How to Pick a Financial Adviser
A roadmap to making the right choices
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How to Invest
Retirement: To have the nest egg you need for retirement, you’ll need to start saving between 10 percent and 18 percent of your gross income annually.
“We see more people outliving their assets because they aren’t putting enough away to live beyond 78,” says Borden of Kobo Wealth. “People are going to be living into their 90s and the rule of thumb in our world is you need to be putting away 15 percent of your take-home paycheck each year to be able to maintain your lifestyle after retirement.”
At retirement, a person’s nest egg should be 15 times their annual salary, he says. So if you’re earning $100,000 per year now, your nest egg needs to be $1.5 million. “The average individual only has a nest egg three times their annual income at retirement,” he says.
Investing philosophies: Different people are comfortable with different levels of risk. The greater the risk, the greater the potential for big gains or losses. In general, the younger you are, the more risk you can afford. There’s a rule of thumb that the bond levels in your portfolio should be the same as your age. Therefore, in your 20s, bonds should be around 20 percent of your portfolio; in your 30s, 30 percent, and so on. The remainder should be in growth stock. That way, if there’s a market downturn when you’re in your 40s, there’s still time to recover.
Well-balanced portfolios generally include a mix of American small-, medium- and large-capitalization companies, and foreign companies as well. No-load mutual funds are considered the best deal because they have a mix of stocks and you pay no commission.
“People may feel they can create wealth by investing in five or six companies, but we feel that’s a highly risky way to invest. … You need diversification,” says Schwab’s Blacktin.
“We’ll find what their risk tolerance is and we’ll suggest a managed portfolio, usually at about 0.5 percent cost. That would be a diversified portfolio of mutual funds professionally managed. For someone with $50,000 to $100,000, that’s what I would recommend. … Once you have $500,000 or more, you can build a more diversified portfolio.”
Vanguard, for instance, has a low-cost family of mutual funds. That’s good because the higher the expenses, the less money you earn. Morningstar.com ranks funds, and tells you the expenses and risk rating for each.
Photo Courtesy of Matthew Hutcheson
What return can I expect? “Expected risk and return must go together,” says independent multibillion-dollar pension-fund manager Matthew Hutcheson based in Idaho. “You need to ask, ‘What can I expect as a long-term return on my capital? How would that compare if I were to invest in some other strategy?’ They should be able to give you a number - somewhere between 3 percent and 7.5 percent for a long-term investment timeframe.” (Expect 3 percent for older investors who don’t want much risk and 7.5 percent for younger investors.)
“Historically, the stock market has returned just under 10 percent a year, so the adviser should be able to tell you what to expect to happen over the next 15 years,” says Hutcheson. “If they can’t, drop them like a hot potato.”
Making your choice
Your comfort level: There should be a rapport on the first visit. You should pick someone with whom you can have a long-term relationship. It’s like a marriage because your financial adviser should know almost as much about you and your spouse as you know about each other.
“The adviser is really someone who should see them holistically through life,” says Merrill Lynch’s Kimura. “If they only have $5,000 to invest, it’s worthwhile to pay someone to help them with budgeting and get them pointed in the right direction. For that they should pay by the hour. It’s worthwhile to have someone refine your financial process and objectives and also your financial personality and how you do goal setting. And then how you measure against your benchmarks. If you’re a young couple starting out, start with that.”
Once established, Kimura says the client/adviser relationship has to be completely honest. “I’ll ask clients things like, ‘Do you have a mistress? Are there children from other relationships? Is there a congenital medical issue in either family?’ I’ll ask, ‘Do you have any drug or alcohol issues with children? Do you feel they’ll be equipped to inherit your estate?’ Then we’ll talk about what some of the solutions are.”
Kimura says a good adviser will prepare a client for life’s transitions, such as retirement or changing jobs, long before they occur.
The adviser’s philosophy: “You will want to learn if they favor a style or class of investments,” says Cindi John, a financial adviser and CFP with Edward Jones. “If it’s someone with a ‘one-size fits all’ mentality, you may want to go elsewhere. If you’re a conservative investor, you may want to avoid someone who specializes in options. I would not go to a stockbroker for real estate advice. So ask what kinds of services your adviser offers to see if it’s a good fit for you. Some only sell investments. Others offer investments and insurance. Others have a team approach that could be very beneficial.
“At Edward Jones, for young people starting out, we help them put together a plan and we don’t charge for that. This could be several hours of work, but someone just starting out doesn’t need an elaborate plan. They just need to get into the habit. You need to know their goals and their objectives to know what strategies to recommend.” missing image file
The Client Should Come First
As an independent fiduciary and manager of dozens of pension funds worth a total of $6 billion, Idaho-based Matthew Hutcheson is a player on the national financial scene. He is called on to testify before Congress and is pushing strongly for Wall Street reform and higher ethical standards across the nation.
As part of the steering group of The Committee for the Fiduciary Standard (www.thefiduciarystandard.org), Hutcheson urges lawmakers to increase the fiduciary responsibility of all financial advisers. A fiduciary standard generally means that financial advisers must put their clients’ interests ahead of their own.
“If you need ongoing financial advice, it’s important that the person has a duty of loyalty to you,” he says.
These are the five core principles every adviser should follow, according to the committee.
1. Put the client’s best interest first.
2. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional.
3. Do not mislead clients; provide conspicuous, full and fair disclosure of all facts.
4. Avoid conflicts of interest.
5. Fully disclose and fairly manage in the client’s favor.
Advising’s Alphabet Soup
Broker/dealer: An individual or company licensed to buy and sell investments to or for clients. Companies generally offer on-going training to their people to keep them current. The FINRA Web site lists licensed firms.
Financial adviser: This generic term covers a broad spectrum of financial professionals but does not indicate any particular skill or training.
Certified Financial Planner: A CFP has several years of education generally covering 10 areas of finance, plus adherence to ethical standards set by a governing board.
Chartered Financial Consultant: A ChFC can be used by financial professionals, including attorneys, bankers, accountants, insurance agents and securities representatives. They must complete an eight-course program, meet experience requirements and adhere to a code of ethics.
Registered Investment Adviser: An RIA firm or individual providing advice on securities for compensation must register with the Securities and Exchange Commission. An individual RIA has fiduciary responsibility and is held to a high standard of conduct. To find one, sec.gov is a good place to start.
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