Understanding Financial Advisers

Few financial areas are more confusing that that of the financial planner or financial advisor. Some have impressive titles like a Certified Financial Planner. Some don't. Who should you consult?

Understanding Advisors and Planners

It has always been my view that most people would do well to become their own financial advisor, but it does take some effort, more than some people are prepared to give. Others have more complex situations that call for extra help. In any case it is worth developing some understanding of the potential help available.

1. Single Association Financial Planners

Financial advisers are often tied to one company or organization. Similar to insurance representatives in this respect, they are limited to offerings by their association. Others are more independent and can choose from many available investment opportunities. There are pluses and minuses for each type.

2. Multiple Association Financial Planners

Some are multi-tied. They work with more than one financial company. This group has the advantage of more independence than the single association type of financial advisor but that does not necessarily work to your advantage. The risk is that they will focus more on the special incentives begin paid by one company or the other rather than your potential benefit.

3. Hybrid Association Financial Planners

Often financial advisors work with several different types of companies, such as those offering insurance or retirement plans, and appear to be independent financial advisors. But some of these may be contracted to only one company within each area. This makes them essentially no different than the single company representative.

4. Certified Financial Planners

Certified Financial Planners have been accredited by the Certified Financial Planner Board Of Standards which does have a rather impressive set of requirements and testing. It is a reasonable measure of an advisor’s knowledge base but is no guarantee, nor is the lack of this accreditation mean that an individual advisor is not qualified.

There are many other types of certification and titles employed by workers in this field, so many that I will not try to identify them by name. Instead I will suggest some of the factors you want to check out when choosing an advisor.

Choosing A Financial Adviser

First and always, determine the vested interest of the adviser. If they work for a bank they are going to promote the banks offerings. If they work for a brokerage firm they will try to sell the offerings making the highest profit for the brokerage company. If they are selling insurance…well you get the picture.

Determine the payment structure for the advisers. If they benefit from your buying and selling stocks they would benefit from “churning” (turning over unnecessarily) your investments at your expense.

Whether they are paid by the hour, they are paid by varying rates based on promotions by different stock or fund offerings, or they are paid based on how much they make for you, the way a financial adviser or planner gets compensated will naturally have a significant influence on their recommendations.

This does not mean you cannot use any of them. It means you must keep your eyes open and be aware of what you are doing. This doesn’t mean you have to be totally cynical about it—just be aware that even honest, well intentioned people will be influenced by their own interests.

The most important advice I can give is to get personal recommendations from people in the know. Don’t listen to people who don’t know a lot about money. Relatives and friends may not be your best source. Ask for recommendations from people who have received good advice from their adviser.

An excellent help is provided by the Certified Financial Planner Board of Standards. It is called Consumer Guide To Financial Self-Defense. This page has a list of ten key questions (with important comments) to ask a potential financial adviser or financial planner, a print out of the list of questions with space for answers to guide an interview, a list of sites to go to for checking any disciplinary actions and more.

When You Need A Financial Adviser

In the end it is up to you to make the right decisions. That is why I encourage most people to learn what they need to know and make decisions that fall within the scope of their own understanding. But obviously that is not for everyone.

If your circumstances call for enlisting a financial adviser or financial planner, whether a Certified Financial Planner or some other, don’t hesitate to do so, but do your homework and choose carefully.