Friday, January 16, 2009

Financial Advisors, Sharks, and How to Tell the Difference

Don't let confusion or intimidation about the investment world prevent you from securing your financial future. Many of the concepts you need to understand can easily be explained in plain English, and this blog seeks to do just that. But, ultimately, you will still have to make specific investment choices for yourself.

There simply isn't any one formula or "silver bullet" investment plan that is right for everyone. Professional investment advisors exist for the purpose of helping you sort out your own ideal investment mix. Unfortunately, as recent Wall Street scandals have shown, there are some unscrupulous people working in this business, so I'd like to offer some advice for helping you to pick an advisor.

Probably the most important thing to watch out for in seeking investment help is conflict of interest. Your advisor should be working with only your best interests in mind, so that's why I recommend that you avoid advisors who accept commissions or payment from mutual funds, insurance companies, or any third party. Look instead for a fee-only financial planner. These advisors may charge you a higher hourly rate for their time (or may not), but you get the assurance of knowing that they are really working for you, instead of essentially working as salesmen for someone else. If you have any doubt about this, don't hesitate to ask them directly whether or not they accept any sales commissions or third party compensation. There is also a national association for fee-only advisors, the National Association of Personal Financial Advisors.

Other important factors to inquire about include experience, training, track record, and investment style. After reading this blog and other investment advice, you may have already reached some conclusions about your own risk tolerance and investment preferences. Most good advisors are open to discussing these issues with you and honoring your personal wishes. Sometimes, people with very low risk tolerance get mismatched with an aggressive financial planner and wind up being taken on a roller coaster ride that they otherwise wouldn't have chosen to get on. Or the opposite kind of mismatch can happen, too.

Impressive past results and glowing reviews from satisfied clients are great, but remember that your own results may differ, and your personal needs may be different from the needs of those other clients. Don't look for hotshot performance or trendy investment choices. A good financial plan seeks long-term, stable, reasonable returns.

Also, be aware that there are no legal training requirements for financial advisors, but of course you want to find a knowledgeable one, so a Certified Financial Planner (CFP) credential, or at least a business degree, is probably a good thing to look for.

Ultimately, you don't have to hire a financial advisor. You could, for example, do some homework and calculating on your own, and then pay a modest sum to a fee-only advisor for a brief session to review and critique your plan.


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I am planning on having a financial adviser and I am very thankful to read this post first. Now I know that choosing a right financial adviser is not that easy.

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