Ask the Readers: Finding a Financial Advisor?

First a side track: From what I’ve learned growing up (ok, well I’m only 22…but I’ve ‘grown up’ a lot when it comes to money over the past few years) the more you know, the less you pay someone else to know. As you mentioned, you and most of your friends use online services that require you to do the research and acquire the knowledge to be competent enough to invest without losing your shirt. So, the first thing I would recommend is to learn at least a little about money. Pick up a personal finance book or scour the internet. Even a personal financial adviser makes mistakes or bad calls or (hopefully not) decisions to better himself and not the customer. Its a lot like going to the store and paying cash for an item and making sure you got the correct change. You learned how to count, and therefore can make sure the clerk isn’t cheating you (or more likely making a mistake). AFTER you’ve acquired some knowledge about how mutual funds / stocks / money itself works, then I would recommend going to http://www.napfa.org/ and finding a personal financial adviser that is fee based, hence, wont be recommending a stock that the company has a big steak in or something, but you still have to be ever vigilant when it comes to your money.
Good luck, and never stop learning.

Perhaps the most important question to ask ANY advisor is ‘How do you get paid off what I invest with you?’

Otherwise you can lose a lot of money in fees (MER for mutal funds) and not even understand how.

Check out the Fool’s school (http://www.fool.com/school.htm) for a basic overview of investing. Just ignore the ads for their newsletters.

Best of luck,
CD

There are essentially two ways financial planners make their money- 1) commissions (they get you to invest in a particular product and earn a commission for doing so), and 2) fee-based (usually a percentage based on the amount you are investing or the value of your portfolio).

In my opinion, you should always go with (2), since there is less chance that the planner is pushing a product that you might not really need.

Second, any financial planner worth anything will first discuss your goals, and not in terms of money- such as, “What age do you want to retire”, “What do you want to do when you retire”, etc. Investment decisions should be made based on those goals.

There are two broad classes of financial professionals, both of which are called advisers, but it is helpful to know the difference before you interview someone to manage your money:

1) Broker/Dealers execute trades and charge transaction fees or mark ups. Agents (the people who work for a B/D) offer advice on investments but the elephant in the room is that they often have incentives to steer you toward investments within their parent company.

2) Advisors and Investment Advisor Representatives who work them make their money on a fee basis, typically based on the assets under management. They don’t sell securities, they advise the client. In many cases they have discretionary trading authority to manage your accounts for you.

In both cases securities regulation forbids them to commit fraud, but the latter is held to a standard as a fiduciary — which means that an investment adviser proper cannot put his interests ahead of yours. In all fairness, agents of brokers (such as Edward Jones) are nearly all honest and fair minded so I don’t mean to say that one classification is right and the other is wrong.

An additional difference is how much money you typically need to have at hand to work with either. An adviser will typically expect you to have over 200k of assets, whereas a broker often will work with clients who have more than 50k.

Either way you go, I’ll second the wisdom of reading up a bit on personal finance in order to have a battery of good questions to ask any potential adviser.

Through my employer, I have the option of self-managing my 401(k) in a Schwab PCRA account. My opinion is they are a solid option for a largely self-directed investor, but with a few pitfalls.

PROS
–They have an extensive list of mutual funds that you can buy online which are no-load and no transaction fee. On the surface this is a nice feature. (Warning: There are also some funds available with a hefty $50 transaction fee — see CONS)

–You can set up an automatic investment purchase into your mutual funds (DCA anyone?)

–You also have access to the world of stocks traded on US exchanges (and a limited number of other exchanges, plus a boatload of ETFs (transaction fee per trade: $12.95)

–You also have access to a variety of CD, bond, money market, treasury, etc. options.

–You can buy CEFs! Including my favorite one that pumps out a monthly dividend. (transaction fee of $12.95 per trade)

–It has a nice web interface

CONS

–If you’re a buy and holder, the transaction fees for ETFs and stocks are palatable, but if you trade frequently this will bite you.

–My big disappointment: the Vanguard family of mutual funds as well as the T.Rowe price family both fall into the “Transaction Fee” category — trading these mutual funds is NOT free even though they are no load. You WILL PAY $50 per transaction to buy any Vanguard or T. Rowe Price mutual fund. This bites since I really wanted to just sink my 401(k) into a Vanguard retirement fund (VFORX or VTIVX).

–Most Vanguard ETFs are available — which is a good thing! — just don’t forget $12.95 per trade.

–Of the index funds that are available as a no-fee option, I wouldn’t touch any of them with a 10-ft pole.

–It’s possible yet difficult to find a no-fee mutual fund with an expense ratio below 1%.

Anyway, that’s Schwab. In a nutshell it’s a good option if you want a variety of instruments to choose from and don’t mind the fees. If you know you want to stick with a specific family of funds (like Vanguard or T.Rowe Price), your best option would be to just open an account with them.

