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Finding
Financial Advisors
by
Gary Foreman of The Dollar Stretcher
Dear
Dollar Stretcher,
A financial corporation offered a class on money and how to
properly use it. I sat through their spiel and asked questions.
Of course they offer the full array of services from investments
to mortgages. All of this sounds good during the presentation.
But it has always been my understanding that no one is willing
to do something for you without getting something in return.
Can you tell me what you think of these corporations and what
they are offering? Is there a catch? How can I tell who is
reputable and who is just going to take me for a ride?
Thanks.
Brent
Brent's
right. Generally speaking there is no free lunch. Strangers may
be willing to give you something, but they do have hopes of
getting something back.
Teaching
a class or hosting a seminar are common and legitimate ways for
financial institutions to find new clients. Back when I was a
broker I even taught a few classes. The hope is to impress your
'students' enough so that they do business with you.
What
do I think of this firm and class? Impossible to say. Because
there is no one right financial firm, broker or planner for
everyone. Brent's needs are different than mine. So it would be
pointless for me to offer an opinion about the class. But with a
little help Brent can answer the question for himself.
He
can begin by deciding what he's trying to accomplish. Some
things are fairly simple. For instance, finding a good deal on
auto insurance. Other things, like estimating how much money
he'll need for retirement, are more complicated.
Next
he'll need to determine how much he already knows about the
subject and how much he's willing to learn on his own. He'll
face a trade-off. He can save money by becoming more
knowledgeable. But, it takes time and effort to gain that
knowledge.
Brent
will find information readily available. Resources that were
only available to brokers 20 years ago are now as close as your
computer. He'll also find a wealth of books on all areas of
money and investments.
One
rule should guide Brent when making financial decisions. If he
doesn't understand an investment, he shouldn't put his money
into it. A careful explanation should allow him to understand
exactly how his money is expected to make more money.
Next
Brent needs to find out how the financial firm will be
compensated. Generally, they make their money by charging
premiums, commissions and fees.
You're
used to paying premiums on insurance policies. The premium is
determined by the insurance company. It is not a set percentage
of the coverage. Typically maximum premiums are regulated, but
Brent should shop for the lowest price.
On
investment products he could run into commissions. A commission
is a charge that's added to the cost of the securities being
purchased or deducted from the proceeds of a sale. It's not a
flat percentage but is related to the amount of money involved.
There
is no standard commission rate. Full service brokers who provide
stock trading advice get top dollar. Less service means a lower
price. It's up to Brent how to decide how much advice he needs.
Fees
come in a couple of different disguises. Some are charged when
you take a certain action. A common one is the fee for a bounced
check. Mutual funds may charge a fee for trading funds within
their family. Typically fees are a set, flat amount and are not
dependent on the size of the transaction.
Many
investment managers are compensated through "management
fees". Typically they'll charge a preset percentage of the
money they control for making the day-to-day investment
decisions. Charges are usually between .25% and 1.5%. The fee
schedule for any money manager (including mutual funds) should
be readily available.
With
some mutual funds you'll incur a fee if you sell the fund. Those
are known as "12b-1 Fees". If Brent hears the phrase
"12b-1" he needs to be sure he understands what fees
he could trigger later.
The
financial services industry is creative in finding ways charge
you for their work. So Brent will need to dig a bit to find all
the premiums, commissions and fees he could be facing. In some
products he'll find a combination of the different charges.
Generally the company is required to advise you of all expenses
before you purchase. But expect to study some fine print to find
them.
How
can Brent find a good advisor? Going to seminars and asking
respected friends who they use are good ways. He needs to have
realistic expectations. A broker can't afford to spend much time
with someone who's going to generate $50 a year in commissions.
And that's ok. For transactions that will generate small
commissions Brent should be able to use a discount or online
broker. And, for a regular investment program, he might be
better off choosing a mutual fund.
The
good news is that there's plenty of help available for just
about any financial situation. Hopefully Brent will get just
what he needs for a bright future.
Gary
Foreman is a former Certified Financial Planner who currently
edits The
Dollar Stretcher website. The site contains hundreds
of free articles to help stretch your day and your dollar.
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