Investing For Your Future

Unit 10: Selecting Your Team of Financial Professionals

Jane Schuchardt, Ph.D., USDA Cooperative State Research, Education, and Extension Service

Being an investor takes some know-how. You can do it yourself using the investing resources discussed in Unit 9, Investing Resources. Or you can reach out to people in the financial services industry to find the advice you need. This unit will help you decide if you need professional help and, if so, where to find it and how to make good choices. A single professional probably cannot provide all the help you’ll need. This unit will help you build a team of financial professionals.

Getting financial help is a little like building a house. Most often, it takes a whole team of people to get the job done—a plumber, electrician, carpenter, carpet layer, roofer, and more. To get your financial house in order also takes a team of professionals—banker, tax preparer, attorney, insurance agent, employee benefit counselor at your place of work, stock broker, and financial planner. You need to know when to use which professional, if at all, and for what purpose. As a beginning investor, the human resources consultant at your place of work may help you make investment decisions regarding your retirement plan. Stock brokers and financial planners are most likely to provide investment advice and recommend products. Insurance agents provide access to investment products through cash value life policies. Some banks also sell investments.

The bottom line is the financial services industry is complex and becoming more so everyday. But don’t let this hold you back. Plenty of information is available to help you make your decisions (see Unit 9), as are many wise and trustworthy advisors who can help you through the complexities.

Investing on Your Own

There is absolutely nothing wrong with going it alone as a beginning investor. Being self-educated reduces your dependence on others for advice. Further, it creates a situation where you can grow in knowledge and confidence as your investments grow in value. To help you educate yourself, we will discuss where to obtain information and how to sort through the extensive material available.

Beyond this home study course, there are many sources of information for the beginning investor that range from free to quite costly. Here are some places to start:

The toughest thing about personal financial management information, especially investments, is dealing with the mass of information that’s available. How do you sort the good from the bad? How do you find good resources that can guide you in making decisions? How can you avoid the "hard sell" and truly find good consumer information and not a so-called "education resource" that is really marketing a product or service.

Contacting your Cooperative Extension office or the U.S. Securities and Exchange Commission (SEC) can put you in touch with unbiased, basic investor information. Signing up for this home study course, and seeing it through completion, is probably the best decision you can make to start you on the road to being an educated investor.

Use caution when using business-sponsored materials. Be sure the resource is solely educational, not designed to blatantly or subliminally sell a product or service. A true educational resource does not contain the business sponsor’s brand name, trademark, related trade names, or corporate identification in the text or illustrations.

In addition, information you can trust needs to be:

You may not have the confidence, time, or motivation to wade through stacks of information to make investment decisions. Creating your team of financial professionals and establishing a trusting relationship with each of them can reap significant benefits. This section will get you started, and help you make wise investment choices.

Why, When, and How Often?

Financial advisors can save you time. All of us would like to put our hard-earned money to work making more money. But searching through the maze of investment options may take too much of your time. Financial advisors can get specialized information for you quickly. Maybe you’ve developed a financial plan yourself and want an opinion from someone with more experience than you, or you need to improve your current financial situation and don’t know where to start. Financial advisors also are helpful if you have an immediate need or unexpected life event such as a severe illness, birth, death in your family, or an inheritance.

Seeking financial advice is like seeing a physician for your health. Just as most people need an annual physical exam, at least an annual review of your financial situation, including your investment portfolio, is a good idea. When the markets are showing extreme volatility, or you have a significant change in life circumstances (e.g., birth of a child, divorce, severe illness or disability, or death of a spouse), more frequent assessment of your investments is recommended. Just as you call on a physician when you have a particular need, you may also need a financial advisor to help with such issues as tax preparation, buying insurance to protect against catastrophic loss of property, or drawing up a will or trust.

When and how often you seek financial advice really depends on the complexity of your financial situation. The bottom line is that having someone to call at the right time, for the right purpose, who is familiar with your situation, and can lead you to an informed decision, is invaluable.

Members of a Financial Professional Team

Depending on your personal financial situation, and how much knowledge you have, your financial professional team can be as large as 10 people. Here are the possibilities:

Though credentialing for financial planners is not required by federal or state law, it is recommended you seek someone who has met certain standards set by well-recognized organizations. The best known credential is CFP (Certified Financial Planner), which is administered by the Certified Financial Planner Board of Standards in Denver (<www.cfp-board.org>). A Chartered Financial Consultant (ChFC) has successfully completed courses from the American College in Bryn Mawr, Pennsylvania. For financial planners who sell or manage assets, being registered with the SEC or the state where they practice is required.

Costs

It is important to be told clearly, and preferably in writing, what the service provided by a  financial professional will cost. Generally, payment can be in one of three forms, or a combination.

1. Salary. The financial professional gets a paycheck from the company. The company gets the money from fees or commissions charged to you.

2. Fees. There may be an hourly rate, a flat rate, a percentage of assets managed by the company, or a percentage of your income. "Fee-only" financial advisors work solely for their clients and are compensated only by a previously agreed upon fee. They do not accept commissions or receive any other compensation for recommending specific products. Many "fee-only" planners are members of the National Association of Personal Financial Advisors. For a list of NAPFA members near you, call 1-888-333-6659 (1-888-FEE-ONLY).

