If you are bewildered by the number of mutual funds on the shelves, selecting a financial adviser has got to be an even more excruciating process. The nation's inventory of mutual funds exceeds 8,100, and if you multiply that number a few times, you'll get some idea of the staggering number of people trying to make a living in the advice business.
Unfortunately, too many people who portray themselves as financial experts aren't. The threshold to get into this business is too low to cull out the clunkers, so you just might need your weed whacker. You can start the elimination round by reviewing last week's column and reminding yourself why you should reject any adviser who isn't a true fiduciary. Working with someone who puts your interests first is so important - and obvious - that I'd urge you to be pigheaded on this requirement. If a financial adviser won't acknowledge a fiduciary duty to you in writing, move on.
Once you've eliminated people without fiduciary credentials, another obvious way to significantly shrink the candidate pool is to decide how you want to pay for the advice you receive. Based on how investment professionals are compensated, you can divide the players into three categories. First, you've got the commissioned crowd. You won't pay commissioned brokers or planners directly, but they will be compensated by the sales charges generated by the mutual funds, annuities and other investments they select for your portfolio.
Second, you've got the fee-only professionals, who get paid by you. Lastly, you have the fee-based folks who can try to have it both ways. They charge a fee, but you also might find commissioned products in your portfolio.
If I were searching for an adviser, I'd ignore the folks who earn their living either partially or totally through commissions. My preference is to pay for what you get, which means I enthusiastically endorse the fee-only camp. Here's my take on the three ways to pay:
- Commissioned professionals. If you aren't sure how your adviser is getting paid, chances are good that he or she is earning commissions.
I believe many people end up with commissioned planners or brokers because it's so easy to slide into a relationship when it doesn't seem to require any financial commitment on their part. You meet a guy who seems to be offering to help you for free. He's not asking you to write a check. You will never see an invoice. There may never be a discussion about the cost. How great is that?