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Be choosy when hiring a financial adviser

Have you amassed a small personal fortune that you would like to transform into a much larger one? Many people who are uncomfortable with managing their own finances turn to an adviser. But how can they tell if their advisers have the right stuff?

It's crazy to pick somebody at random from an ad in the phone book or from a sign in the street, yet that's exactly what many people do. Here are some tips on being choosier:

Be aware of industry standards
Many folks brandish such titles as "financial consultant" or "financial adviser" or "financial planner" on their business cards -- yet did they undergo any training to merit the self-professed expertise? Not necessarily, though the financial industry has come up with an alphabet soup of credentials that advisers can use if they qualify.

To complicate matters, different financial advisers must abide by different ethical standards. For instance, registered investment advisers, who typically buy and sell stocks for clients, must act solely in their best interests. This is generally regarded as the highest fiduciary standard in the industry. Overseen by the Securities and Exchange Commission, investment advisers must file Form ADV if they manage more than $25 million in assets. Form ADV discloses information about any disciplinary action taken against the adviser, as well as data about services and fees.

John Heine, deputy director of the SEC's Office of Public Affairs, says, "In addition, they are subject to inspections and exams by SEC employees. But there are financial planners who aren't in the securities business, so it's not necessary that all financial planners are registered as investment advisers."

Brokers, who are regulated by the National Association of Securities Dealers, must adhere to a looser "suitability standard," rather than the stricter fiduciary standard. It simply means that brokers must choose products that are suitable for their clients based on age, goals and risk tolerance.

The ethical standards of the trademarked Certified Financial Planner designation is undergoing a transition. The CFP Board of Standards is in the process of proposing changes to its ethics code that will address issues of disclosure and conflicts of interest. As the standards are currently written, Certified Financial Planners must disclose conflicts of interest and perform services "in a manner that is fair and reasonable to clients."

The new proposal, to be decided by the board next month, calls for the adoption of tougher fiduciary standards. If approved, that would mean that anyone holding the trademarked CFP credential would have to act "in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances; and in (a) manner he or she reasonably believes to be in the best interests of the client."

Bernard M. Kiely, CPA, CFP, of Kiely Capital Management in Morristown, N. J., describes it this way: "You're saying to the world, if your broker is a CFP he has to put your needs first or he has to put in writing that he's not."

Look for credentials
Advisers using any of the letter credentials are asserting they have undergone a minimum level of training.

 
 
Next: "Ways in which financial planners get compensated."
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