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. . . from the Publisher of Brill's Mutual Funds Interactive^®

Do you need a financial advisor?

by Marla Brill
Publisher, Brill’s Mutual Funds Interactive

Five years ago, David Snowball, 42, an associate professor at a small Illinois college and his wife Linda Roy, 35, a principal with an environmental consulting firm, decided to seek professional advice on their retirement investments from the local office of a major national brokerage firm.

"We were hoping to meet someone who would listen with intelligence and active interest," says Snowball. "What we found was a commission hound who managed to spend an hour with us without trying to learn anything about our financial needs. He seemed excited about the amount of money that we might be able to invest and spent a lot of time talking about the ‘no-brainers’ that he could steer us toward. Frankly, we were capable of figuring out the no-brainers on our own."

Snowball and Roy continued their search, with disappointing results. "The challenge was to find a first-rate professional who views their work as a calling rather than a job," he says. "That was very difficult, especially in a relatively small urban area."

Today, the couple considers themselves successful do-it-yourself investors. "We’ve amassed a decent retirement account, we invest regularly, and the mutual funds we’re relying on are generally in the top third of their peer groups," says Snowball, who spends about a half hour or so each day researching his investments.

Not everyone has the time or inclination to go it alone. According to a 1997 survey of investors by the Securities Industry Association, a brokerage industry trade group, 53 percent of investors rely on professional investment advice.

Stock market volatility has unnerved even some former die-hard do-it-yourselfers enough to consider investment advice, according to Robert Klapper, vice-president of Schwab AdvisorSource, a referral service that matches consumers with financial advisors. "We’re seeing a lot more people looking for some peace of mind from a financial advisor," he says. "Emotionally, it is much easier to invest on your own when the stock market is on a roll."

People decide to search for a financial advisor for a number of reasons. For some, the quest begins with the  realization that retirement and college funding issues are just around the corner. Jonathan Lehrer, a public relations manager and his wife Estee, a teacher’s aid, began their search for a financial advisor about a year ago after admitting that while they didn’t want to manage money, they needed to find someone who could.

The couple, both in their forties, had "reached a point in life where we felt it was time to get our affairs in order," according to Jonathan. "But we knew we needed help, because we had never even invested in mutual funds before. We’re experts in some things, but not in personal finance."

For others, the catalyst is a sudden, unexpected windfall such as an inheritance, a rollover from a corporate retirement plan, or a divorce settlement. "People usually seek financial planning advice after some kind of trigger event nudges them out of their inertia," says Janet McCallen, executive director of the International Association for Financial Planning, a financial planning trade organization. "Other do it after suddenly realizing that their retirement plans they’ve been contributing to for years represent a sizable amount."

Temperament has as much to do with seeking outside advice as external events. Schwab’s Klapper says that when it comes to investing and managing their money, people fall into one of three categories.

"Do-it-yourselfers have no desire to seek investment advice. They like being in control. Delegators are people who want help managing their portfolios, and are willing to give someone else discretionary control. Validators fall somewhere in-between do-it-yourselfers and delegators. They kind of know what they are doing, but feel that they could use some outside help, perhaps in the form of a one-time financial planning consultation." Often, he says, people shift between these categories at different points in their lives.

Getting the low-down

Whether you classify yourself as a delegator, a validator, or just someone who feels the time is right to get help with your investments or financial situation, seeking professional advice should be a systematic, careful process. As you look for an investment advisor, be sure to consider these issues:

Compensation. Generally, financial advisors are compensated in one of four ways:

• Solely through commissions. A commissioned advisor is paid by the companies whose products he or she sells.
• Solely through fees. "Fee-only" advisor are paid directly by their clients, so their compensation isn’t tied to specific financial products. They may charge an hourly rate of anywhere from $90 to $200 for their services. Or, their charge may be calculated based on a percentage of assets under management, usually from .5 percent to 2 percent.
• Through a combination of fees and commissions. Often, an advisor who makes most of his money through commissions will use the label "fee-based" advisor. Usually, this means the advisor charges a nominal fee for a written financial plan, then implements it with mutual funds and other products with sales charges.
• Through a salary and bonus paid by the advisor’s company. Financial advisor who work for banks, credit unions, or other organizations offering financial planning are usually paid a salary. You will probably pay a fee or commission to the employing institution.

To avoid the negative connotation of the word "commission," some advisors call themselves fee-only when they actually earn most of their living from commissions. According to a joint survey released last year by the Consumer Federation of America (CFA) and the National Association of Personal Financial Advisors (NAPFA), an organization of fee-only financial planners, three out of five financial planners who claimed to offer fee-only services actually used commissioned products.

Jonathan and Estee Lehrer decided to use Sidney Blum, a fee-only financial advisor in Northbrook, Ill., following a disappointing experience with a commissioned advisor. "After what he called a ‘free financial analysis,’ he told us that all our problems would be solved by buying lots of insurance products," he says. "Basically, he was an insurance salesman disguising himself as a financial advisor." By contrast, Blum has had numerous face-to-face meetings with the Lehrers, and doesn’t push pricey products.

But his advice, as well as that of many other fee-only advisors, doesn’t come cheap. Jonathan Lehrer says he paid a fee of several thousand dollars for his family’s financial plan. According to Robert Klapper of Schwab, costs for financial plans at a fee-only advisor generally range anywhere from $1,000 to $3,000, depending on the complexity of an individual’s situation. The amount you need to invest to even get your foot in the door can be fairly substantial, too. Schwab’s AdvisorSource program requires a minimum investment of $100,000, and so do many established fee-only advisors.

