How to choose a financial professional

I had a prospective client walk into my office today to do his due diligence before hiring me as his financial planner. Now that isn’t the crux of the story. What is central to his story and both dismayed and concerned me was his experience meeting with two local financial advisors in Los Angeles (I’m not going to drop any names, unless you’re dying to know) who carried the right credentials and education to be able to give sound advice, but they ended up pitching a high commissioned insurance product and an expensive front-loaded mutual fund.

Can you relate?

Finding a qualified and proficient financial professional can be a daunting experience. Where do you start? Can you google them? How do you find out about their experience? Do they have a checkered past? Are they Fiduciaries? What are Fiduciaries?

Working with a financial professional is a highly personal experience. Remember, you may be sharing not only details about your life, values, goals, but also your mistakes, fears, and concerns.

Let’s break down some key questions you should ask yourself.

First: Why are you seeking a financial professional?

• You may have just tied the knot
• About to have your first child
• Ready for a financial checkup
• Would like to start saving for retirement
• Deciding whether to rent or buy a home
• Just got laid off or transitioning to a new career

Second: Who are the players involved?

You should know that there are many different types of financial professionals who give advice. It is not inconceivable to get varying degrees of recommendations depending on which professional you meet. An analogy that comes to mind is when a prospective client looking for a recommendation on a salad option to lower his high cholesterol ends up talking to a butcher. The butcher may talk him out of a Waldorf salad with vinaigrette dressing and into a medium rare filet mignon. Both dishes will provide sustenance, but the cut of meat will not lower his cholesterol.

Often, when someone is not familiar with the title or the industry, they will seek the advice from anyone who is under the same umbrella, so to speak. A classic tale that I hear far too often is when a parent walks into a financial professional’s office looking for advice on how to best save for college, the advisor offers them a variable universal life insurance policy. You may be wondering what is wrong with that? First off, there are alternatives that would be more suitable like a 529 plan or a Coverdell Education Savings Accounts (ESAs). Second, the insurance policy comes with high commissions for the advisor. Third, the subaccount fees inside the policy may be expensive.

As you can see, the advice is tied around the professional’s specialty, which may not be in your best interest.

Third: How do they get paid?

Financial professionals earn their living in different ways. Some work on a fee-only basis, while others earn commissions from selling financial products such as stocks, mutual funds, and insurance. Or they might be a hybrid – both fees and commissions (aka fee-based). It all depends on which compensation arrangement will best suit your budget, your needs, and your comfort level.

I personally don’t see an issue with variable compensation, if and only if the clients are made aware of the details before the engagement. And in turn, if and only if the clients agree to the terms. However, it is not always the case.

Allow me to get on the soap box for a moment. Compensation should be dictated by how much the professional is worth on an hourly basis and then multiplied by how much time he/she devotes to the services. Another classic example: When you hear the wealth management industry continuing to charge 1-2% of assets under management, do you ever wonder how much time your advisor really invests in your portfolio to justify 1-2% per year? Compare the 1% percent of assets under management vs a fixed fee for service of $4200 using a 10 year time horizon scenario to a portfolio balance of $1 million.

What would you do with the savings?

Fourth: Where do you find ethical financial professionals?

This might be the tallest order. If I was in the shoes of the prospective client, I wouldn’t limit myself to my zip code. Technology has given us the opportunity to meet with any Advisor around the world through virtual conferencing. Fortunately, you may not need to look very far for an ethical, proficient advisor. Organizations such as The National Association of Personal Financial Advisors, XY Planning Network, or Fee Only Network offer a directory of local advisors who have pledged to put their clients ahead of themselves.

Bottomline: Do Your Homework

Are you looking for a professional who will help:

• File your taxes?
• Manage your investments?
• Draft a living trust?
• Purchase a term life policy?
• Secure financing for your home?

Each of these questions will lead to a specific professional.

An alternative to seeking out each individual one by one, you have the option of employing the services of a financial planner. Think of the planner as professional who can address various financial concerns all in one place. Using a sports analogy, a financial planner would be the quarterback who carries the playbook and has a team of financial professionals: a tax accountant, an investment advisor, an estate planning attorney, an insurance agent, a mortgage banker all playing vitals roles to ensure you accomplish your objectives.