February 17, 2010

Dear Carrie:

Thanks for your continued financial guidance and vote of confidence towards achieving financial independence. My wife and I believe in an index fund investment approach with annual re-balancing back to our desired asset allocation. Our conundrum is whether using a financial advisor would be worth the additional annual costs or should we manage the process ourselves if we stay diligent?

Dave and Wendy

Dear Dave and Wendy:

This is a good question, especially for investors who are as knowledgeable and disciplined as you appear to be. On the one hand, it sounds like you could continue to handle your investments yourself. But because needs can change, and since your portfolio is just one part of your financial life, this may be a good time to take a broader view. So let’s start with why you might need an advisor, and then talk about what to look for. After all, financial advice comes in many flavorsfrom focusing exclusively on your portfolio to offering a broad array of services.

Look at your complete financial picture

If you take a step back, your financial life includes many partsfrom retirement planning to estate planning, tax planning, and insuranceas well as your portfolio. Ideally, all of the parts work well together. Have you gone through this type of holistic analysis? Are you prepared to do it yourself? If not, that’s where a financial planner can help. An experienced professional who provides a wide range of financial services can create a complete plan as well as handle the details for you. It may cost a bit more, but it could save you money and time in the long run, as well as a certain amount of angst.

Think about the future

One of the most important aspects of successful investing is having what you and the financial pros refer to as a proper asset allocation, meaning the right mix of stocks, bonds and cash for your personal situation. You may be quite comfortable with your current strategy. But think ahead. Will it still work for you in the future? Most likely, you’ll want to continue to make adjustments as you approach retirement. That can mean gradually moving into more fixed income investmentsan area that can be particularly daunting even for fairly experienced investors. At this point an advisor with fixed income expertise could be a welcome partner.

Consider the types of financial advice

From a one-time consultation to ongoing management, there’s a lot to choose from. In terms of your portfolio alone, checking in periodically with an advisor to discuss your strategy and help maintain your focus may be enough. You’d get professional input but maintain control over your investments, make your own decisions and place your own trades.

An advisor who actually manages your money for you is a different proposition. Generally speaking, financial advisors are best suited for people with substantial assets who are ready to give up day-to-day control of their portfolios. This is important. The idea behind having an advisor is to develop a plan of action to achieve your financial goalsand let your advisor do the work. If you prefer to be more hands-on with your investments, it’s probably not for you.

Then there are Certified Financial Planner TM professionals who can advise you on aspects of your financial life beyond your portfolio and help with the big-picture planning we mentioned before.

Steps for finding an advisor

Finding an advisor is a serious pursuit and you need to be wary. You want someone you’re comfortable with both professionally and personally; someone who will listen to your questions and provide clear, understandable answers; someone who truly has your interests at heart. That’s no easy task.

Here are some steps to help you:

• Know what you want. Give serious thought to the type of advice you wantcomplete financial planning, portfolio management or just a periodic check-in.
• Get referrals and make appointments. Start with recommendations from friends, colleagues or other financial professionals. Make an appointment for a complimentary consultation, which most advisors offer.
• Prepare for the initial consultation. Make a list of questions about background, experience and types of services. I also suggest that you probe the potential advisor about their investing philosophy to make sure they’re a good match.
• Ask about compensation. Will you be charged a flat fee for services or a fee based on the size of your portfolio? Does the advisor receive any commission, reimbursement or incentive for selling specific types of investments?
• Verify history, credentials and experience. Be sure to check on an advisor’s education and qualifications, recognizing that there is a difference between a broker who primarily sells investment products and a professional whose primary business is giving advice. If you’re talking to an independent advisor, ask to see Form ADV, which he or she is required to file with the SEC or their state.
• Get references. Ask for a list of past and current clientsand call them.

The ultimate concern

Ultimately, you want to make the most of your money while protecting it. If you need more guidance as your portfolio grows, your strategy changes, or your life becomes busier, an advisor can be well worth the money. Just make sure you use the same diligence in finding the right advisor that you currently use in managing your portfolio.