Module 1: Personal Goals and Objectives

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Module 1: Personal Goals and Objectives

  1. 1. Selecting a Financial Advisor AND Acknowledgement This publication was made possible by a generous grant from the FINRA Investor Education Foundation. FINRA Investor Education Foundation The FINRA Investor Education Foundation supports innovative research and educational projects that give investors the tools they need to better understand the markets and the basic principles of saving and investing. Through a combination of grantmaking and direct investor programming, the FINRA Investor Education Foundation works to educate and protect investors in communities around the country and at military bases around the world. For details about grant programs and other FINRA Foundation initiatives, you may visit www.finrafoundation.org. (12/14/2007) Inquiries and/or comments should be directed to Prof. David Fehr at the Center for Financial Studies at Southern New Hampshire University: (603) 644-3197 or d.fehr@snhu.edu. Page 1 of 10
  2. 2. Selecting a Financial Advisor Executive Summary Educational Motivation The purpose of this module is to discuss To understand how a financial advisor key aspects in choosing a financial advisor, can be helpful and to appreciate both including providing relevant information to advisor and client responsibilities the advisor, setting expectations with the To address key factors in selecting a advisor, understanding the fee structure financial advisor and dealing with problems that might arise between advisor and client. To appreciate the costs in working with an advisor The module is divided into four segments. 1. A discussion of the need for a financial Overview of Material advisor and the responsibilities of the advisor and the investor Key Terminology: 2. Identifying a financial advisor using an Certified Financial Planner (CFP): An online tool and checking the credentials advisor with expertise in estate planning of advisor with another online tool and investments, at least three years work 3. Preparing to meet with an advisor experience and who has passed a comprehensive examination. 4. How financial advisors are compensated, as well as how problems Certified Investment Management with an advisor may be managed Consultant (CIMC): An advisor with three years of consulting experience and who is In particular, the module will address: certified by the Institute for Investment Understanding why you might need a Management Consultants. financial advisor Certified Public Accountant (CPA): A Preparing a self assessment checklist – specialist in accounting and taxes who is what do you want from the advisor and licensed to do business by the State and how do you want the relationship to who may represent taxpayers before the work Internal Revenue Service; rigorous examinations are required for this Preparing an advisor services checklist certification. – what tasks would you like the advisor to perform for you Chartered Financial Analyst (CFA): An investment advisor who has passed a Identifying a qualified advisor in your rigorous examination, has at least three area years of investment management Preparing an advisor prescreening experience and is certified by the checklist – checking references and Association for Investment Management asking questions and Research (AIMR). Describing your current financial Chartered Financial Consultant (ChFC): situation and financial goals An advisor who has passed an examination on the major financial planning areas Evaluating an advisor’s suitability for (income tax, insurance, investments and you estate planning) and has at least three Understanding advisor fees years experience. Dealing with financial advisor problems Chartered Investment Counselor: (CIC): An advisor who is certified by the Investment Counsel Association of America Page 2 of 10
  3. 3. and also holds the CFA designation. their finances. They may be intimidated by the volume and complexity of financial Chartered Life Underwriter (CLU): An information they must process in order to advisor who specializes in life insurance handle their finances. Is your financial and has at least three years experience. planning being neglected because you Commission-Only Planner: An advisor don’t know what to do? Are you the type who is compensated through commissions of person who does not enjoy taking care earned on financial products that you of your affairs, so that no planning will be purchase. (Compare to fee-only and fee- done without help? Do you have “better” and-commission planner). things to do with your life – e.g., leisure or work? Enrolled Agents: A tax professional who has passed a rigorous examination and What an advisor can and cannot do for who is enrolled with the US Department of you Treasury to represent taxpayers before the Internal Revenue Service. (Based on a document titled “Working with a Fee-Only Advisor” found at Fee-and-Commission Planner: An http://www.napfa.org/consumer/Workingw advisor who charges you a fee for service ithaFeeOnlyAdvisor.asp.) but also receives commissions (sometimes called a “fee-based” planner; compare to Your financial advisor can do much more fee-only