5 smart questions to ask before hiring a financial advisor

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How to Choose the Best Financial Advisor

Imagine this: You're got a good job, and you're earning a decent wage. All the media hype about saving for the future is finally beginning to sink in. You know you need to invest, and maybe you've even started. But let's be honest – you don't have a clue about what you're doing. And you're not the type of person who wants to go it alone.

You're ready to hire a financial advisor, but even that decision seems overwhelming. How do you decide which financial advisor to hire, and how do you know if the advisor is good or not?

To get you on the right track in your search for a financial advisor, here are the most important questions to ask before hiring a financial advisor.

1. How are you compensated? Advisors can be compensated in many ways, and the method of compensation is key to understanding whether you are getting what you pay for.

Familiarize yourself with the financial advisory types of compensation, commission, percent of assets under management, fee for service or a combination of those structures.

Many advisors make their fee structure opaque and difficult to unpack. In that situation, walk away and find an advisor with a transparent fee structure. In general, you needn't pay greater than a 1 percent management fee of your total financial assets.

If you're looking for a bit of guidance and minimal hand-holding, you may be interested in the newer robo-advisor platforms. For example, Wealthfront and Betterment oversee your investment portfolio with a smart index fund approach for a reasonable 0.15 percent to 0.35 percent fee structure.

2. How have your returns compared with their respective benchmarks? According to Dictionary.com, benchmark is defined as "A standard of excellence, achievement, etc., against which similar things must be measured or judged."

You've probably heard of the Standard & Poor's 500 index or the Dow Jones industrial average. The S&P 500 is frequently used as a benchmark for the overall U.S. stock market since it includes representation from the 500 most important U.S. companies. The Dow is an old index, founded by The Wall Street Journal editors in 1896 that represents 30 major industrial U.S. companies.

In general, if the advisor's investment portfolio returns are not matching or surpassing those of their respective benchmarks, you need to find out why.

3. What is your training and your professional designation?Did you know there is no universal standard for financial advisors? In fact, there are over 100 financial advisor designations. You want to make sure you're hiring a qualified individual to handle your hard-earned money. Some certifications are not worth more than the paper they're printed on, whereas others require extensive training, years of work experience and comprehensive licensure.

The top three financial advisor certifications are certified financial planner, chartered financial analyst and the newer personal financial specialist, which requires a CPA credential as well. There are other designations which require extensive education, experience and high standards.

In summary, whatever the designation of the financial advisor under consideration, perform your due diligence to determine their education, training and experience level.

4. Are you a fiduciary? Simply put, a fiduciary is held to a code which requires that the assets are managed for your benefit rather than for his or her advantage. While you'd assume that all financial advisors are fiduciaries, it's not true. In fact, stock or investment brokers, compensated by commission, are generally not fiduciaries.

You want an advisor who puts your needs above his or her own. Make sure your future investment advisor is governed by the fiduciary standard.

5. What are your services and investment strategy?Before starting a conversation with a financial planner, figure out what you are looking for. Then find out whether the advisor's services match up with your wants and needs.

Are you looking for a full package of services, including investing, tax, estate and other advising services? Or do you need someone to set your investments on track and monitor them a couple of times per year? Maybe you just want a one-time meeting with an advisor for a quick check.

If the advisor has a complex strategy or investing approach, ask for empirical support and documentation that shows the approach has merit. There are reams of research supporting the success of a simple, market-matching, passive, index fund strategy over time. Make certain that any sophisticated and complicated approaches are valid.

Finally, similar to choosing any professional, do your homework first. Choose an advisor who is forthcoming and disclosing. Make sure his or her approach matches yours.

Copyright 2015 U.S. News & World Report


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