The Different Types of Advisors

How can you be sure that your financial advisor is on the up and up? Your assets are too important for you to blindly trust the person you hire to tend them.

When you first meet with a financial advisor, it’s important to ask not only how much his or her fees are, but who actually pays. An advisor’s compensation method can affect the type of advice you get, so you should understand the differences before you choose who to hire.

There are three basic ways financial advisors and planners are compensated: Commissions, fees and a combination of both. Neither is absolutely more or less expensive for you.

Here is what makes them different and relevant to you as an investor.

Hiring a professional to prepare your tax return is nearly as complex as the return itself. Before you choose a preparer, you need to understand the recent changes to rules and qualifications for various professional designations. Also, know the right questions as you shop around to find an honest preparer that suits your needs.

How do you choose the right financial advisor for you? Here are seven questions you should ask a prospective advisor.

This decision crops up when you reach the point in your career that you need guidance to plan for retirement, save for your kids’ education or invest and grow your wealth. You should interview and evaluate several advisors to find a competent, qualified professional whom you feel comfortable with.

Here are the things to ask:

 
So how do you make sure you don’t run into the next Bernard Madoff? One way is to ensure that your advisor does not oversee every part of your investing.
 
Today is Madoff Day. Four years ago, on Dec. 11, authorities arrested Madoff on securities fraud. He had lost more than $50 billion in investors’ money and is serving a 150-year prison term. Alas, history does repeat itself, and another Madoff is out there.
 

 
When compensating your advisor, which is best for you: paying 1% of your assets under management (AUM) or a flat fee? Answer: the flat fee. The idea is to take the emphasis off of performance and more on overall planning services.
 

Why don’t more people have a financial adviser? Several reasons: public concerns about adviser honesty, doubts that they have sufficient assets to use one and lack of understanding about what an adviser does.
 

A lot of folks think they can handle their finances by themselves and don’t need someone looking over their shoulder. They are wrong. Even the smartest self-directed investors should consult a financial advisor.
 
Every player needs a coach. Those sleek athletes headed for the summer Olympics in London didn’t get that way by themselves. They had a knowledgeable person overseeing their training and health. Even the great Warren Buffett has a team of smart financial types, including his best friend Charles Munger, examining his ideas.
 

Do you have a bad financial advisor? Here are six signs to look for. A financial advisor is supposed to help you keep your finances on track, but that is not always the case.
 
Knowing how to properly vet an advisor can save you time, money and stress. It depends on what kind of financial advice you are paying for. There are two kinds of advisors.
 

Financial advisors serve the full palette of humanity. Yes, some prefer wealthier clients. But many opt for younger folks of more modest means. Reason: In coming years, their incomes and assets will expand.
 
“We grow with them,” says Craig Poeppelman, a financial advisor with Harper Associates in Upper Arlington, Ohio. Engineers, accountants and doctors do not make much when they are starting out, he says, but they gain earning power over time.