Choosing the Right Financial Adviser - Rodgers & Associates
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Choosing the Right Financial Adviser

Greg and Karen were a little overwhelmed when they inherited $500,000 from Greg’s father. Greg had some experience investing up to that point. He picked the invest­ments in their 401(k) plans and had bought the mutual funds in their IRAs. But, the inher­i­tance was a lot of money and he didn’t want to make a mistake. They were also in their 40s. The inher­i­tance was the catalyst they needed to finally get a financial plan in writing and make sure they were on the right track. They needed a financial adviser to help them organize their finances and advise them on how to invest the inher­i­tance.

After calling a couple of the companies that adver­tised financial planning, they made an appointment with an adviser to discuss their situation. The adviser proposed an investment plan for the inher­i­tance and assured them they would be able to meet their goals. The inher­i­tance was invested and Greg and Karen felt confident they had made the right decision.

Meeting with a financial advisor

Months went by without any contact from the adviser. The brokerage state­ments came each month and the accounts seemed to be growing. Greg finally called the adviser after nearly a year went by and was assured that the invest­ments were fine. The adviser even told him about a new fund that was coming out that they should consider. But, Greg was not as confident in this adviser as he had been at the beginning and decided not to invest anything else at this point.

The downturn in the financial markets during 2008 took its toll on Greg and Karen’s invest­ments. Their calls to the adviser always ended the same – the invest­ments were fine and would bounce back when the market recovered. They scheduled a face-to-face meeting to update the plan, but left feeling it was nothing more than a pitch to invest more money. When they threatened to pull their money out of the invest­ments, they learned there were signif­icant penalties if they moved them. They often had wondered how their adviser got paid. The adviser earned commis­sions when they bought their invest­ments. Those commis­sions would be recovered in the form of penalties if they pulled their money out too early.

Is your adviser on the ‘sales’ side or the ‘advice’ side?

Welcome to the world of financial services. The most common complaint I hear from people is, “I never hear from my adviser unless he/she wants to sell me something.” If this sounds familiar, you are probably working with an adviser from the sales side of financial services, not from the advice side.

Financial services are governed by two different regula­tions in the United States. The Securities Act of 1933 regulates the sale of securities. The Exchange Act of 1934 regulates people who sell invest­ments. Persons providing services under The Exchange Act are typically compen­sated through commis­sions earned on the invest­ments they recommend and their official title is Regis­tered Repre­sen­tative. Their job is to sell invest­ments for the companies that employ them. Regis­tered Repre­sen­ta­tives must adhere to the standard of suitability when recom­mending invest­ments. They must ascertain relevant infor­mation from their prospective clients to assure the risk levels of the invest­ments are suitable. They are not required to disclose how they will be paid or disclose conflicts of interest unless they are functioning as an Investment Advisory Repre­sen­tative, where they have a fiduciary duty.

The Investment Advisers Act of 1940 regulates companies and individuals providing investment advice. Persons providing services under this act are typically compen­sated on a fee-for-service basis. The firm’s official title under this act is Regis­tered Investment Adviser. Regis­tered Investment Advisers are held to a fiduciary standard when providing advice. Their sole respon­si­bility is to their clients, to whom they must act with undivided loyalty unless they disclose otherwise. Regis­tered Investment Advisers are required to disclose their compen­sation in full, as well as any potential conflicts of interest.

Consumers may become frustrated when they are looking for an advice-based relationship and they end up with one based on sales. It is easy to see how this can happen when both call themselves “advisers.” Here are a few questions to ask when hiring a financial adviser to help make sure you don’t end up in a situation like Greg and Karen did.

Will you act as a fiduciary? Only Regis­tered Investment Advisers are required to act as a fiduciary. A fiduciary must put the interests of his/her clients ahead of their own. Regis­tered Repre­sen­ta­tives cannot make this commitment.

How will you be compen­sated? This is always a good question to ask no matter the circum­stances. Regis­tered Repre­sen­ta­tives can provide you with a commission schedule. A firm operating as a Regis­tered Investment Adviser may charge fees based on account values, hourly fees or they may work on a retainer basis.

Ask for a copy of their form ADV Part II. This is the disclosure form that all Regis­tered Investment Advisers are required to give to prospective clients. Part II includes infor­mation on an adviser’s fees and investment strategies. Look for the answer to question 1C of the form, which discloses compen­sation. Schedule F of this form discloses conflicts of interest.

What creden­tials do you hold? I could write an entire article just on the alphabet soup that you will find on many advisers’ business cards today. The only ones that carry weight for planning purposes, in my opinion, are: Certified Financial Planner® (CFP®), Chartered Financial Consultant (ChFC), and Personal Financial Specialist (PFS).

Now that you know what to ask, where do you begin looking? Referrals are generally your best source, but not neces­sarily from your friends and relatives. I recommend asking your other trusted profes­sionals, like your accountant or attorney. These people are in a good position to hear who is competent and who should be avoided. They will have had experience working with several advisers through mutual clients. Ask who they would recommend working with.

There are also a couple of websites that can help you find an adviser in your area. Look for the adviser-locator tab at these websites:

A good financial adviser can help you with every aspect of your financial life: savings, invest­ments, insurance, taxes, retirement and estate planning, debt management, etc. Before you invest your money, invest your time in finding competent advice.

