How to Choose an Investment Advisor

By Larry Ferstenou

Based on You CAN Retire Young

Personally, I like managing my own investments. However, I have the interest and, as an early retiree, I have time; not everyone does. If you are too busy to do the research necessary for investing on your own, or if you simply are not interested and don’t mind paying someone else, your next step is to contact a financial advisor (also commonly referred to as a financial planner). Be aware that financial advisors operate under different titles and do not provide the same services. And like any profession, some are more competent than others. A good financial advisor can save you time and make you money; a bad advisor can cost you money.

Financial planners are compensated through either commissions or fees, sometimes both. Many securities brokers, and insurance agents who call themselves financial planners but basically sell their company’s insurance and annuity products, are compensated solely through commissions derived from the investments they buy for you. Be aware of a potential conflict of interest any time commissions are an advisor’s sole compensation.

Fee-only financial advisors charge an hourly rate to develop an investment plan for you. Because their income is not dependent on the commissions received from the products recommended, their investment choices can be more varied—such as index funds and good no-load actively-managed funds instead of only load funds. It may be possible to buy index and no-load funds through commissioned brokers, too, but that usually occurs through special accounts that cost you extra fees. Also, be advised that some fee-only planners are really fee-based and charge commissions in addition to an hourly fee. It is in your best interest to find out how any advisor you plan to work with is actually being compensated.

If you don't want to invest on your own, here are three articles to help you choose a financial advisor: (1) “Investment Advisers: What You Need to Know Before Choosing One,” online at the U.S. Securities and Exchange Commission Web site, www.sec.gov, (2)  “The Right Advice” by Lynn Brenner, Bloomberg Personal Finance, September 2001, and (3) “How To Pick An Honest Broker,” by Eleanor Laise, Smart Money, August 2002. 

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Larry Ferstenou retired over ten years ago at age 42 and is the author of You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). More information can be found at www.youcanretireyoung.com. Copyright © Larry A. Ferstenou, 2002–2003.