Thoughts On Choosing A Financial Advisor

by Dual Income No Kids on June 17, 2009 · 0 comments


For many people, getting started in personal finance can be daunting. The ins and outs of asset allocation, goal setting and deciding how to structure one’s money can sometimes be overwhelming. Because of this, many people choose to hire someone to help them with their cash. While we are not experts in this topic, here are some things you might consider when choosing an advisor.

1) Be Cautious:

Its not an accident that caution is the first point in this posting. Most advisers are actually salespeople. That is to say, they are primarily interested in selling you products like insurance or annuities. This is a conflict of interest because the advisor is usually compensated by a third party for selling you these investments. This kind of reimbursement arrangement means you inevitably come second in the advisers mental calculus.

Some people recommend fee-only or fee-based advising to avoid these conflicts of interest. Fee only advising is also problematic. Fee-only advisers are paid by their clients, BUT they tend to gravitate towards strategies which maximize the amount of money they manage for you. This is a problem in situations when your interests are better served by minimizing the amount of money a professional manager holds for you. For example, you might want to put your money into your own business or your employer sponsored retirement plan, rather than a vehicle the advisor controls.

2) Get Someone Experienced:

Naturally you’ll want to pick someone who knows what they are doing. This means they should have at least two things: 1) a formal education in finance or equivalent experience and 2) be credentialed. This means they should have CFP or CFA (chartered financial analyst) and should be licensed in their state.

Some people don’t agree with me on this second point. But, your financial advisor should be older and richer than you. The benefits of learning from someone older are obvious. Whats less obvious is that they should be richer than you. This is important and bears some thought. If your advisor cannot achieve his or her own financial goals, how can they help you reach yours? I would strongly advise you to select your advisers based on their proven experience and ability to generate wealth. They are, in fact, supposed to help you build your wealth and the last thing you want is someone who doesn’t even know how to build their own wealth!

An additional point here is that markets are cyclical, so its important that you’re working with someone who has been through both up and down markets as well.

3) Get Organized:

No amount of good council will help if you don’t have goals. Before searching for an adviser, its sensible to determine what you want to your financial life to look like. For example, if you want to retire by the time you are 65, you’ll need to determine how much money you need. If you want to have enough income to take a vacation twice a year, you’ll need a goal for that too. Don’t forget, goals should be realistic and measurable. That way you have a shot at meeting the goal and you know when you’ve achieved it.

Also, when goal setting, you might consider reviewing your papers to see what your income, expenses and net-worth are. This will help the goal setting processes and empower you to focus on whats working with your finances and what you could improve. Both reviewing your financial papers and setting goals will help you maximize what a financial adviser can offer you. For more information, check out the SEC’s helpful tips on financial advisor selection.

Happy Hunting!

Best,

James

p.s. We don’t have a financial adviser. We primarily make our major decisions in consultation with one another as well as the real estate, accounting and legal professionals we work with – that is of course, if we can get them to call us back!

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DINKS (Dual Income No Kids) Finance focuses on personal finance for couples. While by no means financial experts, we strive to provide readers with new, innovative ways of thinking about finance. Sign up now to get our ebook, "Making Money Tips for Couples" FREE.

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