This article origi­nally appeared in an issue of Lancaster County magazine

Greg and Karen were a little overwhelmed when they inherited $500,000 from Greg’s father. Greg had some experience investing up to that point. He picked the invest­ments in their 401(k) plans and had bought the mutual funds in their IRAs. But, the inher­i­tance was a lot of money and he didn’t want to make a mistake. They were also in their 40s. The inher­i­tance was the catalyst they needed to finally get a financial plan in writing and make sure they were on the right track. They needed a financial adviser to help them organize their finances and advise them on how to invest the inher­i­tance. After calling a couple of the companies that adver­tised financial planning, they made an appointment with an adviser to discuss their situation. The adviser proposed an investment plan for the inher­i­tance and assured them they would be able to meet their goals. The inher­i­tance was invested and Greg and Karen felt confident they had made the right decision. Months went by without any contact from the adviser. The brokerage state­ments came each month and the accounts seemed to be growing. Greg finally called the adviser after nearly a year went by and was assured that the invest­ments were fine. The adviser even told him about a new fund that was coming out that they should consider. But, Greg was not as confident in this adviser as he had been at the beginning and decided not to invest anything else at this point. The downturn in the financial markets during 2008 took its toll on Greg and Karen’s invest­ments. Their calls to the adviser always ended the same – the invest­ments were fine and would bounce back when the market recovered. They scheduled a face-to-face meeting to update the plan, but left feeling it was nothing more than a pitch to invest more money. When they threatened to pull their money out of the invest­ments, they learned there were signif­icant penalties if they moved them. They often had wondered how their adviser got paid. The adviser earned commis­sions when they bought their invest­ments. Those commis­sions would be recovered in the form of penalties if they pulled their money out too early. Welcome to the world of financial services. The most common complaint I hear from people is, “I never hear from my adviser unless he/she wants to sell me something.” If this sounds familiar, you are probably working with an adviser from the sales side of financial services, not from the advice side. Financial services are governed by two different regula­tions in the United States. The Securities Act of 1933 regulates the sale of securities. The Exchange Act of 1934 regulates people who sell invest­ments. Persons providing services under The Exchange Act are typically compen­sated through commis­sions earned on the invest­ments they recommend and their official title is Regis­tered Repre­sen­tative. Their job is to sell invest­ments for the companies that employ them. Regis­tered Repre­sen­ta­tives must adhere to the standard of suitability when recom­mending invest­ments. They must ascertain relevant infor­mation from their prospective clients to assure the risk levels of the invest­ments are suitable. They are not required to disclose how they will be paid or disclose conflicts of interest unless they are functioning as an Investment Advisory Repre­sen­tative, where they have a fiduciary duty. The Investment Advisers Act of 1940 regulates companies and individuals providing investment advice. Persons providing services under this act are typically compen­sated on a feefor- service basis. The firm’s official title under this act is Regis­tered Investment Adviser. Regis­tered Investment Advisers are held to a fiduciary standard when providing advice. Their sole respon­si­bility is to their clients, to whom they must act with undivided loyalty unless they disclose otherwise. Regis­tered Investment Advisers are required to disclose their compen­sation in full, as well as any potential conflicts of interest. Consumers may become frustrated when they are looking for an advice­based relationship and they end up with one based on sales. It is easy to see how this can happen when both call themselves “advisers.” Here are a few questions to ask when hiring a financial adviser to help make sure you don’t end up in a situation like Greg and Karen did. Will you act as a fiduciary? Only Regis­tered Investment Advisers are required to act as a fiduciary. A fiduciary must put the interests of his/her clients ahead of their own. Regis­tered Repre­sen­ta­tives cannot make this commitment. How will you be compen­sated? This is always a good question to ask no matter the circum­stances. Regis­tered Repre­sen­ta­tives can provide you with a commission schedule. A firm operating as a Regis­tered Investment Adviser may charge fees based on account values, hourly fees or they may work on a retainer basis. Ask for a copy of their form ADV Part II. This is the disclosure form that all Regis­tered Investment Advisers are required to give to prospective clients. Part II includes infor­mation on an adviser’s fees and investment strategies. Look for the answer to question 1C of the form, which discloses compen­sation. Schedule F of this form discloses conflicts of interest. What creden­tials do you hold? I could write an entire article just on the alphabet soup that you will find on many advisers’ business cards today. The only ones that carry weight for planning purposes, in my opinion, are: Certified Financial Planner® (CFP®), Chartered Financial Consultant (ChFC), and Personal Financial Specialist (PFS). Choosing the Right Adviser it’s your money By Rick Rodgers, CFP® Lancaster County — May 2010 23 Now that you know what to ask, where do you begin looking? Referrals are generally your best source, but not neces­sarily from your friends and relatives. I recommend asking your other trusted profes­sionals, like your accountant or attorney. These people are in a good position to hear who is competent and who should be avoided. They will have had experience working with several advisers through mutual clients. Ask who they would recommend working with. There are also a couple of websites that can help you find an adviser in your area. Look for the adviser-locator tab at these websites: National Associ­ation of Personal Financial Advisers. www​.napfa​.org Financial Planning Associ­ation. www​.fpanet​.org Certified Financial Planner Board of Standards. www​.cfp​.net AICPA’s Personal Financial Planning Section. pfp​.aicpa​.org A good financial adviser can help you with every aspect of your financial life: savings, invest­ments, insurance, taxes, retirement and estate planning, debt management, etc. Before you invest your money, invest your time in finding competent advice.