1. Choosing a Financial Adviser
Jennifer Abel,
Virginia Cooperative Extension
November 3, 2004

2. What the Wrong Decision Costs You
Money
Time
Legacy

3. Five Steps to Choosing a Financial Planner
Consider your needs
Gather names
Separate the wheat from the chaff
Meet the candidates
Choose your adviser

4. Whether or not you need an adviser will depend on:
The size of (and types of investments in) your portfolio,
If you have confidence in your own investment knowledge, expertise or experience,
Whether you feel you can rely on your own research,
How willing you are to share the needed information (personal and financial) with an adviser,
The amount of time you can devote to your investments.

5. Before seeking an adviser, it is important to:
Know your investment goals.
Examine your personal and financial situation.
Acquire some basic knowledge about investments.
Think about what type of advice, information and services you want and need.
Learn about the various types of financial advisers and the services they offer.
--are you saving for retirement, college, a home? Do you want more than just investment advice?
--Can you afford the fees that you’ll be expected to pay ($600-$900 for someone to develop a plan for you, more fees for subsequent meetings)
--Have an understanding of the different investment vehicles, what options are open to you at work, your tolerance for risk.
--will you need advice on life insurance, estate planning, taxes, other financial matters? Your needs will determine who you choose.
--the types and services will be covered in the next slides.

6. Gather Names Financial Planning Association (www.fpanet.org)
National Association of Personal Financial Advisers (
Certified Financial Planner Board of Standards (cfp-board.org)
Accountant or attorney
Friends and Family

7. Separate the wheat from the chaff
Understand what the credentials mean
Search for experience
Determine who has your best interests in mind
Find out how they get paid

8. How advisers get paid Commission Fee-only Combination
--Those who work on commission make most or all of their money on the sale of investments or other products. They will therefore steer you towards those that will allow them to make money.
--Problems with commission—who’s the boss, churning, high-priced products.
--Fee-only planners are more expensive but have less to gain from selling you certain products.
--Their fees may be based on an hourly charge, a specific charge associated with a specific service or a percentage of a client's assets or income.
--Be aware that while fee-only planners do not sell financial products (and charge commissions), there may be some type of fee charged by whoever handles the actual purchase or sale of the investment the planner recommends.
--Combination: a combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommendations and commissions are received from any products sold. In addition, some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations.

9. Investment advisers may include:
Registered investment advisers or stockbrokers
Representatives of financial institutions (banks, credit unions, etc.)
Financial planners (with certification from various credentialing organizations)
Insurance agents
Accountants

10. Registered Investment Advisers
Must register with state in which they are doing business
Must register with SEC
RIA designation means passed at least one exam and has registration application approved by state

11. Registered Representative
Also called stockbroker
Must be licensed through the NASD
Usually refers to those employed by registered broker-dealer
Are authorized to buy and sell stocks, bonds, and mutual funds
Link between investor and the traders on floor of stock exchange
--must pass series of securities exams, depending on which securities are sold.
--National Association of Securities Dealers
--Most stockbrokers charge a commission on the value of the securities they sell, also often an annual fee.
--Full service brokerage firms often offer investment advice and ideas. They often have research departments they can produce reports about investment progress and can offer other services to help in evaluating investment alternatives. They may be willing to work with investors to arrange their portfolio to reach investment goals.
--When fees are based on transactions, the larger, more active accounts often receive the most attention from stockbrokers. If you don’t have one of these large accounts, the onus will therefore be on you to keep in contact with your stockbroker to get the advice you need.
--Discount brokers are a lower cost alternative to buying securities if you already know what you want. They offer similar products but no advice to help you evaluate strategies and alternatives.
--If you wanted to make your trades through a discount broker, you could subscribe to an investment advisory newsletter so that you could keep up to date on developments and then feel better educated about the choices you make.
--Discount brokers charge commissions 30-70% less than what the full service operations charge, but there are often minimum fees, so small transactions can cost as much as they would with a full service outfit.

12. Checking up on RIAs and stockbrokers
In Virginia, the Division of Securities and Retail Franchising registers and regulates investment advisors.
Part of the State Corporation Commission
Visit to find out more about registration guidelines
--Some states have investor hotlines and will allow you to search their websites to find out registration information, qualifications, and backgrounds of individual advisors and broker dealers.
--Virginia doesn’t make it easy. This kind of info is not on their website, and when I called them I was transferred four times until I got someone’s voice mail.
--The kind of info that is available on the website are the forms that the advisors have to fill out to register and links that allow consumers to file complaints. There are also investor alerts and articles and investor education links.