and commission-only planner). for you than simply handle your investments. You may want your advisor Fee-Only Planner: An advisor who to assist with retirement and estate charges a fixed hourly rate, a fixed fee or a planning, cash flow management and tax percentage of assets under management. planning. It is not too early for you to (Compare to commission-only and fee-and- begin to think about these long-term commission planner). financial issues. Even though you will Personal Financial Specialist (PFS): A likely not retire for 50 years, you can best designation for accountants who specialize prepare for retirement by investing early in in financial and retirement planning; your working career. certification provided by the American You must also realize that your advisor is Institute of Certified Public Accountants. not omnipotent. The advisor does not have a magical crystal ball to look into the future. She cannot read your mind – you Background Information must tell her explicitly your goals and aspirations. She cannot guarantee the The facilitator will want to survey key performance of your investments. She is aspects of the financial advisor/client not a trained therapist or psychic. relationship. It is often useful to organize the discussion using webpage forms that Identifying an advisor can be filled out and printed. (Based on Do I need a financial advisor? http://www.myfinancialadvice.com/Custom er/Default.aspx) (Based on a document titled “Eleven Reasons You May Need a Fee-Only, How will you identify a list of qualified Comprehensive Financial Advisor” found at financial advisors? You will want to choose http://www.napfa.org/tips_tools/articles.as someone who is close geographically to p; click on “What is Comprehensive you because you will likely want to meet Planning”.) Note that the URL contains an face-to-face with your advisor on a regular underscore (_), not a space. basis. You might want to identify potential advisors who have special expertise that Individuals decide to work with financial you might need, for example in planners for a variety of reasons. They sophisticated tax planning if you will be may be overwhelmed and confused about Page 2 of 10
  4. 4. dealing with trusts. You may need to in a timely fashion? identify an advisor willing to work with Has she ever lied to you or been beginning investors with small account evasive in answers? balances. Has she implemented the strategies Checking advisor references and that you agreed upon? asking questions How is she to deal with when things go (Based on a document titled “Checking poorly? references, Questions to ask” found at Preparing financial information and http://www.gga.ca/tools/choose_5a_chklst data for the advisor .pdf and a document titled “Critical list, Questions for advisor candidates” found at (Based on a document titled “Financial http://www.gga.ca/tools/choose_5c_chklst needs checklist” found at .pdf) Note that each of the URLs contains http://www.gga.ca/tools/choose_5b_chklst an underscore (_), not a space. Note that .pdf and “What Are Your Planning Issues?” similar information may be found in found at http://www.finra.org/InvestorInformation/InvestorP http://www.napfa.org/tips_tools/articles.as rotection/p005882, p; click on “What is Comprehensive http://assets.aarp.org/www.aarp.org_/artic Planning”.) Note that each of the URLs les/bulletin/money/financialquestionnaire.p contains an underscore (_), not a space. df, It is important that the advisor understand http://www.pueblo.gsa.gov/cic_text/mone your financial goals and status as y/financial-planner/10questions.html and completely as possible. It is likely that http://www.sec.gov/investor/pubs/askques your advisor will have a set of forms and tions.htm. worksheets that you will use to convey this In selecting an advisor, you will have information to her. The worksheets can be questions for both the advisor and for short and of a summary nature, or they client references provided to you by the may contain many pages requiring very advisor. specific financial details. Do not hesitate to tell your advisor which type will be most How long have you been working as an advisor? appropriate for you. The facilitator will want students to fill out a short, sample Do you provide just planning or can you financial checklist. Typically, the also manage my investment portfolio? checklist/worksheets will contain questions Will you work with other professionals that are inappropriate for high school assisting me, such as my accountant students, such as marital status, amount of and lawyer? mortgage debt, etc. Nonetheless, it is a useful exercise for students to see the full What are your educational and breadth of questions and determine why professional certification qualifications? selected questions are not appropriate for Will you provide me some client them. The facilitator may, as a follow up, references? want to show students a very detailed (all 13 pages!) questionnaire – see The facilitator may decide to introduce a http://www.efmoody.com/planning/questio discussion of the typical professional nnaire.html. Please note that the certifications (see Key Terminology above). facilitator should emphasize that the hand- Contact the client references provided by out is meant to illustrate the point that the advisor. Don’t be afraid to ask the questionnaires can be lengthy. The references hard questions. facilitator will want to make clear that a specific commercial product is not being Did the advisor ever disappoint you? endorsed. Is the advisor available and responsive Page 3 of 10
