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Course 509
Seeking Financial Advice

Introduction

Maybe your nest egg has become larger than you're comfortable managing on your own. Or you need estate-planning advice. Or you could use some tax help. Even do-it-yourselfers sometimes find the need to work with a financial professional. To choose an advisor who suits your financial needs and personality, follow these steps.

Decide What You Want.

Are you looking for someone to handle one part of your financial life, such as taxes or estate planning, or are you seeking a financial advisor who can take care of it all? Knowing the answer to that question helps you narrow your search to those advisors with skills to match your needs.

Once you've set your priorities, begin your search by asking your accountant or attorney for recommendations. Query friends and professional colleagues who work with advisors. Identify a handful of advisors whose services meet your needs, and then call to determine how much money you'll need to become a client. Confirm their services and specialties. After you've found a few good matches, schedule initial meetings, which should be free of charge.

Ask the Right Questions

Bring to that first meeting a checklist of questions, concerns, or issues you want addressed. Ask for and scrutinize a copy of the advisor's resume, known as the ADV form, available on the Securities and Exchange Commission's website http://www.adviserinfo.sec.gov/(S(qj14ek1nj3rfbnwqf3gaueen))/IAPD/Content/IapdMain/iapd_SiteMap.aspx. ADV forms include advisors' educational backgrounds and list which professional designations they hold, as well as information about the firm's typical clients and its overall assets under management. You'll also be able to see how the advisor is compensated.

If you're turning to a commission-based broker for financial help, you'll need to follow a different due-diligence process. FINRA regulates brokers, and its website provides a tool to check up on a broker's credentials as well as whether they've had any disputes with customers or run afoul of any regulations. Bear in mind, however, that brokers aren't always held to the same standards that financial advisors are. Financial advisors are required to be fiduciaries, meaning that they must recommend what they believe to be the best products for their clients and set aside personal financial considerations when doing so. Brokers, meanwhile, are held to what's called a "suitability standard," meaning that the products they recommend must be suitable for their clients but not necessarily the very best options. (The Securities and Exchange Commission is currently reviewing a proposal that would require anyone proffering financial guidance to be a fiduciary.)

Investigate Investment Philosophy

No matter what type of professional you're relying on for investment suggestions—which funds or stocks to buy—be sure the two of you share the same investment philosophy. Ask advisors to walk you through their investment process, and the types of products they typically recommend to people in your situation. Do they use mutual funds, exchange-traded funds, individual stocks, or insurance-based products such as annuities? Ask a prospective broker or advisor to discuss how frequently they trade, as well as to explain thoroughly what would make them sell a stock or fund. Request a copy of a typical financial plan.

Calculate the Cost

Don't leave an advisor's office until you completely understand how the advisor or broker is compensated. Some advisors charge clients a percentage of their assets per year to manage their money--fees commonly range from 0.75% to 1.5% per year, with lower rates for larger accounts and higher rates for smaller ones. Other advisors charge on an hourly or per-engagement basis; such setups can be the most cost-effective for those seeking help with a specific problem rather than soup-to-nuts financial guidance. Brokers will tend to use a commission structure, earning a cut of each transaction in your portfolio.

Once you understand the structure of an advisor or broker's compensation, get those details in writing. Have the advisor estimate what it will cost to create your plan and manage your investments on an ongoing basis, including both fees and commissions, in dollars and cents.

Ask for References

Ask the advisor for references from investment professionals (such as certified public accountants or certified financial planners) or attorneys who have seen the advisor's work before. Such professionals have reputations they won't want to jeopardize.

Quiz 509
There is only one correct answer to each question.

1 If you want to work with a financial advisor, what's the first thing you should do?
a. Decide what you're looking for--a comprehensive plan or help with a specific issue.
b. Set up a meeting with a handful of candidates.
c. Request references from some advisors.
2 What is an ADV form?
a. The contract you sign with an advisor.
b. The advisor's bill.
c. The advisor's resume, assuming he or she is registered with the Securities and Exchange Commission.
3 Which is not a key distinction between brokers and financial advisors?
a. Financial advisors are required to recommend what they deem to be the best products for their clients, whereas brokers are required to recommend products that are "suitable."
b. Brokers always charge more for their services than financial advisors do.
c. Brokers usually get paid by earning a commission on any purchases or sales made in your portfolio, whereas financial advisors use a variety of different compensation structures.
4 What are some hallmarks of an advisor's investing philosophy?
a. How much she charges.
b. Whether she has other clients in your life stage.
c. How often she trades.
5 When might you especially consider using an advisor that charges a flat hourly or per-engagement rate?
a. When you have a specific problem you need help with.
b. When you have a large amount of assets.
c. When you are looking for a soup-to-nuts financial plan.
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