13. Representatives of Financial Institutions
Reps. of banks or credit unions can help you select savings alternatives
Usually targeted toward your emergency fund and short-term goals fund
No fee
Don’t have to be registered or licensed unless they are involved in securities sales
--If involved in securities sales, then do need to be registered with SEC and licensed by NASD.

14. Financial Planners Credentials Business Degree
Certified Financial Planner (CFP)
Chartered Financial Analyst (CFA)
Charter Financial Consultant (ChFC)
Personal Financial Specialist (PFS)
Business Degree
--These professionals tend to take a broader look at your entire financial situation: current cash flow, spending plan, net worth, savings, investments, taxes, insurance and retirement and estate arrangements.
--In addition to investment advice, these people offer advice on insurance coverage, tax planning, retirement planning and estate planning.
--Must be registered by SEC and licensed by NASD

15. Letters behind a name: CFP
Certified Financial Planners
Must complete an 18 month study course
Must pass a 10-hour exam that covers risk management, investments, taxes, retirement planning, and estate planning
Must have three years work experience
Adhere to prescribed code of ethics
Continue to update knowledge in the field
Certified by Certified Financial Planner Board of Standards

16. Letters behind a name: CFA
Chartered Financial Analyst
Awarded by the Association for Investment Management and Research
Can take three levels of examinations
Training focuses on skills needed in asset valuation and portfolio management
Adhere to strict code of ethics
Visit to find out more
--For example, the first level includes such areas as understanding investment analysis and management, financial markets, portfolio management, and securities law.

17. Letters behind a name: ChFC
Chartered Financial Consultants
Designation offered through the American College in Bryn Mawr, PA
Must complete eight courses in economics, investments, insurance, and taxation
Outgrowth of the Chartered Life Underwriter program, which features extensive study of insurance
Learn more at:
--This designation is broader than the CFA and is like the CFP in terms of the services that can be provided.
--Also have to fulfill experience requirements and adhere to code of ethics.

18. Letters behind a name: PFS
Personal Financial Specialist
Designation obtained by Certified Public Accountants
Need additional specialized education beyond that required for CPA
Allows them to give investment advice and to provide a broad range of financial services

19. Letters behind a name: AFC
Accredited Financial Counselor
Designations awarded by Association for Financial Counseling and Planning
Must pass exams in personal finance and financial counseling
Must follow AFC code of ethics
Commonly employed by credit unions or other institutions where fees wouldn’t be charged for services

20. Insurance Agents Serve as advisers about risk management
Exclusive agents represent one company only
Independent agents can select from several companies that fit your needs
Make sure the agent and company are licensed by Virginia Bureau of Insurance:
--Insurance agents who receive compensation for investment advice or sales of securities must also be licensed by the Virginia Securities Division and the NASD. This additional licensing is not required if advice or sales are limited to fixed-rate annuities issued by insurance companies.
--Insurance agents make most or all of their income from commissions on the sale of insurance and other investment products.

21. Accountants
Certified Public Accountants must become certified and licensed to practice
Licensed and regulated by the Virginia Board of Accountancy
Aren’t investment advisors
Can provide general information or analyses of various types of investments
Charge only for their time
--They obtain extensive education and experience in accounting, auditing, economics, finance, management, taxes and consulting services in relation to various types of business and personal financial matters.
--They can also help you evaluate the possible effects of investment alternatives on your overall financial condition, income taxes and future estate taxes.
--Must have an additional designation to offer investment advice.
--Or charge a set amount for a given service

22. Attorneys
Can tell you about the tax and legal implications of your investments
Should not be considered primary investment adviser
Licensed and regulated by the Virginia Supreme Court
May charge flat fee, hourly rate, or combination
--They are the only professionals who can provide legal advice, resolve legal and property transfer problems and prepare legal documents.
--Attorney fees are high, so you will want to have specific questions ready to ask before consulting with them. However, it may be more costly in the long run if you do not consult an attorney in relation to complex matters like estate planning.

