Financial advisors

Financial advisors

Do you need a financial advisor?

Once you've worked yourself out of debt, built up your emergency fund, covered your insurance needs, and perhaps bought a home you're ready to start investing in securities.

But before you start your odyssey into investments, you should consider whether you need a financial advisor or not. In general I'm not a fan of using financial consultants.

Planners have their place, especially when it comes to complex, one-time events like estate planning or lump-sum distributions from retirement plans. But for most other things, like selecting and managing your investments, you probably can do a good job yourself with a moderate amount of self-education -- like listening to audio tapes like this of course!

Why you may want an advisor

Still, you may want to use an advisor for various reasons. Maybe you've got a special situation like a sudden inheritance, or maybe you need some help getting started. I don't have anything against financial advisors, but here are some things you might want to consider before you sign up with a planner.

Don't hire market forecasters

First, you should avoid those advisors who claim they know where the market is going. Nobody knows where the market is going, and I don't care what their "record" is.

If you want, seek out an advisor who can help you understand retirement accounts, or help you with taxes, but don't look for soothsayers. And if you want a guru, spend your money on the psychic friends network where at least the soothsayers aren't as boring as their financial counterparts.

Don't hire commission-based advisors

You should also avoid commission-based advisors. Since over 90 percent of so-called financial planners sell commission products, there are plenty of these salespeople around. If you're invited in for a "free consultation" you're probably dealing with a commissioned salesperson.

These salespeople can sell you some good products, but at least find out how much the salesperson stands to make if you buy their recommended product. All advisors should provide this information, and if they won't, don't deal with them.

If the investment is as great as the seller says it is, ask the salesperson if she's bought the product herself. Then ask for proof of her investment.

And realize if you use a commission-based salesperson, you're setting yourself up for a possible conflict of interest. Commission-based advisors make money every time they sell something to you, and they're usually selling the product that has the highest commission for them but otherwise may not be a good investment for you.

Don't hire percent-of-assets advisors

You also should be wary of advisors who make their money based on the amount of assets they manage. For example, if you give them $100,000 to manage, they may charge you 2 percent or $2,000 per year.

This is how mutual funds make most of their money, and it's a fair way for funds to charge you for their services. But you should watch out for an individual advisor who charges you 2 percent to tell you which funds to switch into and out of.

These kind of advisors include those who handle so-called wrap accounts. Wrap accounts are popular at brokerages where your broker channels your money into the right stocks or mutual funds.

The money management offered by a wrap account may be OK, but it is usually too expensive. Many wrap accounts charge 2 to 3 percent of the assets under management per year.

This is too expensive. You can get good management at a no-load mutual fund for half a percent per year.

Aside from expense, another problem with a percentage-of-assets advisor is that the advisor wants to control all of your money for the fees it will generate. This can lead to bad investments.

For example, your advisor may tell you to not pay off your mortgage early, or may steer you away from investing in your company's retirement plan. Remember, every dollar you put into your home or your company's 401(k) account means one less dollar for him to earn fees on.

Fee-based advisors

So the best kind of advisor may be one who is strictly fee only. These advisors charge by the hour and probably will not be as subject to conflicts of interest as commission-based or asset-based advisors.

But watch out for so-called fee-based advisors who not only charge you a stiff fee, but also earn commissions on the products they channel you into.

Professional designations

Finally, don't get too carried away with some of the professional designations like CFP, CLU or even MBA that many people stick on the end of their names. Some designations are meaningful, but many of them are easy to get and in no way indicate the holder is an expert in finance.

So I'd recommend that you consider taking the do-it-yourself approach, and only use advisors for special occasions.

But if you do choose to use a planner, try to stick with one planner for consistency's sake. Being consistent is probably better than any slight advantage you might get by switching around. Even in this case, however, a second opinion may be helpful if you're talking about a major issue.