I can’t emphasize enough — you’ll need to watch fees with your Schwab account.

I can’t speak to account minimums at Schwab since I was automatically eligible for the PCRA account. In the future if I leave this job, I plan on taking my PCRA right to Vanguard as a rollover IRA.

My Roth IRA is at T.Rowe Price and I really like them.

“–My big disappointment: the Vanguard family of mutual funds as well as the T.Rowe price family both fall into the “Transaction Fee” category — trading these mutual funds is NOT free even though they are no load. You WILL PAY $50 per transaction to buy any Vanguard or T. Rowe Price mutual fund. This bites since I really wanted to just sink my 401(k) into a Vanguard retirement fund (VFORX or VTIVX).”

Point of clarification. I believe that this fee is paid to Schwab, not to Vanguard or T Rowe Price. I’d bet that very few of the readers here actually have the option of a self-directed 401(k) from Schwab. I buy (non 401(k)) funds directly from T Rowe Price and Vanguard and have never been charged a transaction fee. That $50 fee seem awfully steep, if you’re investing on a monthly basis.

Rebecca,

“Friendly. I know nothing.
Able to help me set up retirement accounts. Roth, Ira, 401k, etc. I have no idea what these mean.”

Get yourself an educational foundation in investing first. You won’t know if a financial advisor is right for you unless you have a good idea of what you want in life, what your risk tolerance is, etc. JD recommends several books, any of which could get you off to a good start.

With regard to the stocks your grandmother gave you, I’d guess that you’d be better off focusing on investments for growth rather than income at this stage in your life, especially if these stocks are held in a taxable account.

As a Software Developer, I am quite picky when it comes to interface. With that said, the more and more I use my Ameritrade account, the more and more I find it very easy and help.

It is one of my top ten interfaces I have seen, up there with anything Apple and Google have put together.

Then again, I only other system I have used is Raymond James and it is horrible.

I think everyone is jumping the gun here. Although the original question asks about finding a “financial advisor” it doesn’t sound to me like that’s what this person needs just yet. Other comments here are already talking about trading/investing, products, commissions, etc.

It sounds to me like, short term, all this person needs is an account in which to receive the stocks gifted by grandmother. Assuming the amount of the gift meets the account minimums, there’s no reason why it can’t sit in an Edward Jones account. FOR NOW. That’s what grandmother has, so that’s probably the easiest, no-cost, transfer of custody.

Another assumption, but unless the questioner needs to spend this money immediately she should spend a bit more time reading up on the basics until she gets to some more specific questions of what will be done with this money. The general questions of what the different types of accounts mean and some more terminology can be answered online from sites like this one. Once she has a better idea of what she wants to do, THEN it’s time to find someone who can make it happen, including advising on issues specific to this individual (such as other income, tax consequences, insurance, lifespan, etc).

I’m not trying to be insulting towards advisors, nor condescending to the questioner, but I think it would be a mistake to go to a financial advisor for basic education.

Disclaimer: I am a financial planner and Investment Advisor Representative (IAR) of my own Registered Invemstment Advisory firm, licensed in Oregon. The difference between IAR’s and Registered Representatives (RR) (all advertising, business cards, etc. must indicate which) is that the RR’s financial obligation is to his/her broker/dealer. IARs’ fiduciary responsibilities are to their clients. The commission/no commission debate is virtually irrelevant. Some excellent products, like the American Funds Capital Income Builder fund that the questioner inherited, pay commissions. Many terrible funds are no-load. If cost were the only factor we’d all be driving Yugos.

There are crooked IARs just like there are crooked RRs. So instead focus on quality. Most state insurance/securities departments have online databases showing complaint & regulatory history of advisers. Having said that, it is obvious that IARs would not have the temptation of offering an inferior product because it paid high commissions.

A good financial planner will ask lots of questions and take notes: “know thy customer” is the cardinal rule. Cutting edge planners will give you a free CD on which to record all your goals, financials, etc. which can then be plugged into comprehensive planning software. Even if you don’t proceed with a comprehensive plan, this is a good exercise. You can’t get to where you want to go unless you know where you are!
A good planner will also find out what you want to do with your all too brief life here on this planet. Maybe instead of buying stocks you should go back to school, or hire an assistant or buy a home or take a trip on a Harley or give it all away. The planner’s job is to help you realize your dreams. Your life is not a math problem.

When people turn to advisors they are usually vulnerable and anxious to catch up on their finances. Advisors know this and those who are more of the commission-driven salesman type will lock them down in expensive products that have severe penalties for pulling out.

Anyone in this situation must pause, read some books and become at least reasonably literate about personal finance before committing to any long term products and costly strategies. Within a month, with a few books read, you will be on far better grounds. The, if you still need an advisor, you will at least have the tools to evaluate good ones.