23. Team of Advisors Many people use a team approach
Could include financial planner, broker, banker, attorney, accountant, insurance agent, or others
May want to select a “team captain”

24. Meet the Candidates Feel Comfortable Financial Expert vs. Salesman
Experience and Education
Specific Questions

25. Meeting the Adviser: Expert vs. Salesman
Don’t be impressed with the name or office
Comprehensive planning vs. Investing
Does the planner promise to beat the market
(Hint: Good planners usually bear bad news on returns)
Investment philosophy
Long-term Buy-and-Hold vs. Frequent trading
Index Funds

26. Meet the Planner: Experience and Education
Look for business or economics degrees
Less important if they have credentials
Consider previous experience
Have they worked major brokerage house or a small planning firm
If from another field, ask why they left and why their previous experience helps in this field
How many years in financial planning

27. Specific questions to ask advisers
What kind of advice and services do you offer?
Do you share (or will you honor) my investment philosophy and tolerance for risk?
What type of clientele do you specialize in?
What is the adviser’s questioning technique?
--Ask for an example of general recommendations for people in your situation.
--Are they clients who are similar to you in terms of age, income and objectives? For example, investment advisers who work mainly with those nearing retirement may not be the best choice for younger, aggressive investors.
--Will the questions provide the degree of insight needed into your current financial situation, your goals, and your tolerance for risk in order for the adviser to provide the appropriate advice?
--Registered investment advisers and registered representatives are required by Virginia regulations or NASD rules to make sure all investment recommendations are suitable for your financial circumstances and needs. The ethical codes of behavior established by self-regulatory membership organizations often have similar expectations.

28. More questions to ask
Does the adviser take the time to explain the investment alternatives and their risks?
Do you feel comfortable with the adviser and the answers provided?
Is he/she familiar with recent tax laws and regulations?
Does the adviser have a broad variety of investment products and companies from which to choose?
--Will they help you to use research reports and understand what they mean?
--How do they keep up with recent developments.
--Does the adviser have any biases, and if so, how do those biases fit with your needs? As a potential investor, you need to determine if the range of choices available will suit your particular needs.

29. Questions, continued
For advisors who sell investments, what sales technique do they use?
What knowledge, experience, and credentials do they have?
Check the performance record of the firm and adviser you are considering--especially for other clients with similar goals.
--Beware of the "now-or-never, once-in-a-lifetime" approach. Good investments will always be available.
--Be extremely wary of investment advisers who give you few or no alternatives, or who try to pressure you to invest in certain investments.
--Ask about their educational background, training and certification.
--What memberships in professional organizations do they have?
--Professional affiliations can help your adviser keep up-to-date on a variety of subjects.
--The length of time in business is a good indicator of experience. A beginning investor may prefer to deal with experienced advisers, feeling that two beginners may mean disaster. Others don't mind the fresh perspective of someone new to the business.
--Don't be surprised if you are referred to the firm's most recently employed investment adviser. Such an adviser may not have many clients, and the office policy may be that all new customers are referred to the newest employee.
--How have their clients' accounts done in the past 5 to 10 years? Does the firm have an audited track record of its investment recommendations?

30. Questions, continued How active are most accounts?
How accessible is the investment adviser?
How often will you be sent statements summarizing your account, confirmations of your trades and other information?
What is the fee structure for the various types of advice, information and services provided?
--A lot of activity with little net gain may indicate an adviser is "churning" the portfolio to generate commissions (note that churning and similar abuses are illegal under securities laws).
--Will you be able to get in touch with the adviser when you need to?
--How heavy is the adviser's client load?
--Ask about other possible situations where fees may be charged. For example, what if you need your funds in an emergency? How soon can you get them, and is there a fee?

31. Questions, continued
Does the adviser have a working relationship with other professionals, and will he/she provide references?
How long has he/she been practicing, and what did he/she do before?
“What are your areas of expertise, and how do they relate to my needs and goals?”
--It's important that your adviser be ready to work with other experts if your needs fall outside the adviser's area of expertise. This is your chance to find out if your adviser is a team player and to assess the adviser's reputation among other professionals.
--Financial advisers come from a variety of backgrounds and have different levels of experience. The right answers to these questions simply are answers you are comfortable with. Everyone has to start somewhere, and if you're just beginning your career, a new financial planner might be a great fit for you.
--Evaluate each adviser you meet based on his or her ability to help you fulfill your unique goals and dreams. Remember that financial advisers offer a variety of services, and some professionals specialize in niche areas.

