September 2005

Choosing a Financial Advisor Who's Right for You

By Leslie A. Smith

Choosing a financial advisor may seem like a daunting task. However, the process of choosing a financial advisor with whom you can be happy, can be easily broken down into several manageable parts.

First: Do you need one?
Common misconceptions about financial advisors can prevent many from seeking the counsel of a good advisor. But unless you have the time, ability and desire to manage all your finances, a good financial advisor or financial planner can be a tremendous asset—if not a necessity. Most people wouldn't think twice about hiring an attorney or finding a good medical doctor. A good financial advisor should fit into this same category.

What is a financial advisor?
That's a more complicated question than it may seem. The National Association of Securities Dealers (NASD), which is charged with regulating the securities industry, points out in its section for consumer education that almost anyone can use the title of financial advisor. So it's important to look at education, registration, licenses and professional designations. (The NASD lists nearly 23 pages of professional designations!)

Generally, a financial planner takes into account all of the many aspects of a person's life—hopes, dreams, desires, taxes, insurance, retirement, budgeting, estate planning. They should look at your entire picture and ask you questions you may have never considered. But a financial advisor might choose to limit their practice to simply offering investments and products. Some financial advisors offer both planning and investment management. A financial planner is usually trained to be much more comprehensive.

What are you looking for and what do you need?
Do you have a financial plan? When it comes to finances, do you feel like a rudderless ship without a plan or a map? Or do you feel like you have a pretty good sense of where you are going and just want to address some specific concerns such as retirement or life insurance? Maybe you are somewhere in between. While it’s helpful if you know what you’d like and what you need, a good financial planner should also be able to help you articulate and define your financial needs. As Will Rogers said, "If you don’t know where you’re going, you’ll probably end up somewhere else." A good financial advisor can help you know where you’re going so you can end up where you need to be.

The following items may be helpful in the selection of a financial professional.

Get names from people you trust.
Ask people whose judgment you respect (friends, neighbors, family, or colleagues) for the name of their financial advisor. If the endorsement is enthusiastic, then one may be enough. If not, get three names and begin the selection process by phone. First impressions count. If your first impression is positive, ask to meet the advisor in person.

When meeting, what should you ask?
Licenses, Education, Registrations: Ask the advisor what licenses they hold and how they are registered. Only Registered Investment Advisors, Certified Financial Planners, or Registered Financial Planners are permitted by law to hold themselves out to the public as a financial planner. A Representative of a Registered Investment Advisor must offer their form ADV (the name of the official form a Registered Adviser must use by law when they become licensed and register their practice as required) and a contract to a new client. Advisors must be registered with the state or the Securities and Exchange Commission and their name can be found at www.adviserinfo.sec.gov. To achieve these registrations or professional designations requires not only experience and a lengthy qualification or certification process but also stringent ongoing continuing education and testing.

If your advisor will be trading securities for you or helping you with your insurance needs in addition to financial planning, they should hold a NASD securities license and/or an insurance license (the number must be listed on their business card). You can verify this license and check for complaints through the State of California Department of Insurance website at www.insurance.ca.gov. Even an independent financial advisor is required to be licensed through the NASD and use a registered broker/dealer to conduct securities transactions on your behalf. Ask what licenses the advisor has and what firm the transactions are cleared through. You can determine if the individual as well as the firm are properly licensed through the NASD website www.nasd.com.

Find out if the firm they are affiliated with is a member of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a firm becomes insolvent.

Experience:
The true test of an investment professional is how many bad markets they have survived. True expertise gets tested in difficult markets. What experience does your advisor have? Will they be with you when economic times are poor? Are they willing and do they have the courage to ask you tough questions and deliver bad news if they need to?

How will your advisor get paid?
An advisor typically gets paid in one or more of the following ways:

• By an hourly fee
• By a flat or comprehensive fee
• By a commission on the investment products sold
• Through a percentage of the assets managed on your behalf

Many advisors offer a number of choices. For example, if you want a financial plan, an hourly or flat fee might be best for you. An advisor will put into writing what the fee will be based on and what they will provide in return. If you have retirement assets or an inheritance, a commission from investment products might be better for you. Commission based products have gotten a bad reputation in the past; but as commissions are reduced industry-wide, this form of payment is seeing a resurgence, as it is often in the best interest of the client. Your advisor may offer multiple choices but should never be double-charging you, i.e. being paid commission on a product by a company and also charging you an hourly fee for the same work.

Intangibles and Miscellaneous:
Have you ever made a decision based on a "gut" feeling or instinct? While all of the items listed above are of supreme importance in finding the best financial advisor for you, the value of the gut test should not be overlooked. Does the advisor seem to be client-centered? Do they appear interested in whether they can serve you efficiently and effectively given their experience and expertise? Does the advisor seem to be overly anxious to have you as a client or do they express a desire to determine if the two of you will be a good "fit?"

Research conducted in 2001, well into the market downturn, by an industry research group CEG Worldwide, found that client-centered advisors were fairing better than product- or investment-driven advisors by almost any measurement—new clients from existing clients, average assets under management, and acquiring new assets from existing clients. CEG defined client-centered advisors as those who know what their clients want, communicate effectively and proactively, and take client-centered actions. While harder to measure and define, these intangibles are important in the selection of a financial advisor who's right for you.

Leslie Smith, a Financial Planner is Principal of Coronado Financial Group, LLC, a state Registered Investment Adviser. She has over 20 years experience in financial planning, investment management and insurance. She holds NASD licenses series 7, 26, 24, 63 and 65 as well as a CA Insurance license #0777261. Contact her @ 650-571-8132, or LSmith@coronadoadvisors.com
Financial Planning services offered through Coronado Financial Group, LLC.
Securities offered through SunAmerica Securities, member NASD,SIPC, member AIG Advisor Group.

© 2005 Leslie A. Smith. All rights reserved.