“Trust, but verify” is how Ronald Reagan defined his position on global arms treaties. When choosing a financial adviser, the same imperative holds. While the vast majority of advisers are honest professionals, there are often conflicts of interest that can lead to reduced investment returns or even loss of capital.
Moreover, in the current economic climate of low interest rates, sluggish growth and diminished portfolio values, finding a financial adviser to fit your needs will take effort. Here are general descriptions of services, competence and conflicts of interest to get you started.
Services: There are three general categories of financial advisers — stockbrokers, advisers and planners. Stockbrokers can help with specific investment choices (e.g. equity, mutual funds). Brokers are basically salespeople earning commissions per transaction or annual service fees. Financial advisers can work independently or within a Wall Street firm. They provide comprehensive financial planning and can manage all your investments charging 1 percent to 2 percent of assets annually. Financial planners also provide comprehensive planning but money management is usually left to the client. Some firms offer more than one service.
Competence: More than 100 different “titles” are used in the advisory business. Some are knowingly deceptive. “Certified senior advisor” (CSA) for example, was a title granted after a three-day at-home study course and multiple choice test. CSAs focused on selling unnecessary high commission products to older investors. Regulators ordered the firm touting these specialists to cease-and-desist. Others designations like “certified financial planner” (CFP) and “certified financial analyst” (CFA) are examples of titles earned after years of experience, rigorous study and exams. The National Association of Securities Dealers website (NASD.org) has a list of designations and their requirements.
Conflicts: There are five different compensation mechanisms in the advice business: percentage of assets under management; hourly fees for specified services; fixed fees; commissions on securities sold; or a combination of these. Conflicts can arise when the adviser receives commissions on investment products, begging the question of objectivity. While there is a general move away from commissions, most advisers still receive payment this way. One compensation poll by Investment Adviser magazine indicated 30 percent of advisers are fee only; 16 percent are 75 percent fees; 18 percent are 50 percent fees; 14 percent are 25 percent fees; and 18 percent commissions only.
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