Choosing an adviser could be the most important financial decision you make in your lifetime. The adviser you choose may mean the difference between financial freedom or paying wasted fees and, in some cases, becoming a victim of fraud.
With so many candidates from which to choose, you need to learn some of the industry jargon, understand the options and define your needs — much like you would with any other professional service.
1. They're not all pros.
Anyone can call themselves a financial planner, but that doesn’t mean they’re an expert investment adviser. So look for experience and credentials.
Check out the person's background and designations at theSECandFINRAwebsites. You probably want a certified financial planner, CFP, at the very least, someone who has passed rigorous standardized exams about managing personal finances.
2. An investment adviser may not be a financial planner.
Most financial planners are also investment advisers, but not all of them. They may be able to recommend some or all of the range of products out there:stocks, bonds, mutual funds, exchange traded funds. They may not, however, be able to assist you in other aspects of financial planning: insurance, taxes, retirement and estate planning.
Either is fine, depending upon your needs. Find out the professional’s limitations, if any. If you're just starting out or are not a "do-it-yourselfer," a financial adviser who can offer you all types of services and products, as well as a comprehensive financial plan, may be the way to go.
3. Meet the prospective adviser in person.
Meet the person face to face. You should be able to feel confident that your adviser is trustworthy and that your personalities match. In times of financial insecurity, this will be the person you will turn to. If you don’t feel comfortable after meeting with the adviser, keep looking.
Does your adviser have a clean track record?
4. Make sure they have a clean track record.
You want an adviser with a clean history. If your prospective planner has received complaints, you should know about them. Obtain a copy of their Form ADV Part Ifrom the SEC website. This document contains information about whether the adviser has had problems with regulators or clients.
5. They should act in your best interest.
Make sure your financial adviser has pledged to act in clients' best interest at all times. This is called "fiduciary duty." (Brokers are held to a lesser standard, though they have to sell you "suitable" investment products.) You are looking for fiduciaries who have pledged to be part of the financial planning honor system.
6. Check out their references.
Ask for the names of three other financial professionals with whom the adviser has worked. You might be able to learn more about the adviser’s abilities and strategies from them. Also inquire whether these individuals get a referral fee from the adviser.
You can also ask your adviser about speaking to other clients, but privacy laws severely limit how much information can be shared. Still, it is worth asking about the number of clients and money under management, and if a single adviser or team will provide all services and oversight. (More:Your Bank Accounts: Are They Really Safe?)
7. Understand how your adviser gets paid.
Is it an hourly rate, flat fee or commission on the value of assets they manage for you or on the securities they sell? Ask for a copy of their Form ADV Part II — or get it from the SEC —which outlines an adviser’s services, fees and strategies. This is the fine print that they may not bring to your attention immediately, but you should certainly ask about it.
8. Know what services are offered.
Some advisers assess every aspect of your financial life, such as savings, investments, insurance, taxes, retirement and estate planning. Others focus on a single objective. Outline the services you need and find out what you will be paying for. An all-of-the-above approach may not work for you if you want advice on, say, just taxes.
9. Ask about the investment strategy.
Are they stock pickers, manager of managers (private funds and mutual funds), buy and hold, active management or frequent traders?
You may not know how to pick the right investment, but you should understand how the investments will work. Ask questions if you don't understand and research material or websites where you can get more information. Don't hesitate to ask for a second opinion. (More: How the Fiscal Cliff Could Hurt Married Couples)
10. Know how often the adviser will be in contact.
Communication is key when determining your financial future with a professional. But how that communication will happen can make or break your experience. How often will your prospective adviser expect to communicate with you and how? Will it be telephone calls, in-person meetings, emails?
You may find that regular reviews and ongoing communication are necessary to keep you on track for your investment and other financial goals. You want to make sure the adviser you hire offers that kind of support.