We, the investors of the world, have provided the funds that American businesses have needed to finance their growth for the last two hundred years in exchange for the right to share in that growth and the profits that were previously granted only to the owners. The investor-management relationship has worked so well that an entire industry has evolved to meet investors’ growing needs for information and advice to help investors make sound investment decisions. Originally available only to the very wealthy, the financial services industry has grown over the decades to be the provider of investment information for approximately 40% of American families.
Most financial advisors are affiliated with large investment firms that channel the firm’s collective knowledge, information, and experience into their advisory cadre for delivery 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 smaller or independent advisors.
Thus, the financial advisor who advised you and me was actually taking “expert knowledge” from companies, tailoring it for our cleanup, and advising us where we should invest our savings to achieve our financial goals. They told us that since 1900, if you stayed invested in a well-diversified portfolio, you would never have less than when you started in any ten-year period.
So what happened in the last decade? Most of us lost a sizeable chunk of our savings in the tech bubble of 2001 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, then increased to $80,000 in July 2007, and is now worth $40,000 today. We are eight years closer to retirement and we wonder how we will survive if we ever do retire.
Do we just plan to work for the rest of our lives? Do we work until we can’t get into Medicaid and welfare becomes a burden on the US economy? Do we take what we have left and develop a strategy and lifestyle that allows us to live a comfortable life without being a burden to our 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 the way we look at investment markets and our financial advisors. 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’s time to make a change. I’m talking about a financial adviser, not an investment adviser, there are less than 5% of the world’s population that should seek the services of an investment adviser. The investment markets are not a place most of us turn to make money; they are a place for us to preserve the capital we have left and to 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. Here are some of my suggestions:
o Help me preserve my remaining capital and grow it at a conservative rate of return.
o Help me live within my means and establish an investment strategy based on my needs and goals.
o Help me protect my family from the loss of my earning capacity 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’ll need to find a qualified provider. As in all professions, the first qualification to look for 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 deeper course of study than Series 66, so I would rule out anyone who doesn’t have a Series 7 securities license.
Seventy percent of people who represent themselves as financial advisers drop out of school beyond their licenses and their required annual continuing education. It’s the other 30% of advisors you’re looking for. These are the people with initials behind their names that represent professional designations. At the top of this pecking order of designation is the designation CFP (Chartered Financial Advisor). 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, go to: 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 available education. 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 top 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 advisors. (finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm) Here you can learn about your prospective advisers’ work history, licensing history, and whether they have had any legal or disciplinary action against you. We’ve been through some pretty tough financial times in the last ten years and many good advisors have been sued, so use this information as a means to ask your potential advisors some tough questions. “Can you tell me what these topics are about?” Now google your short list and see what you find; you will be surprised what you will learn.
At this point, you should 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 don’t address the “Help Me” points above, you’re not a financial adviser. If they start talking about managed accounts, sector investing, momentum, technical fundamentals, or options strategies, you’re talking to an investment advisor.
o What was the value of your business book on March 1, 2008 and what is the value of your business book today? Can I see support reports? They’re going to ask to see your finances, it’s only fair that you ask to see theirs and if you’re down more than 25%, you’re in the wrong place.
or 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 should take into account is the 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 results in a common goal. Fees will involve special work like a financial plan or research project related to your specific situation, and that’s fair.
o How often will we meet to review my situation? This must be at least twice a year.
or tell me about yourself How long have you been in business? Do you have any professional designation? Have you had any legal or disciplinary action taken against you? What is your work and educational experience? Have you written any books or articles that I 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’ve been using, but now you know they’re qualified to give you the service you need from your new financial advisor.
Choosing your best financial advisor can be just as important as choosing your best doctor, so do your homework and then take responsibility for your decision. As is the management of your health you have to take an active role in managing your finances; stay involved and understand everything.