Even for people with a modest income, using a financial advisor to manage their money is a step in the right direction. A good financial advisor will look at the whole picture including the insurance needs, retirement planning and estate management which many people will miss even if they are savvy about investing.
It is always a good idea to learn the basics of investing before a person starts investing, but if he has little time or motivation or he is plain lazy to keep the knowledge updated, then it is a good idea to look for a financial planner. Any good financial planner worth his money sees the whole picture and can assist in investing the money wisely according to the needs and risk appetite.
A good financial planner will benefit anyone greatly but as is the case with world, there are good financial planners and bad financial planners. A bad financial planner is more interested in earning commissions for himself rather than acting in the best interests of his client.
There are many factors that needs to be considered before choosing a financial planner.
Fee-based Financial Planners and Commission based Financial Planners
There are two ways by which a financial planner makes his money - fees (usually a percentage of the amount which is invested or the percentage of the value of the portfolio) and commissions. In the case of a fee-based financial planner there is no conflict of interest because he is not earning money on commissions. He will not bombard the client with sales pitch of products that earn him a hefty commission, rather than choosing products that are more suitable for him. When meeting a prospective financial planner, it is often a good idea to indicate in the beginning itself that you are looking for a fee-based service.
A good financial planner should always begin with discussing about the debt, retirement plans and appetite for risk of the client. He will be able to take good investment decisions based on these, but if he is directly trying to sell a product, drop him.
Registration and Reputation
Just like a good financial planner can make money, a bad financial planner can lose it. So always check the credentials of the potential financial planners. Ask friends and relatives about their financial planners and use the resources available online. FINRA BrokerCheck is a free online tool. Check the professional background of current and former FINRA-registered securities firms and brokers. According to the site, it should be the first resource investors turn to when choosing whether to do business with a particular broker or brokerage firm.
According to the Securities and Exchange Commission(SEC), Federal or state securities laws require brokers, investment advisers, and their firms to be licensed or registered, and to make important information public. This information is easily available in the web or by making a phone call. They advise that before investing or paying for an investment service, make sure first that the brokers,
investment advisers and investment adviser representatives have not had run-ins with regulators or other investors. Check also to see whether they are registered or licensed. To find out about investment advisers and whether they are properly registered, read their registration forms, called the "Form ADV." The Form ADV has two parts. Part 1 has information about the adviser's business and whether they've had problems with regulators or clients. Part 2 outlines the adviser's services, fees and investment strategies. Before hiring an investment adviser, always ask for and carefully read both parts of the ADV. See the SEC site for details.
Experience and Qualification
A financial planner with years of experience behind him is always better than a novice. An experience of 5 years or more is ideal. Likewise, he should have the proper qualifications. Nowadays the term "financial planner" is used by many financial professionals. Some of the certifications a financial planner can have are CERTIFIED FINANCIAL PLANNER professional (CFP), a Certified Public Accountant/ Personal Financial Specialist (CPA/PFS), or a Chartered Financial Consultant (ChFC). Whatever be his credentials, he should have experience in financial planning topics such as insurance, tax planning, investments, estate planning or retirement planning.
Finally, a financial planner must be comfortable to work with. Even if he has the highest qualifications and experience, if he is not willing to listen to the goals and plans of his client, there is not much he can do for him. So ask parents and friends, get good referrals and then double-check the prospective financial advisor's experience and qualifications before hiring him.
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