Jonathan cattana asks: what makes a good financial advisor.

First we must examine what a financial advisor is. here is a reference from wikipedia:

A financial adviser (UK spelling) or financial advisor (US spelling), more recently often referred to as a financial planner, is a professional who renders financial planning services to individuals, businesses and governments. this can involve investment advice, which may include pension planning, and/or advice on Life insurance and other insurances such as income protection insurance, critical illness insurance etc, and/or advice on mortgages.

Ideally, the financial adviser helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation. Financial advisers use stock, bonds, mutual funds, real estate investment trusts (REITs), options, futures, notes, and insurance products to meet the needs of their clients. many financial advisers receive a commission payment for the various financial products that they broker, although “fee-based” planning is becoming increasingly popular in the financial services industry.

A further distinction should be made between “fee-based” and “fee-only” advisers. Fee-based advisers both charge fees and collect commissions. Fee-only advisers do not collect commissions, and thus do not face a conflict of interest created by commissions or referral fees paid by other product or service providers.

“Client-Centered” investment advisors only charge a fee based on the assets managed for the client. Typically they charge about 1.5% per year to make the investment decisions for the client. They do not collect commissions.

Contents [hide]
1 Financial planning
1.1 Designations
1.2 Financial Adviser Qualifications – United States
1.3 Financial Adviser Qualifications – United Kingdom
1.4 Goals
1.5 Retirement Planning
1.6 Investing
1.7 Fee-Only financial advisors
2 United States
3 United Kingdom
4 Regulation
5 See also
6 External links
7 References

[edit] Financial planning
[edit] Designations
A “investment adviser” can be anyone whose vocation is consulting with clients with an intent to better their financial situations. the term can apply to Certified Public Accountants (CPA), investment representatives, insurance consultants, attorneys whose practice surrounds personal financial or estate matters, or financial planners. a financial planner is one who specializes in outlining comprehensive financial plans and strategies encompassing most or all of a client’s financial areas.

[edit] Financial Adviser Qualifications – United States
The Chartered Financial Analyst (CFA) designation, the Certified Financial Planner (CFP) designation, the Chartered Life Underwriter (CLU), the Chartered Financial Consultant (ChFC), Chartered Retirement Planning Counselor (CRPC), Registered Financial Consultant (RFC) and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain. These professional designations are issued by organizations such as the Chartered Financial Analyst Institute, [1] the Certified Financial Planner Board of Standards, [2] and the College for Financial Planning. [3]

[edit] Financial Adviser Qualifications – United Kingdom
There are three main bodies awarding qualifications for financial advisers in the UK. the main one is the Chartered Insurance Institute, which offers professional financial services qualifications all the way from beginner to degree levels. the IFS School of Finance offers alternative courses/qualifications in certain specialist areas such as mortgages and equity release. the Institute of Financial Planning offers the Certified Financial Planner.

[edit] Goals
The main purpose of a financial adviser is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. to ensure ethical practices, financial advisers must understand a client’s financial situation as well as their need for financial stability. Finance can be complicated and any adviser has responsibilities ethically to see that a client’s risk is minimized, and monetarily, that money is maximized.

[edit] Retirement Planning
One of the major services that financial advisers offer is retirement planning. a financial adviser should have knowledge of budgeting, forecasting, taxation, asset allocation, and financial tools and products to establish realistic goals and the strategy by which to reach them. in the United States, this will include the use of several investment tools such as 401(k)/403(b) Roth account(s), Individual Retirement Accounts/Roth IRAs, mutual funds, stocks, bonds and CDs.

The financial adviser determines what percentage of the available income is necessary—taking into account tax liabilities, expected inflation, and projected return on investment—to meet a minimum balance by the client’s target age of retirement. this is a fairly straightforward calculation, and many automated tools do this. the financial adviser’s greatest contribution is asset allocation: determining how to maximize the return on investment while satisfying the client’s risk tolerance.

[edit] Investing
Financial advisers may help their clients invest for both long and short term goals. It is the financial adviser’s duty to determine the clients’ goals and risk tolerance and then to recommend appropriate investments. Generally, a long time horizon allows for the advisor to recommend more volatile investments with potentially greater risks and rewards. Such investments include direct investment in stocks or through collective investment products such as mutual funds and unit investment trusts/unit trusts.

If the client has shorter term goals, the adviser should recommend less volatile investments with shorter time spans. Such investments could include cash deposits, certificates of deposit, and short term bonds. while these types of investment generally have lower returns there is less volatility and there is less likelihood of losing principal capital. although short-term investments can guard against loss of capital, their value can be eroded by inflation over longer periods of time.

[edit] Fee-Only financial advisors
As defined by the review materials for the Certified Financial Planner exam and the National Association of Personal Financial Advisors, fee-only financial advisors are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. neither advisors nor affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.[4] the fee-only model of compensation reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.

A clear distinction should be made between brokers, who often refer to themselves as “Fee-Based” (receiving both fees and commissions) and Fee-Only (someone who never receives compensation or incentives from a third party.)

A fee-only advisor may reduce conflicts of interest such as:

advising a client to buy products and make investments when holding cash and other liquid assets may have been a more suitable recommendation at that time.
an incentive to generate commissions through the unnecessary buying and/or selling of securities (also known as churning).
an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the advisor can generate a commission.
an incentive to make recommendations that pay higher sales commissions to the advisor when a less expensive alternative may have been available.
Working on a fee-only basis allows the advisor to:

Customize an investment portfolio that is designed to help the client realize short-term and long-term investment goals.
Provide simplified performance reporting, making it easy for clients to monitor their accounts.
Support the client with ongoing professional advice, timely information about accounts and updates on the world’s financial markets.
Manage a client’s portfolio and make investment changes–without commissions–as a client’s objectives or the economic climate changes.
It is worth noting that:

Operating on a fee-paying basis may make the advice too expensive to obtain for the broader market otherwise catered for by commission-based advisers. if a client must pay a flat fee of $1000 to his adviser as a lump sum, this is less manageable for all but the wealthy, rather than the more manageable option of paying through regular charging and commissions. However this is not to say that fee-only is more expensive than paying by commission; commissions earned by brokers can add up over the course of a year, especially if many changes are made. It is worth noting that many fee-only advisors charge an annual fee that is deducted on a quarterly basis.
On the other hand, if an advisor charges a flat percentage (e.g. 1% of total assets under management) for all clients, the advisor may not be able to afford to service clients below a minimum net worth.
Asset based advisors may have the prerogative of managing all of a client’s manageable monies. although this is a particular bias for asset-based advisors, this can also lead to a more streamlined and efficient working relationship and service.
While fee-only advisers cannot accept commissions, they may still have personal favorites amongst product providers and investment houses that lead to one provider being specifically favored over another when competing advice is given.
If certain restrictions are not in place, there can be an incentive to take too much risk in a portfolio to generate additional gains that translate into “raises” for an asset-based advisor.

http://en.wikipedia.org/wiki/Financial_adviser

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