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Choosing a Broker or Advisor

The best brokers and investment advisors are those that have your best interests in mind. They have expertise in the financial areas that are important to you, they make you feel comfortable, they have read and understand your investment plan, and they do not trade a lot. They are looking out for number one—you.

There are a number of important areas you should consider if you are thinking about hiring a broker or advisor. Some of these areas are listed below and include some of the basic questions you should ask before hiring anyone to help you manage your finances.

1. Are you a full time broker/registered investment advisor (RIA)/financial planner (FP)?

Work with brokers/RIAs/FPs who work full-time at their business. This gives greater assurance that they are knowledgeable in the products you need.

2. What is your education and what licenses do you have?

Many financial advisors have had little or no financial training. There are no required courses for someone who wants to be called a financial advisor. If you are paying for help, get the best help you can. I recommend that you stick with those that have spent the time and have qualified for specific designations, such as certified financial planners (CFPs), chartered financial analysts (CFAs), and certified public accountants—personal financial specialists (CPAs).

Make sure your choice is licensed. If you require stock and bond assistance, they should have their CFA or Series 7. If they are RIAs, they need their Series 65 and 66. If they are financial planners, I recommend they be CFPs.

3. How long have you been a full-time brokers/RIA/Financial Planner?

Work with someone who is experienced and established. While a new broker may be competent, an experienced broker will likely be competent and have experience.

4. Are you working as a fiduciary or an advisor?

Fiduciaries are required to recommend products that are in the best interests of their clients. Some fee-based advisors at brokerage firms are held to a lower standard that only requires that they recommend products that are a reasonable choice for their clients. I recommend that you only work with advisors that will commit to acting as a fiduciary on your behalf, and that will act only in your best interests.

5. Do you only offer investment advice, or full financial planning services?

Many advisors only offer investment advice. But from this course, you realize that there is much more to comprehensive financial planning than picking financial assets. I recommend that you work with someone who will help you in those other areas as well, including goals, budgets, mortgages, insurance, taxes, retirement planning, and so on.

6. What companies do you represent?

There is a trade-off here between captive and independent brokers/RIAs/FPs. If they work with multiple companies, they may be able to offer more competitive products. If they only work for one company, they may be limited (or biased) in what they recommend.

7. How are you compensated?

Many advisors earn money by collecting commissions on the investments they sell. While they are compensated for the time they spend, there is no additional incentive for them to watch your investments after you have purchased them as they make no additional fees. In addition, there is the potential for conflict of interest, as well as for excessive trading. Remember that every dollar in commissions you pay reduces your returns, and every time you sell a security, you create a taxable event that may require you to pay more taxes. You want to make sure that the broker/RIA/FP is working on your behalf. By knowing the commission on various policies, you may be able to avoid investments that are more of a benefit to the broker than to you. Beware the agency problem!

8. Tell me about your proposed assistance:

a. Trading commissions: How much will it cost to buy stocks or other securities? Are there different prices for market and limit orders? What are those prices? Does your firm offer both safekeeping and recordkeeping services?

b. Other fees: What are your annual maintenance or custody fees? Are there inactivity fees if you're not a frequent trader?

c. Minimum initial deposit: What is your minimum initial deposit? What is the monthly fee for going below this minimum?

d. Customer service: How good is your customer service? Any references? Do you have an 800 number for transactions and quotes?

e. Traditional banking services: Do you offer traditional banking services? Can I write checks on my account?

f. Research: Do you provide objective, independent security analysis? Do I have to pay for reports?

g. Mutual funds: Do you have access to high-quality, low-cost fund families outside the funds sold by the broker, such as Vanguard/Fidelity? If not, what is the cost for me to invest with these fund families?

h. Investment product selection: Do you have certificates of deposit, bonds, options, and so on (list the items you may want to invest in)?

i. Insurance: Is my account insured by the Securities Investor Protection Corporation (SIPC) to $500,000?

j. Other methods of trading: How do you make trades if your computer is down or you're away from home? Can you trade via phone?

k. Other perks: Do you have any special deals that would make it more attractive for me to work with you? Do I receive interest on idle cash in your account?

9. Do you have any clients who are willing to recommend you?

Your broker should either supply you with names of satisfied clients or share testimonial letters from others. You should not consider a broker/RIA/FP without recommendations from others.

While it may be time consuming to find a good financial planner/broker/registered investment advisor, the correct choice can be very beneficial to helping you achieve your personal and financial goals.


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