By Claudia Buck, The Sacramento Bee, Calif.
April 25--Choosing a financial planner is a big decision. Here with some advice on what to consider is Kevin Young, a certified financial planner in Davis, and one of our "Ask the Experts" advisers.
To see more of his advice on personal finances, go to: http://www.sacbee.com/ask. That's where you'll also find advice from our other local experts on taxes, investing and wills/trusts.
I need a knowledgeable financial adviser. The company I am with now labels the person handling my account "a representative." The person appears to have no idea about my investments or what is happening to them. I need a financial adviser I can depend on and who knows what he/she is doing. Help!
In responding to your question, let me share a recent meeting I had with a prospective new client. Like you, this client was not happy with her current "adviser" broker. She had "invested" $800,000 with this broker, who charged her a 5.5 percent front load. If you subtract the fee, she only invested $756,000. The remainder compensated the broker and his company.
Also, there was a 1.5 percent annual expense ratio (about $11,000 a year) charged to the client's account.
The client received no comprehensive planning, no estate planning review, no risk management review, no personal goal review, no evaluation of her tax situation and no analysis of retirement or college needs. The client's portfolio was not properly diversified and performed horribly.
In addition, no fees were disclosed to the client because the salesperson was not required to disclose them.
When working with an investment adviser, consumers should challenge and ask questions about what is being suggested. Too many clients have no idea what investments they own or the fees involved. They simply trust the person who sold them the product.
When investing, it's important for consumers to understand the difference between loaded mutual fund shares (which have sales charges), compared with no-load funds, which don't. Here is a helpful link from the Financial Industry Regulatory Authority: http://www.finra.org/Investors/protectyourself/InvestorAlerts/MutualFunds/p006022.
When selecting a financial planner, I recommend someone who doesn't sell investment products; who holds the Certified Financial Planner (CFP) designation (you can check an adviser's credentials at http://www.cfp.net); and who is developing your financial plan from a comprehensive perspective.
(Note: According to the CFP website, professionals offer their services in many different ways, ranging from fee-only to operating within large financial institutions, where they are compensated through product sales.)
It's also important to find an adviser who has a basic understanding of modern portfolio theory, which looks at how to construct an investment portfolio that delivers the highest returns given the amount of risk the investor is willing to accept.
You may wish to consider a fee-only financial adviser who is a member of National Association of Personal Financial Advisors (http://www.napfa.org), since these advisers don't receive compensation from referrals or selling financial products. Also, please understand the difference between broker-dealers (who must meet a suitability obligation) and financial advisers (who are required to act as fiduciaries).
Under the suitability standard, financial firms are not required to put the client's interests first. A fee-only adviser is held to a fiduciary standard, which requires putting a client's interests above their own.
This YouTube video explains the difference between a broker and a fiduciary: http://www.youtube.com.
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