We, the investors of the world, have provided the funds that American companies have needed to finance their growth for the past two hundred years in exchange for the right to participate in that growth and profits that were previously only granted to owners. The investor-management relationship has worked so well that an entire industry evolved to meet the growing number of investors who need information and advice to help investors make sound investment decisions. Originally only available to the very wealthy, the financial services industry has grown over the decades to become the provider of investment information for approximately 40% of American families.
Most financial advisers are affiliated with large investment firms that channel the company’s collective knowledge, information, and experience to their advisory cadre for transmission to individual and institutional investors. In theory, this gave investors associated with large companies potential for returns that they could not achieve on their own or in partnership with a smaller or independent advisor.
Thus, the Financial Advisor who advised you and me was taking the “expert knowledge” of the firms, adapting it to our sanitation and advising us where we should invest our savings to achieve our financial goals. We were told that since 1900, if you remained invested in a well-diversified portfolio, you would never have less than when you started in any ten-year period.
So what happened during the last decade? Most of us lost a significant portion of our savings in the 2001 tech bubble only to lose more of our savings in the subprime bubble. The $ 100,000 we had in January 2001 was reduced to $ 60,000 in October 2003 and then increased to $ 80,000 in July 2007 and is now worth $ 40,000 today. We are eight years closer to retirement and wonder how we will survive if we ever do retire.
Do we plan to work for the rest of our lives? Do we work until we can’t get into Medicaid and welfare becomes a drain on America’s economy? Do we take what we have left and develop a strategy and a lifestyle that will allow us to live a comfortable life without being a burden on the children and our country?
Personally, I think the last option is the best option, but it will require an adjustment in our attitudes and lifestyle. One of the adjustments has to be in how we look at the investment markets and our financial advisers. Whether you need to change your financial advisor or not, now is the time to evaluate the performance of your current advisor and decide if it is time to make a change. I mean a financial advisor, not an investment advisor, there is less than 5% of the world’s population that should seek the services of an investment advisor. Investment markets are not a place most of us turn to to make money; they are a place to preserve our remaining capital and grow that capital at reasonable rates of return.
The first step in choosing your new financial advisor is for you to decide what you want from your advisor after your attitude adjustment. These are some of my suggestions:
o Help me preserve my remaining capital and grow it at a conservative rate of return.
o Help me to live within my means and to establish an investment strategy based on my needs and objectives.
o Help me protect my family from the loss of my earning power or my death.
o Help me and my family reach our financial goals before retirement.
o Help me accumulate enough to enjoy a comfortable retirement.
o Help me assess my need for long-term care insurance.
o Help me establish 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 a variable products license. A Series 66 allows them to sell mutual funds and a Series 7 allows them to sell stocks, bonds, options, and mutual funds. A Series 7 is a more in-depth course of study than Series 66, so I would eliminate anyone who doesn’t have a Series 7 securities license.
Seventy percent of the people who represent themselves as financial advisers stop their education beyond their licenses and their required annual continuing education. It is the other 30% of advisers that you are looking for. These are the people with initials after their names that represent professional designations. At the top of this hierarchical order of designation is the CFP (Chartered Financial Advisor) designation. A CFP is comparable to a master’s degree in financial planning; three years of study and at least three years of practical experience are required. To find a CFP in your community, visit: cfp.net/search. Other designations such as ChFC (Chartered Financial Consultant) and CLU (Chartered Life Underwriter) focus on specific segments of the financial advisory field. These designations are comparable to Board Certifications in the medical fields, and I personally would not put my finances in the hands of anyone who does not take their profession seriously enough to pursue 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 best of ten professions in the United States. This should help you narrow down your list to a manageable number of qualified advisers.
Next, go to the NASD (National Association of Securities Dealers) website and find their short list of qualified advisers. (finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm) Here you can find out your employment history of potential consultants, licensing history and if they have had any legal or disciplinary action against you. We’ve been through some pretty tough financial times over the last ten years and a lot of good advisers have been sued, so use this information as a means of asking your potential advisers some tough questions. “Can you tell me what these problems are about?” Now Google your short list and see what you find; you will be surprised what you will learn.
At this point, you need to sit down with those left on your short list. Here is a list of questions to ask.
o What is your approach to financial planning? If they do not address the “Help Me” points above, you are not a financial advisor. If they start talking about managed accounts, sector investing, momentum, technical fundamentals, or options strategies, you should speak to your investment advisor.
o How much was your business book worth on March 1, 2008 and how much is your business book worth today? Can I see backup reports? They are going to ask you to see your finances, it is fair that you ask to see theirs and if it has dropped more than 25%, you are in the wrong place.
o How do you get paid? There are only three possible answers here; commissions, asset base compensation, gold fees. Most will be a combination of all three possibilities; the one you want to take into account are commissions. Commissions can create a conflict of interest. Asset-based compensation means that as your assets grow, your compensation grows, or as your assets decrease, so does your compensation. I liked that it resulted in a common goal. The fees will involve special work like a financial plan or research project in relation to your specific situation, and that’s fair.
o How often will we meet to review my situation? This should be at least twice a year.
o Tell me about yourself. How long have you been in business? Do you have a professional designation? Have you had any legal or disciplinary action against you? What is your work and educational experience? Have you written any books or articles that you can read? You know all the answers, just sit back and judge.
By following this process, you will find the best financial planner for you. You may end up with the person you have been using, but now you know that they are qualified to provide you with 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. Like managing your health, you must take an active role in managing your finances; Stay involved and understand everything.