Monday, May 21, 2007

How To Choose a Financial Advisor

How To Choose a Financial Advisor

At the outset, answer this question, ”Am I comfortable with brand names or independents?” When you start scouting for a financial advisor, there will be big names that crop up. They can be impersonal and corporate mandates can drive sales of proprietary products. Conversely, independent financial advisors, who are self-employed and unaffiliated with major companies, are unencumbered by corporate policies and may have more flexibility in terms of their product offerings. You want to be sure that you are going to get someone who works with people like you, listens to your needs and concerns, will be honest and will look out for your best interests. Get names from people you trust. Ask people whose judgment you respect (friends, neighbours, family, or colleagues) for the name of their financial advisor. If the endorsement is enthusiastic, then one may be enough. If not, get three names and begin the selection process by phone. First impressions count. If your first impression is positive, arrange for a meeting with the advisor.

A few vital concerns that you must consider while choosing a financial advisor are:

Background and experience

Try to learn as much as possible about the advisor's background and experience. What is his educational background? Does he have qualifications in specific areas of study and professional licenses to provide services? How long has he been doing this? There is something about the passage of time that tends to shake out the incompetents. As an industry undergoes its normal ebbs and flows, those participants who cannot acclimatise are weeded out, either voluntarily or otherwise. And those are exactly the persons you do not want advising you.

The Advisor's practice

Find out about the advisor's practice. Has the advisor worked with clients whose situation is similar to yours? How many clients does the advisor currently have? What is the product basket offered? Does he have resources in terms of research and support? Does the advisor have minimums for investment assets, net worth, or income? Does he maintain client confidentiality?

Investment pattern compatible with yours

As an ideal investment goal, let your advisor’s personal portfolio of investments reflect your own. The advisor should work with you to set target rates of return, focus on risk in selecting your portfolio and rebalance your portfolio periodically. Keep regularly abreast of your advisor's financial activities.

A mode of payment that avoids conflict of interest

The issue of advisor compensation should be explored and fully understood. How is the advisor compensated (hourly, retainer, percentage of assets, commissions)? Are there financial incentives for the advisor to recommend certain financial products? The advisor should be compensated on a fee-only basis rather than by brokerage commissions. Advisors who work on commissions are more likely to recommend frequent transactions in your portfolio. A fee-only advisor has fewer conflicts of interest and is more likely to have your best interests in mind.

A feel for working with the Advisor

You should try to get a feel for what it would be like to work with your advisor. What is the process once you hire the advisor? How often would you meet the advisor?

Verification of the basis for confidence

It is sad, but misplaced confidence is a primary cause of financial disaster for many investors. Of course, it is mostly preventable. Just as a leopard does not change its spots, persons with unsavory backgrounds tend to repeat. So, how does this translate? Consider no advisor on whom you have not obtained a) an exemplary personal credit report, b) a clean record for disciplinary actions and lawsuits, and c) personal recommendations from at least three current clients of adequate duration.

Have you ever made a decision based on a "gut" feeling or instinct? While all the items listed above are of supreme importance in finding the best financial advisor for you, the value of the gut test should not be overlooked. Does the advisor seem to be client-centered? Does he appear interested and whether he can serve you efficiently and effectively given his experience and expertise? Does the advisor seem to be overly anxious to have you as a client or does he express a desire to determine if the two of you will be a good "fit?" Does the person seem to have time for you, regardless of how much money you have to invest? Does he or she really listen to you and seem to respect your opinions? Does the person use financial jargon or explain investments to you in clear terms? While harder to measure and define, these intangibles are important in the selection of a financial advisor who is right for you.

The foregoing, though admittedly a skeletal view of the financial advisor selection process, provides the crucial ingredients. Gauge your level of comfort with the advisor as you are looking for a long-term relationship. Never hesitate to ask whatever is on your mind; however foolish the questions may sound. Always remember that it is your money and your future.

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