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The Most Important Financial Decision You Will Make
From The Truth About Money, Part XIII – How to Choose a Financial Advisor.
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By now, you need no convincing that you must pay attention to your personal finances. You need to eliminate debts, build cash reserves, buy and manage investments, prepare your tax return, develop an estate plan, save for college and retirement, make the best use of workplace benefit programs, and buy the right types and amounts of insurance. Oh yes, let’s not forget the importance of making the right decisions when buying homes, obtaining mortgages, arranging automobile purchases, helping family members, and dealing with a multitude of other financial issues.
For sure, I don’t have to convince you of your need to tend to all this. Rather, there’s really only one question you must answer: Do you want to tackle these issues yourself, or would you prefer to delegate these chores to a financial professional?
You see, although Barron’s named me the #1 independent financial advisor in the nation*, in some respects I’m really just … Jiffy Lube.
Here’s what I mean. You know you need to change the oil in your car. You know that if you don’t, the car’s engine will eventually seize. So, you can run to the store to get some oil and then go home and do the work yourself, or you can take your car to Jiffy Lube and let those friendly folks do the work for you.
Interestingly, Jiffy Lube doesn’t promise to put better oil in your car than you could yourself. Instead, it promises that you won’t get your hands dirty. Thus, Jiffy Lube simply provides a service, and you pay a fee to receive it. Is the fee worth it?
Absolutely, if you don’t know how to change the oil, if you don’t know which type of oil to buy, if you don’t have the time to change the oil, or if you simply don’t want to do it yourself. In any of these cases, Jiffy Lube is well worth the modest fee it charges.
In short, everyone needs to change the oil in their car, but not everyone needs to hire Jiffy Lube. And by the same notion, everyone needs a financial plan, but not everyone needs a financial planner.
This book is called The Truth About Money, and the truth is that there are really only three reasons you might need to hire a financial advisor:
- 1. You lack the knowledge to make the right decisions.
2. You lack the time it takes to properly tend to your investments and personal finances.
3. You lack the desire to spend your time on these chores; you’d much rather spend your time elsewhere.
If any of this describes you, then you need to hire a financial advisor. And that decision — choosing your advisor — becomes the most important financial decision you will ever make. So read on to learn how to make this decision successfully.
Financial advisors can be found in banks, brokerage firms, accounting firms, trust companies, insurance companies, and of course, in financial planning firms. Although their titles and credentials vary, they all have the same job: to help you identify and achieve your financial goals. They do this by examining your situation and giving you advice across the full spectrum of personal finance —the very topics we’ve explored throughout this book.
As you know, the world of personal finance is broad and complex. Consequently, so is the landscape of financial advice and those who provide it. Therefore, this final part of the book will show you the different kinds of advisors that exist, how the services they offer may differ, and explain how they are licensed, regulated, and compensated. You’ll also learn how to select the advisor who’s right for you and how to get the most value from your relationship with him or her.
Understanding What You’re Really Paying For
As I explain thoroughly in my book Discover the Wealth Within You, a properly constructed financial plan begins with setting goals. You determine what you want to do, when you want to do it, and how much it will cost. You then examine your income and assets, comparing them to your expenses and debts, so that you can determine how much you need to save and what kind of investments you need in order to reach those goals. As Part XI showed you, a properly constructed financial plan also helps you determine what kinds and amounts of insurance you need.
Some people skip the planning part and go straight to buying investments and insurance. But either way, you’ll find yourself faced with the decision of buying investment and insurance products.
Yes, products. In the end, the financial services industry is in the product manufacturing and distribution business.
So the real question you must answer is rather simple: Do you want to pay for advice (that tells you what you need to do) or do you want to pay for the purchase of products?
This question is at the core of the entire discussion that follows, because, as you’ll see, some advisors are paid to give advice, while others are paid to sell products. Some are paid to do both. And just because your intent is to pay for one doesn’t mean you won’t also pay for the other.
Sound confusing? If the federal and state laws and regulations that govern the field seem complicated, well, they are only reflecting the field itself. But hang in there — by the time you’re done reading this part, it’ll all make sense. And you’ll be ready to interview potential advisors — or re-evaluate your current one.
*Barron’s ranking "Top 100 Independent Financial Advisors" (Aug. 27, 2012/Aug. 28, 2010 / Aug. 31, 2009) based on the quality of the advisors’ practices, including client retention and compliance record, contribution to the firm’s profitability, and the volume of assets overseen by the advisors and their teams.
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