En español | The latest stock market volatility has a lot of people seeking assistance in managing their money. If you're working with a financial adviser — or were thinking about hiring one — you may be wondering if it's worth it to have professional help in planning your financial future.
See also: How to check out your investment broker.
The decision to retain a money-management pro shouldn't be taken lightly. And it shouldn't cost you an arm and a leg either.
Here's how to get the most out of your financial adviser, and make sure you get your money's worth, too.
Recognize the Differences Between Advisers
Based on how they are paid, financial advisers are generally classified in three ways: as fee-only planners, fee-based advisers or commission-based advisers.
With fee-only planners, there is no conflict of interest because the adviser will charge either an hourly fee or a flat annual fee based on a percentage of your assets he or she is managing. In the latter case, when you make money, so does the adviser. Likewise, if you lose money, so does the adviser. In this way, your goals are aligned.
With fee-based planners, there is some potential for a conflict of interest. If you use a fee-based planner, you will generally receive a written financial plan or report on which a fee is charged, theoretically for an objective analysis of your situation. Frequently, however, the plan will recommend that you purchase a commissionable product, like life insurance, annuities or mutual funds.
You may very well need those products. But just be aware that "once a product is purchased, the adviser receives a commission, so there is clear potential to craft a written report that could substantiate the need or reason to purchase a highly commissionable product," says Debra Morrison, a certified financial planner based in Lincoln Park, N.J.
Lastly, a commission-based financial adviser, sometimes called a financial consultant or representative, is actually a salesperson for a company or companies. "Since the representative only earns money when a product is purchased, there is obvious incentive to sell products, and particularly highest commissionable products, such as life insurance and annuities," Morrison says.
The bottom line: Financial professionals make their money through various compensation models, so make sure you ask about any real or perceived conflicts of interest and know exactly how your advisor is being compensated.
Ask the Right Questions
In order to gauge whether you're truly getting good value from a financial adviser, you'll have to pose a series of questions in your vetting process.
Your first question should be: "How are you compensated?"
"If a person starts squirming around because they get paid a commission and they really didn't want to talk about that, it's a big red flag," says Morrison.
Four other questions you should ask are:
1. "What is your educational background and what professional credentials, licenses, certifications do you hold?"
Practically anyone can hang out a shingle and call himself an "adviser." But highly qualified experts will have designations — such as CFP or CFA — that are earned based on experience, continuing education and adherence to a professional code of conduct. FINRA offers good advice about understanding professional designations.
2. "How many other clients do you have that fit my profile?"
You want an adviser who is accustomed to dealing with clients like you.
3. What specifically will you do for me?"
You want to know if the person will make investment recommendations, manage money on your behalf, create a financial plan for you, or perhaps suggest money-savings ideas you can implement.
4. How do you prefer to communicate?
"You definitely need to ask this question, or at least say: 'I prefer telephone calls, face-to-face communication or emails and here's what I expect,'" says Diahann Lassus, a certified financial planner and the president and co-founder of Lassus Wherley, a fee-only wealth management firm headquartered in New Providence, N.J., with a branch office in Bonita Springs, Fla.
"If your expectations are at a level that an adviser can't do, you should move on — or you may have to adjust your expectations," Lassus adds.
Don't Be Afraid to Talk About Fees and Costs
Mark Cortazzo, CFP and founder of MACRO Consulting Group in Parsippany, N.J., says that unfortunately there's not a lot of disclosure about fees in the money management business.
"It's surprising to me that with all the money being managed, there is no place to get side-by-side comparison pricing on what various firms charge to do asset management," Cortazzo says. "I don't even know how a consumer has a way of gauging whether they are on the high end or low end."
If you want to know about the cost of your mutual funds, you can look up the average expense ratio with firms like Morningstar. But nothing like that service currently exists among money managers. (BrightScope, which rates retirement plans, recently launched a new, free way for consumers to research and select financial advisers. While the company doesn't yet disclose fee arrangements for advisers, BrightScope says that information will be forthcoming soon).
That's why Cortazzo recently began a program called FlatFeePortfolios.com, which offers a uniform pricing structure of $199 a month to all clients — regardless of whether your retirement assets are $250,000 or $2 million.
For those with assets of less than $250,000, the monthly fee is $129. Each option provides clients with two reviews a year, quarterly reports, professional rebalancing of funds, and video updates, among other things.
One thing that's not included: face-to-face service.
Experts say that in general, high net worth retirees and pre-retirees with sizeable portfolios — typically $1 million or more — are the clients who primarily get "high touch" service. That means more frequent in-person meetings, usually twice a year or so, along with routine phone calls that may include key members of the investor's financial advisory team.
These well-heeled individuals, advisers say, have more complex finances that require a lot more account analysis, tax issues, coordination with attorneys and other professionals, as well as higher-level financial planning.
"For the majority of individuals that have money in IRAs and who are still in the asset accumulation phase, they just need good guidance and basic coordination," Cortazzo says.
Morrison, the CFP based in Lincoln Park, N.J., agrees.
"I don't want my clients looking at their investments quarterly, as investing is a long-term endeavor," she says. "So unless there are planning opportunities or situations, I do not meet quarterly, on a face-to-face basis."
If you're shopping around for a financial planner, advisers say that fees of $150 to $250 an hour is a good benchmark. Several experts recommended the Garrett Network or NAPFA, the National Association of Personal Financial Advisors, to find fee-only advisors within this price point.
A fee-only planner that charges you 1 percent to 1.5 percent of the assets she's managing for you is competitive, experts said. If you can get less than 1 percent, that's even better. But for fees in the 2 percent range, that adviser had better be delivering exceptional value and service — otherwise he's overpriced.
Ultimately, Cortazzo says, "You need to feel comfortable and confident with the person. But you need to get a sense that the person really cares about you and your success and that they're structuring how they work with you to align your interest with theirs."
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