  5. 5. Understanding financial advisor fees may want to use the FINRA website to explore options for dealing with problem You should not expect your advisor to work brokers. for free, but you need to understand how you will pay for her services. Your advisor might work on a fee basis – you will pay a Web Site Documentation fixed annual fee and/or pay an hourly rate. Under this approach, the advisor has no http://www.finra.org/InvestorInformation/I particular incentive to direct your nvestorProtection/p005882 investments toward a specific investment category or family. Alternatively, your A useful FINRA website containing advisor might be compensated based on a registration and licensing information for percentage of your assets that she individual brokers and brokerage firms. manages or via commissions she earns from mutual funds, insurance companies, http://apps.finra.org/datadirectory/1/prode etc., for investing (using your funds) in signations.aspx their products. The facilitator will want to address the potential conflict here. With A detailed website providing information on well-prepared students, the facilitator could many finance professional designations productively talk about a wide range of principal/agent issues. http://www.sec.gov/investor/brokers.htm To illustrate the corrosive effect of fees, A U.S. Securities and Exchange use the EFFECT OF MANAGEMENT FEES ON Commission website useful in researching RETURN EARNED handout contained brokers and investment advisors; provides herein. links to key FINRA sites. Dealing with problems with your http://assets.aarp.org/www.aarp.org_/artic advisor les/bulletin/money/financialquestionnaire.p (Based on df http://www.finra.org/InvestorInformation/I nvestorProtection/InvestWisely/index.htm) A 10 question financial advisor questionnaire that investors can give to Your working relationship with your advisor potential advisors. may not always go smoothly. You will want to take measures to protect yourself http://www.pueblo.gsa.gov/cic_text/mone from unscrupulous advisors and y/financial-planner/10questions.html understand how to resolve problems. Protecting yourself is often a matter of Provides an alternative 10 question applying common sense. Be on the financial advisor questionnaire. lookout for “too good to be true” recommendations. It is usually a bad idea http://www.sec.gov/investor/pubs/askques to invest based on telephone only tions.htm solicitations. If your advisor touts “inside” information or guaranteed investments, be A U.S. Securities and Exchange very wary. You should also be aware of Commission website that provides the number of transactions that occur in questions you should ask about your your account - lots of transactions can investments and what to do if you have a generate huge commissions for your problem with a professional advisor. broker, may not be in your best interest and are a clear warning sign of trouble. To address serious problems, you will want to contact the appropriate regulating authority. As an illustration, the facilitator Page 4 of 10
  6. 6. http://www.kiplinger.com/personalfinance/ http://www.gga.ca/choose7.html features/archives/2004/12/finadvice.html This website contains links to documents This website lists several financial advisor prepared by Fidelity Investments that networks that can be used to identify and address choosing an advisor and providing qualify financial advisors by geographic financial information to the advisor. A area. gateway to the three immediately preceding links. http://www.myfinancialadvice.com/Custom er/Default.aspx http://www.finra.org/InvestorInformation/I nvestorProtection/InvestWisely/index.htm A typical referral service for financial advisors – a good website to use for FINRA website reviews selecting a broker illustration purpose during the class and avenues for problem resolution with session. brokers. http://www.napfa.org http://www.efmoody.com/planning/questio nnaire.html This website for the National Association of Personal Financial Advisors is a gateway to This website provides an example of a very several documents about financial comprehensive client questionnaire planning, including the two listed next. financial worksheet. http://www.napfa.org/tips_tools/index.asp http://www.retireearlyhomepage.com/advi se.html Note that the URL contains an underscore (_), not a space. This website has some useful discussion about selecting an advisor and also This website provides links to several provides the table on the effect of documents that provide a variety of management fees that is provided as a information about selecting, preparing to handout for this module. meet with and working with a financial advisor. http://www.napfa.org/consumer/Workingw Lesson Plan and Relevant Assignments ithaFeeOnlyAdvisor.asp This website describes the responsibilities Materials Needed: of the financial advisor and the investor. WEBSITES handout http://www.gga.ca/tools/choose_5a_chklst EFFECT OF MANAGEMENT FEES ON .pdf Note that the URL contains an RETURN EARNED handout underscore (_), not a space. “Checking references, Questions to Ask” 90-minute Lesson Plan: prepared by Fidelity Investments. 