Now Are You Ready to Hire a Financial Adviser?
After the market's white-knuckle ride, it may be time to call in a pro
It’s not only the stock market’s recent terrifying drop, followed by dramatic twists and turns. It’s the headlines screaming: “The sky is falling!” And your sitting glued to CNBC, antacid in hand, worrying what the market turmoil means for your 401(k) balance.
Maybe these moments of market madness are making you second-guess your ability to handle your investments on your own. If so, the time has come to reach out for professional advice to help bulletproof your portfolio and possibly protect you from making costly, impulsive mistakes. A talented, calm financial adviser will assure you that even when markets are manic, you don’t need to be.
Here’s what a good adviser would have told you this week:
- China’s stock market problems were not a big surprise. Those who pay attention have watched growth rates in China slow down for years.
- The recent U.S. market selloff was only a matter of time. Normalization of the markets was expected and overdue because the stock market is supposed to care about risk. Declines must happen, and are healthy, in order to break the “no-risk” return perception.
- The stock market is not like any other marketplace. It’s the only type where when everything goes on sale, everyone runs out of the store.
- Stock market shocks (and corrections) happen when you least expect them. That’s why they call them shocks.
- Stocks don’t go up or down in a straight line. And sell-offs of 10 percent or so happen sooner or later. It’s been four years since the last real correction.
If you don’t have an investment adviser, perhaps you’re wondering how to find one.
Your top priority: making sure the pro’s interests align with yours. That means asking if his or her qualifications are in sync with the financial issues you’re trying to address.
Advisers specialize in different areas — such as divorce planning, retirement planning or trust services. So ask prospective advisers to describe their typical clients and how these experts typically communicate with them. Do you want an adviser who will reach out to you proactively or do you prefer to initiate a discussion? These different styles of interaction need to jive.
The next critically importantly question you’ll want to ask is, how does your adviser expect to get paid?
There are three types of financial advisers:
Commission-based When an adviser working on commission recommends a certain mutual fund, annuity or other investment product, there’s a sales charge that often comes right out of your pocket. This can create a potential conflict of interest for the adviser, who may feel incentivized to recommend the option that pays him or her the most.
Fee-only This type of adviser gets paid either by an hourly rate, a fixed annual retainer or a percentage of your investment assets under management. A fee-only adviser’s guidance is independent of the products recommended.
Fee-based While this sounds similar to “fee-only,” it’s a system that blends commission-based and fee-only. Consequently, fee-based advisers can be vulnerable to the conflicts of interest that the commission structure entails.
The market’s turmoil is part of investing. And the urge to “do something” at just the wrong time can be powerful. The time to manage your risk is beforehand, when things are calm, not after a dramatic downturn.
If your inner investor could use a little confidence, this may be the perfect time for you to find a really good adviser. Incidentally, at Pamkrueger.com, I’m working on creating a website to help people find, vet and connect with financial advisers who’ll be the right fit for them. Stay tuned.