Understand your needs in seeking help with finances


Your Money

August 22, 2004|By EILEEN AMBROSE

OFTEN, IT'S some major financial decision appearing on the horizon that causes do-it-yourself investors to throw in the towel and seek professional help.

And once they decide to hire an adviser, they typically ask friends, family and co-workers for the name of a broker or financial planner and consider their homework done.

Far from it.

"If your entire financial future rests on somebody, it doesn't hurt to do as much research as you would to buy a car," said William Droms, a finance professor at Georgetown University.

That research should start with understanding what sort of financial advice you need, experts said.

Do you want help with estate planning, budgeting or navigating long-term care? Do you want a stock picker, or someone to advise you on how to withdraw cash from retirement accounts without running out of money?

Will you need a lot of hand-holding, or are you just looking for a financial plan that you can carry out on your own with occasional checkups?

Once you understand your own needs and have compiled a list of three to five professionals, then you're ready to find the best adviser for you.

Here are things you'll want to know about your adviser:

Experience and education: Every new adviser needs to learn the ropes, but should you be the guinea pig?

"I don't want to be their first client," said Droms, who recommends an adviser have at least five years experience.

You'll want to know an adviser's work history, too.

"If they change firms once a year, I want to know why," Droms said.

Find out what the professional did before offering financial advice.

"Someone's prior work experience might give you a clue to what kind of bent or tilt they would have in the advice they give you," said David Yeske, board chairman of the Financial Planning Association. For example, someone coming from the insurance industry might tend to favor insurance products, like variable annuities, Yeske said.

Besides regular schooling, what financial education has the adviser undergone? Generally, advisers who pursue additional instruction receive a professional designation. Find out what the designation means and what it takes to earn it, experts said.

"Some of them require a lot of educational training and have experience requirements, continuing education requirements and very strict testing," said John Gannon, vice president of investor education for the National Association of Securities Dealers. "With others, you pay a couple hundred dollars and take an online four-hour course and get a certificate."

For the lowdown on designations, check out the NASD's Web site at www.nasd.com.

Droms recommends one of the three major designations: certified financial planner (CFP), personal financial specialist (PFS) and chartered financial analyst (CFA). Designations don't guarantee good advice, but they indicate a certain level of competency, he said.

Disciplinary background: Many consumers could have avoided getting financially stung by a dishonest adviser if they had simply checked the adviser's disciplinary record, said Shashin G. Shah, a Texas financial planner.

"A quick check to see if the person has the [required] licenses or is registered in that state ... can pay dividends," Shah said.

You can research complaints, disciplinary actions and criminal violations from several sources. Start with your state securities regulator, which often has information on financial planners and brokers at big and small firms and other information not reported in national databases, experts said. Marylanders can call 410-576-7784.

The Securities and Exchange Commission, at www.sec.gov, offers background information on advisers at large investment firms as well as links to other regulatory sites. Investors can also review a broker's record at BrokerCheck, available on the NASD's Web site.

How the adviser will be paid: This is crucial information.

"There is no right or wrong way to be paid for financial service," said Susan Wyderko, the SEC's director of the office of investor education and assistance. "However, each method of paying for services may provide slightly different incentives for the people giving you advice."

Basically, there are three ways an adviser is compensated.

Commission-only advisers will make money when they sell investments to the client. A fee-only adviser will charge a flat sum, charge by the hour or receive a percentage of assets under management. And then there's the combination of fee and commission, often called fee-based.

Good advisers, of course, can be compensated under any of these methods. Still, consumer advocates tend to favor fee-only advisers who don't have a financial incentive to sell clients' products. Even some big brokerages are now moving away from commissions to a fee structure, Gannon said.

Investment philosophy: If a professional is going to manage your money, find out the strategy that will be used and whether the manager's investment philosophy matches your own, experts said.

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