I’ve had about two years of experience with Edward Jones, and I think the individual experience depends a lot on your local rep. I really like mine, and he’s great for my retirement plans (which are 100% mutual funds). Every time I see him, he makes me feel great about saving.

I understand people don’t like front-load mutual funds, but they do pay off over the longer term. Class A shares of a mutual fund usually have a stiff sales fee up front, which gets discounted as the amount of money you invest increases (usually at $25k, $50k, etc.). This is offset when you consider holding the funds for a long time (10+ years), since Class A shares have the lowest annual expenses of any share class.

Edward Jones is completely wedded to the buy-and-hold strategy, and discourage their clients from active trading. Their stock commissions are really high ($50 or 2% per trade). As I grow more comfortable owning individual stocks, I’ve been looking to open a ShareBuilder or Zecco (free trades – woot!) account for the smallish purchases I’ll make for my “fun” investing.

Some financial advisors, called certified financial planners , have taken about 300 hours of instruction, taken an all day exam, gotten at least one years experience in the field and signed a pledge of ethical conduct. Only 5% of financial planners have formal education in the field. You can find a certified financial planner in your area by going to the website http://www.cfp-board.org

In an article published last year in the Wall street journal in february , 2006 they talked about the questions and info you should request from any financial advisor. I will summarize:

1. Do you act as broker or registered investment advisor or both? (sometimes they “switch hats” .)
2. Do you have a fiduciary duty to look after my best interests and are you willing to sign a statement to that effect?

3. What credentials and experience do you have?
4. Have you ever been cited for a profssional or regulatory violation? By anyone or by any government agency or by any individuals or corporations, groups or partnerships?
5. How are you compensated and how much?

Ask to see the ADV, the investment advisor registration, all parts.

The cfp website has more stuff, questions to ask, etc.

A registered investment advisor is not necessarily the same as a certified financial planner.

Other credentials that signify formal education , training and pledges of ethical conduct besides certified financial planner are:
chartered financial consultant
chartered financial analyst
CPA-personal financial specialist

I also wanted to differ with Tolak’s completely unfounded supposition that the people who turn to a financial adviser are “vulnerable” and “anxious”. I would be interested in seeing the survey or study from which that conclusion was drawn.
In my experience, people turn to a financial advisor with similar motivations that send them to the dentist for their annual exams and cleanings, to the doctor for their prostate exam or Pap smear, and to the mechanic for their vehicles’ 3000 mile oil changes. Hardly ever is it out of anxiety or desperation. If it were, 1000% more people would be running to financial advisors!
As it is, the public at large dreads not only assessing their financial status but are also loathe to even consider changing their financial behaviors. The anxiety and vulnerability are real. But they block constructive action rather than precipitate it.

One small note (as I look down, I am realizing that the note gets longer and longer…)to finance girl (if she happens to check this blog again). Your a little off on your understanding of the Edward Jones situation. I would highly recomend you sit and talk with an Edward Jones Advisor, not to move your accounts over, but to get a better handle on what it is you are talking about. It also sounds like you are in the Suze Orman boat of never buy front load funds. There are great no-load funds and there are great load funds. There are also really, really poor funds in both categories. However, if you go through many of the quality funds on both sides (three or four star and up on S&P ratings or on MorningStar ratings), and compare average 10yr returns, I am sure that you will be surprised that you tend to be better off with funds that have a sales charge. Nevermind investing in any index. However, one thing to point out is that an advisor can be a highly valuable asset. Let’s see if I can remember this right: over the last twenty years, the S&P500 has returned an average annual return of a little over 11%. Over the same period, individual investors have only averaged a little under 4%. Why? Many of these folks jump in and out of their investments because their emotions get the best of them. They end up buying high and selling low (chasing the market); not a good way to make money. When an advisor can help people navigate these tides and help investors hold on to their quality investments in poor markets, then the advisor is adding value for the investor. Now, a quick note on paying wrap fees of a percent or two a year vs. a commision (granted, there can be a conflict of interest when commision is involved). Would you rather pay a one time fee of x% and be done with it and own your investment, or would you rather pay y%, compounded year after year after year (in effect, paying for your investments for the rest of time)? Just a thought.

If you are transferring stock that is owned by your grandmother, to your name, consult a CPA on figuring the cost basis for income tax purposes. If its a small amount it will not matter. If its a large amount, the cost basis is figured on what your grandmother originally
paid per share plus expenses. If its inherited the cost basis becomes the value when inherited. This can create a large tax liability in some situations.

My firm (ClaroConnect.com) matches investors just like this to financial advisors. Our website has a free, unbiased search tool to screen through advisors by location, specialty, qualifications, fees, etc. exactly as you requested.