Are you retired and second guessing some of your Do-It-Yourself financial choices? Maybe you are just about to enter retirement and want to put together a plan for spending down assets efficiently. Perhaps you still have 20 years until retirement, but you are wondering how much you will need to save. You could be fresh out of college and want to capitalize on the time value of money. The one question everyone will face at one stage or another is: how do I pick a financial professional to help me? Here it is. The How To guide on interviewing and choosing a financial professional.
First, you need to identify what kind of professional you want to work with. You have probably heard the titles financial advisor, investment adviser, stockbroker, registered rep, agent, financial planner, and probably many others. You have probably also noticed by now that I spelled adviser with an “or” first and “er” the second time. You thought it was a silly typo. Nope, not only are there different types of financial professionals, but there are even different ways of spelling the titles of financial professionals. You’re googling it now to see which one is right… Stop it and pay attention!
How IFC is Compensated
First, we’ll outline how we’re compensated. We’re considered financial planners, meaning that our team has a very broad knowledge base of all financial topics with an emphasis on how they relate to each other. We offer a broad scope of services and either:
Charge a percentage of the assets we manage
And/or receive commissions for investment products.
Need further clarification? Just ask us!
How Other Financial Professionals are Compensated
This is a pretty vague term that doesn’t explain much about this person’s services. It isn’t a bad thing! You will just want to ask them about their licenses, any designations, and services they offer. You won’t know based on their title alone.
Stockbroker, Registered Rep, Agent
This person at a minimum passed the Series 6 or Series 7 exam and works for a Broker/Dealer. For a person operating with only a Series 6 or 7; they are subject to the most frequent conflicts of interest because they are compensated by commissions on the sale of securities. They are also only subject to the suitability standard meaning if investment A generally meets your objectives, but investment B pays a higher commission and also generally meets your objectives, this person can sell you investment B since it is still suitable. They don’t need to take into account all differences between investment A and investment B.
This terminology can sound a bit silly. A Registered Investment Adviser (RIA) is a firm. The Investment Adviser Rep (IAR) is the individual. The common name is simply shortened to Investment Adviser. These professionals passed their Series 65 or Series 66 and do strictly fee based planning. The big difference between an investment adviser and say, a stockbroker, is that they are held to a fiduciary standard instead of a suitability standard. These professionals are compensated by a percentage of assets they manage or hourly, not by commissions. They also must disclose any potential conflicts of interest they have in working with you and must be able to demonstrate they are working in your best interest.
Now you know the differences between different financial professionals. Once you have identified what kind of professional you want to work with, you will need to choose one. Here are a few conversation starters to get an idea of who you want to work with and who can help you:
What licenses or designations do you carry? You are looking to identify what this person can do and give advice on.
Do you take taxation and inflation into account? How? Some professionals don’t include how taxes impact a financial plan or retirement plan. Many don’t include how inflation will impact your numbers.
Do you use average or actual annualized rate of return historicals? What you are looking for here is an actual annualized history. Average rate of return is simply smoke in mirrors. Let’s do a hypothetical example for illustrative purposes: If you have a $100,000 portfolio and the market hypothetically went up 100%, down 50%, up 100%, then down 50% over four years, that is an average rate of return of 25%. Double check my math. Add up the returns and divide them by 4. Now let’s look at the dollars. The $100,000 doubled to $200,000. Then it got cut in half to $100,000. It doubled to $200,000 again. Then got cut in half to $100,000 again. An actual annualized rate of return of 0%. You didn’t earn a single dollar in those four years even though the averaged rate of return for those four years was 25%! So ignore the average.
Hopefully that gives you some ideas and courage to go out and find the financial professional you want to work with to meet your goals!
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