Dear Carrie,
While I've always managed my own money, it's getting harder for me to stay on top of everything. I'm considering seeking out professional advice, but I feel wary. Any tips on what/who to look for?—A Reader
Dear Reader,
Financial advice can come in a lot of forms and be delivered by a variety of professionals. Just wading through what has been referred to as the ‘alphabet soup’ of financial certifications—CFA, CPA, CFP® to name just a few—is enough to confuse anyone. Add to that the news you may have read about the new, partially implemented Department of Labor Fiduciary Rule, and it’s no wonder you’re unsure.
The positive side is that you have a choice—and the opportunity to find the best advice to help you achieve your financial goals. But finding appropriate and reliable advice at a reasonable cost takes careful thinking and research.
Start by deciding how much and the type of advice you need
Financial advice isn’t all or nothing. You're in control and can choose the type and amount you want, ranging from high-tech automated portfolio advice to a comprehensive and in-depth, personalized relationship with an advisor or team of professionals.
- Automated investment advice—Brand new investors may want to start here. Harnessing the power of technology, a number of online services will build a well-diversified portfolio based on your stated goals. This type of service may rebalance your portfolio automatically, and for a small additional fee may also provide access to a financial advisor.
- One-time or periodic consultation—If you feel you only need periodic guidance to keep your portfolio on track, another approach can be to simply check in with an advisor now and then. A consultation would give you the opportunity to discuss big-picture strategy as well as particular investments. For a little more help, you could arrange to meet with an advisor on a regular basis. Either way, the advisor might make recommendations but you'd make the decisions and might even handle the transactions.
- Ongoing portfolio management—This is a bigger proposition and is generally best suited for people with at least $250,000-500,000 in assets to manage. In this arrangement, you'd work with an advisor to come up with a long-term investment strategy. With your approval, your advisor would manage your accounts for you, making your life simpler by handling the transactions. However, you'd still be very much involved in the decisions.
- Complete financial plan—This typically includes all aspects of your financial picture—investments, retirement planning, estate planning, taxes and insurance—and makes sure that all the parts are working together to support your goals. It will take a fair amount of time and effort to gather all the necessary information and communicate your long- and short-term goals, but in my mind, almost everyone can benefit from having this type of holistic perspective and ongoing relationship that will evolve over time.
Understand what the credentials mean
There are a wide variety of financial credentials, representing an equally wide variety of education, experience and regulatory oversight. Perhaps the most important distinctions (and most often confused) are those between a broker, an investment advisor and a financial planner.
A broker typically is employed by a broker-dealer and is registered with the Financial Industry Regulatory Authority to buy and sell securities on your behalf. A broker can help you evaluate your portfolio, make buy and sell recommendations, and execute trades.
In contrast, an investment advisor, also known as a registered investment advisor or RIA, is registered with either the Securities and Exchange Commission or a state securities regulator specifically to provide financial advice and/or investment management, which can include buying and selling securities. A distinction is that RIAs are held to a fiduciary standard, which means they're required to act in your best interest at all times, while brokers (excluding those providing guidance on retirement accounts under the new DOL Fiduciary Rule) are held to a different and less stringent suitability standard, meaning recommendations must simply be appropriate to your needs.
Another option is to work with a Certified Financial Planner™ (CFP®) professional who is required to complete extensive training and continuing education. This type of advisor can help you with big picture planning as well as with portfolio management and is also held to a fiduciary standard. A good resource for finding a CFP® professional is the Financial Planning Association’s website, plannersearch.org.
The DOL Fiduciary Rule I mentioned earlier is designed to expand the fiduciary standard to include retirement accounts and extends the fiduciary responsibility to brokers as well advisors who are already held to this standard. While this new rule is still being debated, it really is important for individual investors to make certain they question any potential broker or advisor about whether or not they are held to that fiduciary standard.
Know what you're paying for and how
Another important issue is compensation. A one-time consultation might be free or have an hourly fee. For ongoing management, it's common to be charged a percentage of assets managed, typically about 1 percent. A comprehensive financial plan may be included in your investment management service, or it may entail a separate fee.
It’s also critical to look out for potential conflicts of interest. You should understand whether your advisor stands to benefit by selling you an investment. Bottom line, your goal is to make certain an advisor’s counsel is based on what's best for you, not what's best for his or her own paycheck. In fact, if someone is compensated by commissions or incentives, I'd proceed with an extra amount of caution—if at all.
Ask the right questions
Finding the right advisor is about asking the right questions. Arrange for an initial consultation (it’s usually complimentary) and ask about education, time in the business, number of clients, types of services and amount of money under management. Find out about their investing philosophy and preferred types of investments. And get very specific about how you will be charged and why.
Plus, don't overlook the importance of a good rapport. If you expect to have a long-term relationship, you want to be comfortable personally as well as professionally.
Stay involved
Lastly—even with an advisor—stay on top of things. Make sure you understand the thinking behind any recommendations and advice. And remember, it’s your money; the final decisions are ultimately yours.
Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article.
This article originally appeared on Schwab.com. You can e-mail Carrie at askcarrie@schwab.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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