Do your homework before making any commitments to using a financial advisor.
Ask about an advisor’s investment philosophy, to see if it meshes with yours, and don’t judge solely by past performance. In fact, you should be wary of an advisor who starts by telling you about investment results. That might have been because of taking too many risks, with investments skewed towards hot sectors. An advisor who believes in asset allocation may not have the best results one year, but he or she won’t have the worst results the next year.
Always should ask how an advisor will get paid. Fees that are too low may be just as dangerous as fees that are too high. An advisor has to get paid somehow so low fees may mean that the advisor’s compensation will be driven by selling you things you may not need.
If you are wary of having brokers recommend trade after trade in order to pad their compensation, one option is to trade through a discount broker. However, with a discounter you won’t get financial advice.
As an alternative, consider fee-based investment advice. Most brokerage and financial planning firms offer these arrangements. In these programs you’ll pay a fee based on the assets that are managed.
There are no additional transaction costs so you won’t have to worry about your broker “churning” your account in order to increase commissions. What’s more, your advisor has an incentive to see your account grow because asset-based fees will grow, too.
If you’re interested in this approach, it’s vital that you work with a knowledgeable financial consultant. He or she should take the time to truly understand your goals and your risk tolerance. In future years, the advisor should earn his or her fees by monitoring the performance of your mutual funds and money managers, suggesting changes if something goes off course. You should receive detailed quarterly reports and at least two personal meetings a year with your advisor.
