We, the investors of the world, have provided the funds American corporations have needed to finance their growth over the past two hundred years in exchange for the right to share in that growth and profits that were previously given only to owners. The investor/management relationship has worked so well that an entire industry has evolved to cater to the growing number of investors needing information and advice to help investors make sound investment decisions. The financial services industry, which was originally accessible only to the very wealthy, has grown over the decades to provide investment information to approximately 40% of American families.
Most financial advisors are affiliated with large investment firms that channel the collective knowledge, information and expertise of the firm to their group of advisors to pass on to individual and institutional investors. In theory, this gave investors associated with large companies the potential for returns that could not be achieved alone or with an association with a smaller or independent advisor.
So the financial advisor who advised you and me was actually taking the “expert knowledge” of the business, adapting it to our remediation, and advising us where we should invest our savings to achieve our financial goals. We have been told that since 1900, if you stayed invested in a well-diversified portfolio, you would never have less than when you started in a ten year period.
So what has happened over the past decade? Most of us lost a significant portion of our savings in the tech bubble of 2001 only to lose more of our savings in the subprime bubble. The $100,000 we had in January 2001 fell to $60,000 in October 2003, then rose to $80,000 in July 2007 and is now worth $40,000 today. We are eight years closer to retirement and wondering how we will survive if we ever retire.
Do we just plan to work for the rest of our lives? Do we work until we can’t get into Medicaid anymore and welfare becomes a drain on the US economy? Do we take what we have left and develop a strategy and lifestyle that will allow us to lead a comfortable life without being a burden on our children and our country?
Personally, I think the last option is the best, but it will require an adjustment in our attitudes and lifestyle. One of the adjustments has to be in the way we look at the investment markets and our financial advisors. Whether you need to change your financial advisor or not, now is the time to assess the performance of your current advisor and decide if it’s time to make a change. I’m talking about a financial adviser and not an investment adviser, there is less than 5% of the world’s population who should seek the services of an investment adviser. The investment markets are not a place most of us can turn to for money; they allow us to preserve our remaining capital and grow that capital at reasonable rates of return.
The first step in choosing your new financial advisor is to decide what you expect from your advisor after your attitude adjustment. Here are some of my suggestions:
o Help me preserve my remaining capital and grow it at a conservative rate of return.
o Help me live within my means and establish an investment strategy based on my needs and goals.
o Help protect my family from loss of earning capacity or death.
o Help my family and I reach our pre-retirement financial goals.
o Help me accumulate enough to enjoy a comfortable retirement.
o Help me assess my need for long term care insurance.
o Help me make an estate plan.
Once you know what you want from your advisor, you will need to find a qualified provider. As in all professions, the first qualification you should seek is education. Your potential advisors will have a Series 66 or Series 7 securities license as well as an insurance license and variable product license. A series 66 allows them to sell mutual funds and a series 7 then allows them to sell stocks, bonds, options as well as mutual funds. A Series 7 is a more in-depth program of study than a Series 66, so I would eliminate anyone who does not have a Series 7 securities license.
Seventy percent of people claiming to be financial advisors stop training beyond their licenses and required annual continuing education. That’s the other 30% of advisors you’re looking for. These are the people whose initials behind the name represent professional designations. At the top of this designation hierarchy is the CFP (Chartered Financial Advisor) designation. A CFP is comparable to a master’s degree in financial planning; it takes three years of study and at least three years of practical experience. To find a CFP in your community, go to: cfp.net/search. Other designations such as ChFC (Chartered Financial Consultant) and CLU (Chartered Life Underwriter) focus on specific segments of the financial consulting field. These designations are comparable to board certifications in medical fields, and I personally wouldn’t put my finances in the hands of anyone who doesn’t take their profession seriously enough to seek out all the education available. This search can leave you with a list of three to three hundred depending on the size of your community. I suggest you check out BestofUS.com, a website that lists the top ten professions across the United States. This should help you narrow down your list to a manageable number of qualified advisors.
Then go to the NASD (National Association of Securities Dealers) website and check out your short list of qualified advisors. (finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm) Here you can find out the work history of your potential advisors, their licensing history and whether they have been subject to legal or disciplinary action . We’ve been through some pretty tough financial times over the past ten years and many good advisors have been sued, so use this information as a way to ask your potential advisors some tough questions. “Can you tell me what these problems consist of? Now Google your short list and see what you find; you will be surprised at what you will learn.
At this point, you should sit down with those who remain on your shortlist. Here is a list of questions you should ask yourself.
o What is your approach to financial planning? If they don’t meet the “help me” points above, they are not a financial adviser. If they start talking about managed accounts, sector investing, momentum, technical verse fundamentals, or options strategies, you talk to your investment advisor.
o What was your business volume worth on March 1, 2008 and what is your business volume worth today? Can I see the supporting reports? They’re going to ask to see your finances, it’s only fair that you ask to see theirs and if it’s down more than 25% you’ve come to the wrong place.
o How are you paid? There are only three possible answers here; commissions, asset base compensation or fees. Most will be a combination of all three possibilities; the one you want to monitor is commissions. Commissions can create a conflict of interest. Asset-based remuneration means that as your assets increase, their remuneration increases or as your assets decrease, their remuneration also increases. I liked that it led to a common goal. The fee will involve special work like a financial plan or research project relating to your specific situation, and that’s fair.
o How often will we meet to discuss my situation? This should be at least twice a year.
o Tell me about yourself. How long have you been in the business? Do you have professional titles? Have you been the subject of legal or disciplinary proceedings against you? What is your professional and educational background? Have you written any books or articles that I can read? You know all the answers, sit down and judge.
If you follow this process, you will find the best financial planner for you. You may end up with the person you used, but now you know they are qualified to provide the service you need from your new financial advisor.
Choosing your best financial advisor can be as important as choosing your best doctor, so do your homework and then take responsibility for your decision. Just like managing your health, you need to take an active role in managing your finances. stay involved and understand everything.