Broker Check

Who can you trust with your money?

| December 05, 2017
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When it comes to having people in your corner, there are a couple of professions you should spend a significant amount of time researching. The three I think of, in no particular order, are your doctor, your insurance agent, your financial advisor, and your accountant.

Having competent and trusting people in your network can make an enormous difference in your life. It can remove stress and give you much deserved peace of mind.

Since he or she will be handling your financial future, it is very important the financial advisor you choose is researched, interviewed, and properly vetted to ensure your finances are properly taken care of. Here are some tips for doing so.

Do I need one?

You first need to ask yourself if you need a financial advisor. If you are young and just entering the workforce, it probably isn’t essential to have one. An advisor likely isn’t necessary is if you are investing using a brokerage account and index funds. You save and invest money into index funds, which are designed to track the market and save you money on fees.

When a situation arises that requires a financial professional’s advice, there are certain things you should look for:

  1. What licenses do they have?
  2. How are they compensated?
  3. Are they a Fiduciary?
  4. What is their philosophy on money/investments?

Licenses

The licenses a financial professional has can say a lot about what they offer. An advisor that has a Series 6 is fairly limited as to what investments they can sell, but one that holds a Series 7 has many more financial products at their disposal. In addition, there is also a Series 65, which gives them the title of Registered Investment Advisor (RIA). A RIA is automatically held to the Fiduciary standard, which says that the advisor must act in his/her client’s best interest.

Compensation

An advisor’s compensation is a very important question. Some advisors will get paid commissions on certain products they sell you. It is important to know an advisor compensated by commissions has to recommend products that are suitable for you, but can recommend a product that fits your investment profile as well as earns them a high commission.

A fee only advisor, on the other hand, is usually held to the Fiduciary standard. Because they are compensated by a fee, be it hourly or assets under management (AUM), they don’t have an incentive to sell a product with a high (if any) commission.

Money/Investment Philosophy

The last thing you should ask about is the advisor’s investment philosophy. This is the person’s view on money, investments and other finances. As an example, I will use my personal philosophy.

My view comes from a position of increased savings and cutting of costs. People can often save more money than they think, so I encourage people to create budgets and find places where they can cut costs and save more. In addition to this form of cost cutting, I also believe people should pay very close attention to how much they are paying in commissions, fees, and expenses. The amount you play for these services can have a huge impact on the size of your nest egg in retirement.

I focus on these two aspects because I believe relying or having a heavy focus on investment performance is a poor approach. Investment performance will vary, and isn’t something you should count on. An annual return of 10% versus 5% is a dramatic difference. You will not and cannot know what your investments will do in the future. The only way to have some control over your future nest egg is to save as much as you can and cut costs.

Conclusion

Your financial advisor will play a significant role throughout your life. Being diligent in your selection process is extremely important and can make or break your financial future. Use the tips I’ve provided when looking for an advisor and make sure you interview more than one during your selection process.

Note: The materials provided in this article are opinions from the author and should not be taken as personal financial advice. Please do your due diligence and consult with a financial professional before making any financial decision.

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