve identified some potential advisors, contact them and arrange for get-acquainted meetings. You don’t need to, or even should, provide every detail concerning your finances during this meeting. Instead, you should be concentrating on getting a feeling for each person’s general views and philosophies on investments, an overview of his qualifications, and a feeling for whether or not you’d be comfortable working with him.
Some questions you should ask your potential financial advisor are listed as follows:
Once you’ve met with several financial advisors, developed a feeling for whether or not you’d like to work with each of them, and checked out all their references, choose the one (assuming the qualifications are equal) with whom you are most comfortable and feel you’ll work the best.
Different kinds of financial advisors have different types of fees. Some will bill you hourly or charge a flat fee, while others work on commission for products they sell. One thing for sure, though, is that financial advisors don’t work for free. Let’s take a look at how various types of advisors might earn their money.
Certified financial planners may charge in different ways. Some charge flat fees, while others work on commission. There’s concern in the financial industry about CFPs who work for commission. Many CFPs are employed by brokerage firms, which encourage them to sell the products on which the firm will earn the highest commissions.
If that’s the case, your advisor could recommend that you buy a particular mutual fund, not because he really believes that it’s a great fund, but because his firm will receive a big commission on it. Make sure you ask a CRP how she earns her money. If she tells you she works on commission, be sure to have her explain exactly how she chooses the products she’ll recommend that you buy.
Financial consultants generally charge either a flat or hourly fee for their services. Remember that they don’t typically sell products—they allow you to do so, based on their information and advice.
Fees for financial advisors vary greatly, so be sure you find out up front what someone you’re considering hiring charges. Also, be sure to ask whether you’ll be billed for your initial meeting. Most professionals will schedule a get-acquainted meeting for no charge, but others will bill you.
Certified public accountants, both those with and without the personal financial specialist designation, normally charge an hourly fee. If a CPA or PFS starts pushing particular products, you should ask what’s going on.
Insurance agents, on the other hand, generally earn their money through commissions. And money managers typically receive a percentage of the market value of their client’s account as compensation for their services.
A fee-only financial advisor makes her money by charging clients each time they ask for advice or information. If your advisor is fee only, ask to be billed regularly so you can keep track of exactly what it is you’re paying for.
If your advisor works solely on commission, talk to him about any concerns you have in that area. If you feel that you couldn’t be comfortable with that arrangement, look for someone else.
While most financial advisors adhere to industry standards and codes of ethics, there are, as in every business, some who will try to get away with practices that are less than honest and fair.
If your advisor tells you that he’s fee only, but you find out that he’s been making big bucks off of the mutual funds he’s been pushing on you, that’s a serious infraction called misrepresentation. He’s misrepresented himself to you about how he earns him money, and given you serious doubt about the products he’s recommended.
If you suspect that your advisor may be getting commissions and he’s told you he’s not, or are having other kinds of problems with him, you can check to see whether there have been any complaints lodged against him in the past. All financial advisors are required to register with their state Securities Exchange Commission and fill out a form called the Uniform Application for Investment Advisor Registration.
If you are uncomfortable about something your advisor has said or done, you can contact either your state Securities Exchange Commission or the Washington, D.C., office and request a copy of your advisor’s registration. The form will contain information about whether your advisor has had problems in the past, such as being sanctioned or having his license suspended.
Adding It Up
Misrepresentation occurs when a financial advisor guarantees that an investment will be successful, misinforms you about how he earns his money, or tells you that he’s something or someone who he’s not. If he tells you he has a degree from the Harvard Business School when he really doesn’t, for instance, that’s misrepresentation.
Another means of misrepresentation is when your advisor tells you to put your money in a certain investment because you’re guaranteed to make 20 or 30 percent, and you end up losing most of your investment.
It’s one thing for an advisor to recommend an investment and tell you he thinks you’ll do well in it. He can’t, shouldn’t, however, guarantee an investment unless somehow he has a written guarantee.
Another practice you should be aware of is called churning and burning. This is when an advisor moves investments from one fund to another, pulling down a commission with every move.
If it seems that your advisor is trading and moving your investments more often than necessary, don’t hesitate to ask why he’s doing so. If he doesn’t have a good response, ask to speak to his supervisor or the office manager.
Probably the biggest complaint clients have regarding their financial advisor is that they’re ignored, or their wishes not carried out as expressed. If you request your financial advisor to make a particular investment on your behalf, he should do so. He may advise you that he doesn’t think it’s a good idea, but, if you insist, he should follow your instructions.
If your advisor doesn’t do what you ask him to, or acts without your approval, it’s time to look for someone else to handle your money. You should always feel free to call your advisor and request a meeting. If he’s too busy to meet with you, there are plenty of other financial advisors available.
Not everyone needs a financial advisor, but most people in their 40s and 50s who have some money saved can benefit from the services of a qualified professional. Just be sure to hire the best advisor you can find, and work to establish and maintain a good relationship.