Today’s volatile market highlights the importance of focusing on controllable variables. Investors should closely monitor the value added by their financial advisor. Here are five questions to ask your financial professional:
1. What education do you possess?Insurance representatives, annuities salespeople and stockbrokers all refer to themselves as “financial advisors.” Are these individuals qualified to provide objective, comprehensive financial advice that’s in their clients’ best interest? While these salespeople are well equipped to illustrate how their product is appropriate for any client, they may not have the education or financial motivation to present possibly superior alternatives.
The Certified Financial Planner (CFP) designation is widely recognized as the “platinum standard” of financial planning expertise. Unfortunately, only 7 percent of “financial advisors” are CFP certified. A CFP has the education and access to financial tools to evaluate all investment options and make recommendations regarding an individual’s specific circumstances.
2. How are you compensated? Realize your advisor’s behavior is influenced by his or her compensation. Advisors are paid either by commission on products sold or by fees charged to their clients. Commissioned advisors have financial motivation to sell products that may not be the best option for their clients. Fee-only advisors are prohibited from collecting product commissions and are exclusively compensated by their clients. Thus, a fee-only planner’s compensation encourages objective advice that is always in the client’s best interest.
Know how much you pay your advisor. Remember, your advisor’s compensation is in addition to the fees charged by your investments. Total fees, covering both your advisor and investments, should be less than 2 percent.
3. Do you act as a fiduciary? Planners who accept a fiduciary responsibility to clients are legally obligated to act in their clients’ best interest. Advisors who are not fiduciaries only commit to act in a manner that does not harm their client. Big difference! If your advisor isn’t familiar with the term “fiduciary,” look elsewhere.
4. Do you provide superior service? When did your advisor last call you? Is your advisor aware of changes in your goals, family or personal situation affecting your financial future? Advisors must be responsive to the rapidly changing circumstances of their clientele and should meet with their clients at least once per year.
Service is impacted by compensation. While commissioned advisors are paid to continually sell products to new customers, advisors who are compensated only by their clients have tremendous motivation to consistently exceed clients’ expectations.
5. Do you provide me with a comprehensive financial plan? A financial plan detailing insurance needs, investment options, tax consequences, retirement projections and estate planning should be the basis of all financial action. Having a comprehensive long-term plan will minimize emotion and emphasize logic when making financial decisions. However, beware of financial plans that are simply a sales pitch. A financial plan should be objective in nature and investment decisions should be based on the plan; the plan should not be a tool to steer you toward predetermined and limited investment options.
Enduring today’s market is challenging. Make sure you have an educated financial advisor who is compensated to act in your best interest and financially motivated to ensure your perpetual satisfaction.