10 minutes: Segment 1. Discuss the http://www.gga.ca/tools/choose_5c_chklst possible need for a financial advisor and .pdf Note that the URL contains an the responsibilities of both the advisor underscore (_), not a space. and the client. “Critical list, Questions for advisor 25 minutes: Segment 2. Distribute the candidates” prepared by Fidelity WEBSITES handout. Have students Investments. identify and select an advisor that would be appropriate for them using http://www.gga.ca/tools/choose_5b_chklst the Identifying a Financial Advisor .pdf Note that the URL contains an assignment below. underscore (_), not a space. 10 minutes: Segment 2 cont’d. Discuss “Financial needs checklist” prepared by ways to check on the background and Fidelity Investments. qualifications of the advisor using the Page 5 of 10
  7. 7. Checking Advisor References and Assignments: Asking Questions assignment below. Segment 2 – Identifying a Financial 25 minutes: Segment 3. Guide students Advisor through completion of the Preparing URL: Financial Information assignment http://www.myfinancialadvice.com/Custom below. er/Default.aspx While useful for our 10 minutes: Segment 4. Discuss how purposes of identifying an advisor, please advisors are paid and the impact on note that this is a commercial website that your rate of return caused by fees. contains advertising and attempts to sell Distribute the EFFECT OF MANAGEMENT products. It would be very useful lesson to FEES ON RETURN EARNED handout. remind students that commercial sites are often designed as primarily sales and 10 minutes: Segment 4 cont’d. Discuss marketing sites. how problems with your advisor may be handled. 1. Click on a particular financial topic to find an advisor for that topic. 35-minute Lesson Plan: 2. Enter your state of residence to view In this shorter session, it is recommended advisors in the appropriate geographic that the class not complete the preparation area. Submit. of the financial worksheet (Segment 3), but rather concentrate on the mechanics of 3. Move the cursor over the name of any choosing an advisor (Segments 1, 2 and advisor and click to view more detailed 4). information on the advisor. Explore the information in the advisor profile. Of 5 minutes: Segment 1. Discuss the particular interest would be expertise, possible need for a financial advisor and credentials and fees. Students will the responsibilities of both the advisor want to compare and contrast profile and the client. screens for different advisors. 15 minutes: Segment 2. Distribute the WEBSITES handout. Have students identify and select an advisor that Segment 2 cont’d – Checking Advisor would be appropriate for them using References and Asking Questions the Identifying a Financial Advisor URL: assignment below. http://www.gga.ca/tools/choose_5a_chklst 5 minutes: Segment 2 cont’d. Discuss .pdf Note that the URL contains an ways to check on the background and underscore (_), not a space. qualifications of the advisor using the Checking Advisor References and Alternatively, you may go to Asking Questions assignment below. http://www.gga.ca/choose7.html and select “Checking references, Questions to 10 minutes: Segment 4. Discuss how ask”. advisors are paid and the impact on your rate of return caused by fees. and URL: Distribute the EFFECT OF MANAGEMENT http://www.gga.ca/tools/choose_5c_chklst FEES ON RETURN EARNED handout. .pdf Note that the URL contains an underscore (_), not a space. Alternatively, you may go to http://www.gga.ca/choose7.html and select “Critical list, Questions for advisor candidates”. Page 6 of 10
  8. 8. 1. Go to Segment 3 – Preparing Financial http://www.gga.ca/tools/choose_5a_ch Information klst.pdf (“Checking references, URL: Questions to ask”). Note that the URL contains an underscore (_), not a http://www.gga.ca/tools/choose_5b_chklst space. .pdf Note that the URL contains an underscore (_), not a space. 2. Click the SELECT button near the top of the Adobe Acrobat window. Then check Alternatively, you may go to each box representing a question that http://www.gga.ca/choose7.html and you would like to ask advisor select “Financial needs checklist”. references. and URL: 3. The completed form may not be saved http://www.napfa.org/tips_tools/articles.as as an electronic file but can be printed p; click on “What is Comprehensive by clicking on the PRINT FORM button Planning”, select “What Are Your Planning near the top of the window. Issues?”. 4. Go to 1. Go to http://www.gga.ca/tools/choose_5c_ch http://www.gga.ca/tools/choose_5b_ch klst.pdf (“Critical list, Questions for klst.pdf (“Financial needs checklist”). advisor candidates”). Note that the Note that the URL contains an URL contains an underscore (_), not a underscore (_), not a space. space. 