3. Commissions. These are paid to the financial professional when recommended financial products (e.g., mutual fund) are purchased. Commissions are generally based upon a percentage of the amount you invest in a product.

4. Combination of fees and commissions. A financial planner may charge a set fee to develop an investment plan for you, and receive commissions from any products purchased to implement the plan.

Choosing Your Team of Financial Professionals

Choosing your team of financial professionals, and especially those who may advise you on investment decisions, takes some comparison shopping on your part. Say you have decided you could use the help of an investment advisor, a stock broker, or a financial planner.

Here’s a six-step process that can help find the financial professional that is best for you.

STEP 1. Get some names.

You can check the yellow pages of your phone book, but a better idea is to work from referrals. Ask your friends, work colleagues, and family members for their recommendations. You also can contact professional organizations for names of professionals practicing in your area. To do this, call toll-free, or check their Web sites.

STEP 2. Make some calls.

Ask to have information sent to you in writing, including the names of a couple of satisfied clients. You can get a good feel for how a financial professional will work with you by the way that person treats you on the phone and through the mail. Pay special attention to the financial professionals’ credentials.

STEP 3. Check out references.

Call to see if the person is licensed. For example, all stock brokers must register with National Association of Securities Dealers (NASD) and are listed in the Central Registration Depository (CRD). Call NASD or your state securities regulator to see if the broker is registered, and ask if there are any disciplinary actions on file. Here are some numbers to call to check for disciplinary action taken against a financial professional:

STEP 4. Set up a face-to-face meeting and ask some questions.

1. How long have you been a financial planner? What other related experience do you have?

2. What are your professional credentials and affiliations?

3. What is your investment philosophy? (You will feel most comfortable with a financial professional whose recommendations are driven by YOUR tolerance for risk and other preferences, not his or hers.)

4. How will we work together (e.g., by phone, electronically, in person) and how frequently?

5. What services do you offer?

6. What can I expect from you?

7. What will it cost and how are you paid?

8. Who will work with me (e.g., the person you are interviewing or a business associate)?

9. May I see a sample financial plan?

10. Are you registered with state or federal regulators?

STEP 5. Ask yourself, "Do I feel comfortable with this person?"

Working with a financial professional making investment decisions requires a relationship of mutual trust and respect. You must feel the financial professional has your best interests in mind and will be responsive to your needs. You must feel completely confident that this person will treat your situation with strictest confidence and act in a professional manner at all times. You must feel that this professional relationship, putting the effects of market volatility aside, will leave you better off than before.

STEP 6. Make the decision.

Ask for a written agreement that details the services to be provided. Demand the best. Keep up your end of the relationship by providing prompt and accurate information about your current financial situation, your short- and long-term financial goals, and your tolerance for investment risk. Advisors are required, by law, to make recommendations that are suitable for you; so they need to know a lot about you and your objectives.

Summary

Selecting your team of financial professionals, and especially someone to advise you on investments, is only the first step. Building this relationship and getting the most payback for your investment dollar requires constant monitoring on your part. Be involved. Ask questions. Review your portfolio periodically, at least yearly, to be sure your investment strategy will help you reach your financial goals.

Review monthly statements carefully and understand what they say. Monitor economic conditions (e.g., interest rates) to see things on the horizon that may affect your investments. Then consult with your financial professional for advice. If you have a problem or complaint about your financial professional, act quickly to resolve the situation (See Unit 11 for how to complain.).

Building your financial professional team is only a start. Being an active part of that team will increase your chances of making wise investment choices. Often, financial professionals stay with you for a lifetime and can be as great an asset as a solid net worth. Choose wisely.

Work on the Action Steps now to get started.

Action Steps

Check off the steps after you have completed them.

References and Resources

North American Securities Administrators Association (NASAA)
202-737-0900
<www.nasaa.org>

66 Ways to Save Money—by the Consumer Literacy Consortium, single copies available for 50 cents each from Save Money, Pueblo, CO 81009. Make your check or money order payable to Superintendent of Documents.

What You Should Know about Financial Planning, and 10 Questions to Ask When Choosing a Financial Planner—pamphlets available at no charge from the CFP Board of Standards. Call toll-free at 1-888-237-6275, or visit the Web site at <www.cfp-board.org>.

When and How to Choose a Financial Planner—pamphlet available at no charge from the National Endowment for Financial Education. For a free copy, send a self-addressed, stamped envelope to National Endowment for Financial Education, 5299 DTC Boulevard, Suite 1300, Greenwood Village, CO 80111.  Visit their Web site at <www.nefe.org>.

Author Profile

Jane Schuchardt, Ph.D., is National Program Leader, USDA Cooperative State Research, Education, and Extension Service, Washington, DC, the federal partner in the Cooperative Extension System. During 1999, she was Senior Fellow with the National Endowment for Financial Education, Denver.  She is a past president of the American Council on Consumer Interests (ACCI).