In order to learn how to find a good financial advisor, you will need to take the four important steps outlined below. Financial advisors are a dime a dozen, but good financial advisors are far more rare. So what are the four steps? First you will need to do your research and find a handful of advisors to interview. Second, you will need to ask each of them the right questions. Third, you will need to do your due diligence. Fourth, follow up on referrals and make a decision. See? Does learning how to find a good financial advisor sound difficult to anyone? Didn’t think so. So let’s hop to it.
Find Some Prospects: The first step in how to find a good financial advisor is to go out and choose a handful of participants for your “financial advisor tryouts” if you will. The financial advisors may consider you a prospect, but in this case, you are the one looking for them. It is a niceSo how is this done? It’s all a matter of personal preference, however, I find that asking co-workers, family and friends is a great place to start. A lot of times you will find that they may have financial planners that they have worked with for years. Nothing is better than a quick personal look into how their advisors do business. If you can’t find any personal recommendations then you will want to do some research online, there are a number of sites that rank local financial planners. This could be a good place to start. Your goal here is to get a handful of advisors to interview. I find that 3-5 is a good number. This way you will get to hear the sales pitch from a couple of different angles. You will also get to hear responses to your questions (which we will detail below) from different perspectives. All of this will help to create a well-rounded knowledge base from which you can make an informed decision.
The Right Questions: So by now you should have your list of financial planners, time to reach out to each and request a meeting. They are sales people so this will be easy. They may even offer to take you out to lunch. Once you sit down with the prospective advisor you will quickly realize that you are being sold. This is ok, let them go through their script, take copious notes of anything that piques your interest. Once they are done, most will ask you if you have any questions. Time to strike! On to the questions:
- Education: The first probing question that you should ask is “Tell me about your education and your professional designations.” This should invoke the financial advisor to rattle off their educational achievements, degrees, licenses and letters behind their name. Again, take good notes here as you will want to compare advisor to advisor on an apples to apples basis. If you like two of them equally, education can sometimes be a great tie breaker!
- How Are You Paid: The next question will differ from advisor to advisor, and the answers will help you decide which direction to go. There are three ways that financial advisors get paid. Listen for commission only, fee based and fee only. Most individuals would prefer a commission only arrangement, since there are no hourly fees associated with less complex planning of this type. However, when dealing with a commission only representative, be sure to understand how their commission structure works. Most financial planners will try to build you a plan around a life insurance product. Commission payments on life insurance are typically 50% of first year commissions. Which, in laymen’s terms means 50% of whatever you have to pay in your first year of coverage. For instance a policy that costs you $1,000 in the first year will pay $500 to the advisor. Just something to keep in mind. Fee based advisors are known to “double dip” on fees and commissions. They generally charge a smaller hourly rate and also receive commission from product sales and assets under management. Fee only advisors work solely on a fee based structure which works well in more complex cases. If you own a business or have generational wealth to protect, a fee only advisor may be your best bet.
- Can You Explain Your Investment Methodology: If you plan on funneling some assets into the hands of your future financial advisor, you should know how they plan to invest it. If your advisor is part of a big brokerage firm, ask if they will be pooling your assets with others to get into alternative investment products, or, if they plan on using mutual fund or index fund vehicles to park your cash. Ask them if they have a track record of annual returns that you could see. If they do, great, make sure that the returns exceed around 3% on average. The higher the better, but you want to make sure that taking the risk profile matches the average return profile. Ask them how they plan to allocate funds as you age. They should provide you with some sort of income protection model that they use with low risk investment vehicles such as treasuries or bonds.
- How Long Have You Been In Business: The last question you want to ask is how long the advisor has been around. The world of financial advising is a turnover haven. Young advisors come and go quickly as sales leads and income dry up. You want to make sure that your time will not be wasted with a flighty advisor. Aim to find someone with 7 – 10 years in the business. This should guarantee that you will have the same advisor working with you for some time ahead.
- References, Please: Ask for a few references, names, phone numbers and years of work together.
Do Your Due Diligence: Now that you have met with your handful of advisors, and asked them the right questions and documented those answers, it is time to do some research on your own. Follow up on referrals, check out the firms that the advisors work for and confirm their credentials on the web if possible. Once you have done all of this, you should have a very good idea of who you would like to hire to usher you down the road of financial strength and well being.
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