Despite the increasing popularity of fees in the industry, the majority of financial advisors still rely on commissions for most of their compensation. Although there are many excellent commissioned financial advisors, be careful if a candidate seems to push higher-commission products such as annuities. Also be on guard if he or she strongly favors his employer’s own investment products over other alternatives, since the compensation they receive for in-house products is generally higher than for other investments.

Whatever compensation arrangement you choose, insist that a financial advisor disclose all fees and commissions up-front, before you invest. Fees are generally controlled by the advisor, so they may be subject to negotiation. Some advisors, for example, will waive all or part of the financial planning fee if you later decide to use their asset management services. Commissions are determined by the company providing the financial products, so there’s less wiggle room here.

Professional designations. Someone’s professional designations can reveal a lot about the types of investments they may recommend and areas they are likely to focus on. Someone with a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC) designation should have a fairly broad knowledge of financial planning. An advisor with a Chartered Life Underwriter (CLU) designation has undergone expanded study in insurance. A certified public accountant (CPA) has a more extensive background in tax issues. You may come across other designations such as Chartered Financial Analyst (CFA), or Certified Fund Specialist (CFS).

A good explanation of the educational requirements for these credentials can be found at the International Association For Financial Planning’s consumer Web site (www.planningpaysoff.org), or by calling 1-888-806-PLAN and asking for the brochure, "Selecting Your Financial Advisor." The Securities and Exchange Commission (www.sec.gov; 800-732-0330) also offers advice on selecting a financial advisor.

Professional history. Several resources can help you do a background check on a financial advisor you’re considering. The National Association of Securities Dealers (NASD) has the disciplinary history of member brokerage firms and their registered representatives dating back to 1995. The privately-owned National Fraud Exchange in Reston, VA gives consumers access to a broad database containing disciplinary information from the NASD, federal and state regulatory agencies, and securities industry organizations such as the New York Stock Exchange.

"Don’t assume you’re safe if your broker works for a big firm," warns William Matthews, managing director of the Exchange. "Someone who’s had numerous arbitration hearings and sanctions can still perform as a stockbroker."

Services. A financial plan shouldn’t be used as quick fix, or a blueprint for a sales pitch. It should take several meetings, and as much as 25 to 30 hours of work, to put together a comprehensive financial plan.

Ideally, a financial advisor will coordinate his or her efforts with other professionals you use, such as an attorney or accountant. At the least, a good advisor should help you clarify your present situation, develop a financial plan to help you meet your goals, and review the plan at least every year, or more often as your personal situation and economic conditions change.

Performance. One question that is likely to come up is how well an advisor’s investments have performed. That’s difficult to answer because, unlike large institutional money managers, financial advisors for individuals rarely have audited performance numbers. Some use software that allows them to present their track records based on the aggregate performance of all accounts they manage, so they can’t highlight the best ones. If those figures aren’t available, ask to see performance numbers from an account of someone in a financial and lifestyle situation similar to yours.

Don’t expect performance miracles. "If a financial advisor tells you it’s realistic to expect returns of eight to 10 percent a year, and you’re determined to shoot for 15 to 20 percent, you’re probably not going to work together very well," cautions the IAFP’s Janet McCallen. "A good financial advisor will steer clients toward a balanced, diversified portfolio, which tends to moderate both the ups and the downs."

Ultimately, the search for a financial advisor might lead back to your own doorstep, as it did for David Snowball and Linda Roy. "In the end, we felt our finances, and our future, were too important to be left to someone else," says Snowball. "After talking with friends about their experiences with financial advisors, we decided we could do as well on our own."

He admits that he sometimes misses the hand-holding a good financial professional provides. "We’d all like to have that big brother or sister who is there with sage advice," he says. "Given that I didn’t find any advisor competent to fill those roles, I think I’ll ask Linda to hold my hand instead."

Resources:

A number of resources are available to those seeking a financial advisor:

For referrals:

The International Association for Financial Planning. 800-806-PLAN or www.planningpaysoff.org. Refers members from a variety of professional backgrounds.

Institute of Certified Financial Planners. 800-282-7526 or www.icfp.org. Provides referrals to institute members with the certified financial planner (CFP) designation.

National Association of Personal Financial Advisor. 888-333-6659 or www.napfa.org. Makes referrals to fee-only planners.

American Institute of Certified Public Accountants, Personal Financial Planning Division (AICPA-PFP Division) 800-862-4272. Provides referrals to CPAs who specialize in personal financial planning.

Charles Schwab & Co., Inc. AdvisorSource ™ 888-800-8029 or www.schwab.com. Referrals to fee-only financial planners who work with Schwab.

For background checks…

National Association of Securities Dealers Regulation. 800-289-9999 or www.nasdr.com. Provides access to disciplinary history on all registered representatives and NASD member firms.

National Fraud Exchange. 800-822-0416, ext. 33. For $39, this organization does a comprehensive background check on financial professionals.

Securities and Exchange Commission. 800-732-0330 or www.sec.gov. For literature on evaluating SEC-regulated advisors.

Investor Protection Trust. www.investorprotection.org. This Web site has information on selecting an advisor, and links to state and federal regulatory agencies.