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Q: What is an investment advisor?
A: Investment advisors give advice about securities to clients. For example, individuals who receive compensation for giving advice on investing in stocks, bonds, or mutual funds, are investment advisors. Some investment advisors manage portfolios of securities.
Q: What is the difference between an investment advisor and a financial planner?
A: Most financial planners are investment advisors, but not all investment advisors are financial planners. Some financial planners analyze every aspect of your financial life, including savings, investments, insurance, taxes, retirement, and estate planning—and then help develop a strategy or financial plan for meeting all your financial goals.
Some call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren't securities. Before you hire any financial professional, you should know exactly what services you need, what services the professional can deliver, any limitations on what they can recommend, what services you're paying for, how much those services cost, and how the adviser or planner gets paid.
Questions you should always ask when hiring any financial professional:
- What experience do they have, especially with people in your circumstances?
- Where did they go to school? What is their recent employment history?
- What licenses do they hold? Are they registered with the SEC, NASD, or a state?
- What products and services do they offer?
- Can they only recommend a limited number of products or services to you? If so, why?
- How are they paid for their services? What is their usual hourly rate, flat fee, or commission?
- Have they ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work they did?
- For registered investment advisors, will they send you a copy of both parts of their Form ADV?
Be sure to meet potential advisors in person to make sure you can establish a good relationship. Remember: there are many types of individuals who can help you develop a personal financial plan and manage your money. The most important thing is that you know your financial goals, have a plan in place, and check out the professional you chose with your securities regulator.
Before you hire any financial professional, ie. stockbroker, a financial planner, or an investment advisor—you should always find out and make sure you understand how that person gets paid. Investment advisors generally are paid in any of the following ways:
* A fixed fee
* An hourly fee for the time they spend working for you
* A percentage of the value of the assets they manage for you
* A commission on the securities they sell, or
* Some combination of the above.
Each compensation method has potential benefits and possible drawbacks, depending on your individual needs. Ask those you interview to explain the differences before you do business with them, and get several opinions before making your decision. Also ask if the fee is negotiable.
Q: Do investment advisors have to register with the U.S. Securities and Exchange Commission?
A: Depending on their size, investment advisors have to register with either the SEC or the state securities agency where they have their principal place of business. For the most part, investment advisors who manage $25 million or more in client assets must register with the SEC. If they manage less than $25 million, they must register with the state securities agency in the state where they have their principal place of business.
Q: How do I find out whether an investment advisor ever had problems with a government regulator or has a disciplinary history?
A: Most investment advisors must fill out a form called "Form ADV." They must file their Form ADVs with either the SEC or the state securities agency in the state where they have their principal place of business, depending on the amount of assets they manage.
Form ADV consists of two parts. Part 1 contains information about the advisor's education, business, and whether they've had problems with regulators or clients. Part 2 outlines the adviser's services, fees, and strategies. Before you hire someone to be your investment advisor, always ask for, and carefully read, both parts of Form ADV.
Q: What should be done if the financial professional claims that he or she is a "certified" professional?
A: If the professional you're considering claims to be a CFP® certificant, you should also visit the website of the Certified Financial Planner Board of Standards, Inc. to see if the professional is, in fact, certified as a CFP® professional and whether the professional's certification has been suspended or revoked by the CFP Board. You can also call the CFP Board at (888)-237-6275 to obtain other disciplinary information about the professional.
Q: Are investment advisors required to have specific credentials?
A: While some investment advisors and financial planners have credentials -- such as CFP® certification or CFA (chartered financial analyst) -- no state or federal law requires these credentials. Unlike federally registered advisors, many states do require their advisors and representatives to pass a proficiency exam or meet other requirements.
Investment advisors and financial planners may come from many different educational and professional backgrounds. Before you hire a financial professional, be sure to ask about their background. If they have a credential, ask them what it means and what they had to do to earn it. Also, find out what organization issued the credential, and then contact the organization to verify whether the professional you're considering did, in fact, earn the credential and whether the professional remains in good standing with the organization.
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