Do You Need an Advisor - Ch 16 of the Bogleheads Series at Catch a Gideon

November 23rd, 2006 by digerati

This is Chapter 16 in the Bogleheads series here at Catch a Gideon. We are going through each chapter in the book and letting you know what we learned from reading it. You should buy the Bogleheads Guide to Investing. It has more examples and more depth than I’m giving here, and is overall an excellent investment book.

I helped put two children through Harvard–my broker’s children. –Michael LeBoeuf

When someone buys or sells an investment, the broker makes money, and the brokerage house make money, and two out of three ain’t bad. Many times brokerage houses are interested in encouraging clients to buy and sell frequently (churning) so they can earn higher commissions. It is important to note that your and your broker’s interests are not necessarily aligned.

Official Titles

Want to be a financial advisor? Would a financial consultant be better than an investment consultant? Actually, it doesn’t matter; none of these titles are regulated by the SEC (or anyone else). You can simply put them on a card and start your advising business.

There are over 50 designations that are regulated, often by the SEC or the National Association of Securities Dealers (NASD). These listed must meet certain educational and experience requirements before being designated. Chartered Financial Advisors (CFA) and Certified Financial Planners (CFP) are two of particular interest.

Ed note: I’ve more commonly heard the term CFA as Chartered Financial Analyst. A few people have pointed this out. I’ve left advisor since that is the term used in the book.
A CFA must have an undergraduate degree, must be working in a financial field, and have three+ years of professional experience involving investment decision making, or four years of other qualified work experience. They also must complete 250 hours of study at three different levels and pass a comprehensive exam. CFAs are often among the most highly qualified in their fields.
Three Ways to Pay

Assets Under Management (AUM). This method involves paying a set percentage of your total assets (invested) to the advisor on an annual basis. Often the percentages range from .25to 2% depending on the advisor and the account size. Often the advisors will limit the number of clients they take on to guarantee personal service. Be aware that you will pay this percentage even in years when your portfolio declines.
One time fee. Just as it sounds, there is a fee charged either for each investment or initially when creating a financial road map.
Hourly rate. You pay the advisor based on the time you spend discussing and planning with them.

Choosing a Planner

The SEC puts out these guidelines when choosing a planner:

Know the type of financial services you require. This will help you avoid paying for services you don’t want and also help you find the right advisor for you
Get names from friends, neighbors, family, etc. Someone recommended is likely better for you than someone you find in the phone book.
Understand how you will pay them for their services. Ask if they receive additional commissions based on what they sell
Make sure the professionals and their firms are properly registered with NASD, the SEC and state insurance regulators.
If the investment professional will sell you products ask if the firm the person works for is a member of the Securities Investor Protection Corporation )SIPC).
Part of making the right investment decision is finding the investment professional that best meets your financial needs. Resist investment professionals that urge you to immediately work with them.

For more advice on finding a planner see www.cfp.net.

Go out and buy The Bogleheads Guide to Investing.