If you made a New Year’s resolution to choose a financial advisor or replace your current one, proceed with caution. This is one of the most important financial decisions you will ever make. The person you select will influence or control your investment decisions and the quality of those decisions will impact your long-term financial security, in particular during your retirement years.
You can’t delegate your choice of an advisor the way you can hand off investment work. You own this decision, and your vetting process has to be good enough to separate the weak from the strong. Here's how to look past the smoke and mirrors.
1. Decide what type of advisor you want. These are the four basic types of advisors and the key characteristics for each.
Registered representatives, also called stockbrokers, investment representatives, and bank representatives, are paid commissions to sell investment and insurance products. Their primary sales licenses are Series 6 or Series 7.
Financial planners are a tough category. There are no licensing requirements for planners. Anyone can claim to be a financial planner whether it is true or not. Your vetting process should limit your selection to those who have earned the CFP, CPA/PFS or ChFC certification.
Financial advisors are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). They are compensated with fees and are financial fiduciaries so they are held to the highest ethical standards in the financial services industry.
Money managers have the same registrations and characteristics as financial advisors. Their distinguishing feature is that they make decisions for investors without their approval in advance.
2. Be objective. Use a process of elimination--vet four advisors, and select one, so you have to exclude three. As you identify weaknesses, cross these advisors off your list. Focus on qualifications—among other things, you might want a professional who has retirement planning expertise. Don’t just choose the advisor with the best personality and sales skills; chances are this is not the person you want advising you on investments.
3. Gather and compare data. Get the same information from multiple professionals so it is easy to compare their responses.
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