2. Click the SELECT button near the top of 5. Click the SELECT button near the top of the Adobe Acrobat window. Then click the Adobe Acrobat window. Then check on each blank representing a question each box representing a question that that you would like to answer and type you would like to ask your advisor your answer. candidate. 3. The completed Adobe Acrobat form may 6. The completed Adobe Acrobat form not be saved as an electronic file. The may not be saved as an electronic file. completed form can be printed by The completed form can be printed by clicking on the PRINT FORM button near clicking on the PRINT FORM button near the top of the window. the top of the window. 4. Go to http://www.napfa.org/tips_tools/article s.asp. Note that the URL contains an underscore (_), not a space. click on “What is Comprehensive Planning”, select “What Are Your Planning Issues?”. This form does not allow for electronic inputting of data. 5. Working with either a hard copy of the form or viewing on the screen, compare this version of a worksheet to the worksheet prepared above. 6. To view an even more comprehensive worksheet, go to http://www.efmoody.com/planning/que stionnaire.html. Page 7 of 10
  9. 9. SELECTING A FINANCIAL ADVISOR WEBSITES http://www.finra.org/InvestorInformation/InvestorProtection/p005882 A useful FINRA website containing registration and licensing information for individual brokers and brokerage firms. http://apps.finra.org/datadirectory/1/prodesignations.aspx A detailed website providing information on many finance professional designations http://www.sec.gov/investor/brokers.htm A U.S. Securities and Exchange Commission website useful in researching brokers and investment advisors; provides links to key FINRA sites http://assets.aarp.org/www.aarp.org_/articles/bulletin/money/financialquestionnaire.pdf A 10 question financial advisor questionnaire that investors can give to potential advisors. http://www.pueblo.gsa.gov/cic_text/money/financial-planner/10questions.html Provides an alternative 10 question financial advisor questionnaire. http://www.sec.gov/investor/pubs/askquestions.htm A U.S. Securities and Exchange Commission website that provides questions you should ask about your investments and what to do if you have a problem with a professional advisor. http://www.kiplinger.com/personalfinance/features/archives/2004/12/finadvice.html This website lists several financial advisor networks that can be used to identify and qualify financial advisors by geographic area. http://www.myfinancialadvice.com/Customer/Default.aspx A typical referral service for financial advisors. http://www.napfa.org This website for the National Association of Personal Financial Advisors is a gateway to several documents about financial planning, including the two listed next. Handout page 1 of 2 Page 8 of 10
  10. 10. SELECTING A FINANCIAL ADVISOR WEBSITES http://www.napfa.org/tips_tools/index.asp Note that the URL contains an underscore (_), not a space. This website provides links to several documents that provide a variety of information about selecting, preparing to meet with and working with a financial advisor. http://www.napfa.org/consumer/WorkingwithaFeeOnlyAdvisor.asp This website describes the responsibilities of the financial advisor and the investor. http://www.gga.ca/tools/choose_5a_chklst.pdf Note that the URL contains an underscore (_), not a space. “Checking references, Questions to Ask” prepared by Fidelity Investments. http://www.gga.ca/tools/choose_5c_chklst.pdf Note that the URL contains an underscore (_), not a space. “Critical list, Questions for advisor candidates” prepared by Fidelity Investments. http://www.gga.ca/tools/choose_5b_chklst.pdf Note that the URL contains an underscore (_), not a space. “Financial needs checklist” prepared by Fidelity Investments. http://www.gga.ca/choose7.html This website contains links prepared by Fidelity Investments addressing choosing an advisor and providing financial information to the advisor. A gateway to the three immediately preceding links. http://www.finra.org/InvestorInformation/InvestorProtection/InvestWisely/index.htm FINRA website reviews selecting a broker and avenues for problem resolution with brokers. http://www.efmoody.com/planning/questionnaire.html This website provides an example of a very comprehensive client questionnaire financial worksheet. http://www.retireearlyhomepage.com/advise.html This website has some useful discussion about selecting an advisor and also provides the Table on the effect of management fees that is a handout for this module. Handout page 2 of 2 Page 9 of 10
  11. 11. SELECTING A FINANCIAL ADVISOR EFFECT OF MANAGEMENT FEES ON RETURN EARNED The Effect of Management Fees on your Earnings. Assumes $2,000 yr. contribution, 10% annual return before management fee. IRA Balance after 5 Years 10 Years 20 Years 30 Years 40 Years Mgmt. Fee @ 0.02% $13,423 $35,022 $125,696 $360,454 $968,249 Mgmt. Fee @ 0.25% $13,334 $34,556 $122,204 $344,402 $907,762 Mgmt. Fee @ 0.50% $13,238 $34,077 $118,528 $327,816 $846,479 Mgmt. Fee @ 1.00% $13,047 $33,121 $111,529 $297,150 $736,584 Mgmt. Fee @ 2.00% $12,672 $31,291 $98,846 $244,692 $559,562 Mgmt. Fee @ 3.00% $12,307 $29,567 $87,730 $202,146 $427,219 (SOURCE: http://www.retireearlyhomepage.com/advise.html) Page 10 of 10

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