32. Questions, continued
“How will we work together, and what do you expect from me?”
“Can I have it in writing?”
Could anyone besides me benefit from your recommendations?”
“After assessing my risk tolerance and goals, how do you decide what percentage should go into each type of asset?”
--It's important that you are comfortable with the relationship. Some advisers may work with you one-on-one, face-to-face. Others may have other team members who'll work on your account. Again, there is no right or wrong answer. Just make sure you are comfortable with the arrangement.
--Ask the planner to provide you with a written agreement that details the services that will be provided. Keep this document in your files for future reference.
--Some business relationships or partnerships that a planner has could affect her professional judgment while working with you, inhibiting the planner from acting in your best interest. Ask the planner to provide you with a description of her conflicts of interest in writing. For example, financial planners who sell insurance policies, securities or mutual funds have a business relationship with the companies that provide these financial products. The planner may also have relationships or partnerships that should be disclosed to you, such as business she receives for referring you to an insurance agent, accountant or attorney for implementation of planning suggestions.
--types of assets being stocks, bonds, real estate, and so on. Lots of advisers use optimization software that sets exact percentages that should go into each asset class to optimize your portfolio. To do this, optimizers need projections of future returns. No one can say for sure what those returns will be, so next question to ask is: How are the projections determined and what makes you think they’ll be right?” Optimizer replaces rather than fosters careful thinking. Is adviser aware of the limitations of this approach? If not, go somewhere else. If so, adviser also needs to understand how inputs are determined and why they’re reasonable. Good adviser acknowledges limitations, explains research behind projections, allows for additional projections to see what the outcome might be if the base assumptions are wrong.

33. Questions, continued
“Do allocations change? If so, how do you decide what to change them to?”
“How do you pick investments?”
“What else do you do that adds value for me?”
--Some advisors select allocation and stick to it. Others try to achieve better earnings by occasionally changing allocations. This approach demands research and discipline. If adviser changes weightings, ask how he/she determines changes and how big they are likely to be (bigger mean more opportunity but more risk). If adviser can’t explain his rationale, there probably isn’t one.
--This question gets at the issue of whether or not your adviser benefits personally from any of the investments selected for you. Good advisers know the reason every asset was selected for your portfolio. He/she has well defined criteria for selecting investments, follows performance, and can articulate specifics about why their choices are sound. Have your adviser walk you through the justifications for a few of the investments he/she has selected for you. An adviser who can’t give sound, research-based reasons for every investment you own is substituting hope for skill.
--Good advisers consider the tax impact of every move. May spot opportunities to reduce your tax liability by shifting income form one year to another, spotting a good time to do Roth conversions, using tax sheltered college savings plans, or finding other means. They might be able to give advice on your 401k plans.

34. Points to remember: What do you want in an adviser?
Some advisors handle investment purchases and sales
Others are consultants, offering information and advice
Some will manage your investments and act on your behalf
Others provide info when you ask and let you know of investment opportunities
--Before interviewing potential investment advisers, it is very important that you think carefully about what type of advice, information, and services you want and need.

35. Once you’ve identified potential advisers:
Correspond with some by and telephone
Schedule an interview with several advisers
Inquire about fees when you make the appointment
--See if the advice, information and services they provide match those you need.
--They should be willing to spend some time with you at this initial meeting at no charge.

36. Key facts about interviews
You are interviewing the advisers; they are not interviewing you
You are deciding whether to employ them
It is your money and future at risk
Ask for references of former and current clients
--Follow up by talking to as many of these references as feasible.

37. Other sources of advice
Consult investment newsletters
Read magazines
Business Weekly
Forbes
Fortune
Kiplinger’s Personal Finance
Money
Smartmoney:

38. Investment Newsletters
Value Line Investment Survey—detailed information about individual stocks
No-Load Fund X
Equity Fund Outlook
No-Load Fund Analyst
The Prudent Speculator
The Chartist
Hulbert’s Financial Digest—provides monitoring of investment newsletter performance

39. The choice is yours Financial advisers can provide guidance
Decisions rest with you
Be knowledgeable about your goals and financial situation
Know enough about investments to ask the right questions
Insist on understanding the plan and its implications
--…and understand the answers and implications of various decisions.

40. Adviser won’t always be right
They are only human
More important that they be:
Honest
Knowledgeable
Straightforward
Provide good service
Understanding of your financial goals
--They need to work for and with you

41. STEPS REVIEWED Consider your needs Gather names
Separate the wheat from the chaff
Meet the candidates
Choose your adviser, or decide to go it alone

42. Sources
Bizjournals Planning for the Financial Future: Choose adviser to match your personality, goals. Online:
Brimelow, Peter “Investment newsletters 101,” Forbes.com. Online:
Cavanaugh, Joyce Choosing a Financial Adviser. University of Missouri Cooperative Extension; Columbia, MO.
Certified Financial Planner Board of Standards Tips for Choosing a Financial Planner.
Esbenshade, Amy. March, “They ride the hot funds,” Kiplinger’s Personal Finance Magazine. pp
Gregory, Ken and Savage, Steve. Oct., “Questions for your adviser,” Kiplinger’s Personal Finance Newsletter. pp