Navigating the Financial Advice Maze

Question of the week:With all the upheaval in the markets lately, I'm ready to get some professional advice about where to go from here. It seems like there's so many kinds of financial advisors these days-how do I find the right kind?
--Mike in Milwaukee

Dear Mike,

Lots of people are feeling the way you do these days. According to a survey of upper-income households done by the Certified Financial Planners, 22 percent of respondents use financial planners. We asked folks in the Armchair Millionaire community about their experiences with financial advisors, and here are some of the responses we got:

"An independent advisor can insist on discipline and really help fill in your financial education gaps. It allows you to rest assured that someone else is looking at your financial well being." --Peter

"Combining my knowledge of money with the expertise of someone who works to achieve my financial goals has been a great experience for me. I think it would be necessary for most people." --Michael R.

"I use my CPA as my advisor. She gives me a lot of advice--not about stocks or funds--but about ways to define my financial life that have lots of advantages that I wouldn't know about otherwise." --Paulie

With everyone from attorneys to accountants and insurance agents offering investment advice and services these days, it's not easy to sort through your choices and make a decision. My guide will help.

The Armchair Millionaire Guide to Financial Advisors

Referrals from friends or coworkers are a good place to start, but be sure to get them from people who have they same kinds of financial goals and challenges as you. These people will be much more likely to refer you to advisors who are best suited to working with you. Also, if you already work regularly with a CPA, attorney, or insurance provider, they may be a good source of referrals.

• Where do I find an advisor?
• What kind should I get? Lots of different professionals offer financial advice now, and the major types can overlap a bit, so it can be confusing. Anyone can call him or her self a financial advisor, so work with someone who has been credentialed, ensuring that he or she has a certain level of knowledge and experience. Here are the major types of advisors:
  • Financial planners provide overall planning assistance, though many may specialize in one area such as retirement or education planning, tax guidance, or insurance. Many planners have earned the Certified Financial Planner (CFP), Chartered Financial Consultant (CFC) or, for CPAs, the Personal Financial Specialist (PFS) designations.
  • Investment advisors give advice about securities, and must be registered with the Securities and Exchange Commission or their state securities commission, depending on how much money they manage. Their credential is usually either an Investment Advisor (IA) or Registered Investment Advisor (RIA).
  • Insurance agents can sell and give you advice about insurance, and must be licensed in their state to do so. Many agents hold the Chartered Life Underwriter (CLU) credential.
  • Accountants can offer tax planning help and hold the Certified Public Accountant (CPA) designation.

  There are three ways advisors can get paid:

  • Fee-only advisors are paid only for their advice, not for selling products (such as mutual funds, stocks and annuities to name a few). Depending on the advisors, they may charge a percentage of your portfolio (typically one to two percent), by the hour, or a flat annual fee.
  • Fee-based advisors are paid by a combination of fees for their advice and commissions from selling products but derive their income primarily from fees.
  • Commission-based advisors earn their money strictly from the commissions on the products they sell.

• What will it cost?

THE BOTTOM LINE: In my experience, fee-only or fee-based works best for most people. Paying your advisor primarily based on fees gives you a greater assurance that your advisor has fewer conflicts of interest and is most likely to work with your best interest in mind. However, any advisor should spell out exactly what you'll be paying and what you'll receive in return.