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Using Financial Advisors

By David Luhman on Mon, 05/11/2009 - 23:31

Using Financial Advisors

Why you may want an advisor

Types of advisors to avoid

Professional designations and their meaning

Why you may want an advisor

Hire an advisor if you want

  • Help on specific problems like taxes or estate planning
  • Someone to do the paper work
  • A second opinion

If you hire an advisor, try to stay with the same person

Jumping from advisor to advisor will leave you with spotty insurance coverage and a jumbled portfolio

Remember that most advisors who are willing to give you "free" advice are pushing commission products

Advisors are humans who make mistakes and may do a poorer job than you could do by yourself

Be aware of possible conflicts of interest

Don't put too much faith in a financial advisor

Types of advisors to avoid

Avoid market forecastors

  • Many are like the broken clock -- only correct twice a day
  • No one knows the future

Avoid commission-based advisors

Generally push products that pay the highest commissions and aren't necessarily the best for the customer

Some "fee-based" advisors charge you a fee and receive a commission

Look for "fee-only" advisors

Avoid percentage-of-assets advisors

May charge 1 to 3 percent of your assets to manage your money -- on top of what a mutual fund might charge you

3 percent of your assets is too high!

Include wrap account advisors who will select mutual funds or individual securities for you

As investors get smarter about load funds, brokers are moving to charge excessive fees to manage no-load mutual funds

To gain control of more of your assets, may discourage you from making investments that they can't manage

  • May discourage you from investing in company retirement plan
  • May discourage you from paying off your mortgage

If you need an advisor, consider hiring a fee-only planner

May charge $100 or more per hour

Professional designations and their meaning

  • CEBS - Certified Employee Benefit Specialist (pensions, retirement accounts)
  • CFA - Chartered Financial Analyst (mutual fund managers are often CFAs)
  • CFP - Certified Financial Planner (often sell insurance on commission)
  • ChFC - Chartered Financial Consultant (often sell insurance on commission)
  • CIC - Certified Insurance Counselor
  • CLU - Chartered Life Underwriter (insurance)
  • CPA - Certified Public Accountant
  • EA - Enrolled Agent (federal taxes; must pass 2-day IRS test)
  • FSA - Fellow of Society of Actuaries (for pension, insurance management)
  • MBA - Master of Business Administration
  • PFS - Personal Financial Specialist (CPAs who also pass a personal finance test)
  • RIA - Registered Investment Advisor (only need to file SEC papers and pay fee)
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