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Financial Planning

Find the Right Pro to Manage Your Money

Broker, planner or registered adviser? Choose the right professional to invest your portfolio.

EDITOR'S NOTE: This article was originally published in the October 2007 issue of Kiplinger's Retirement Report. To subscribe, click here.

Financial firms are just dying to get their hands on the fat portfolios of the growing number of retirees and aging baby-boomers. You probably can't go a day without hearing a pitch from some sort of adviser begging to manage your assets.

The so-called experts come with different names: financial adviser, wealth-services provider, investment consultant and senior specialist, just to name a few.

Disregard those fancy titles. While there's no magic formula for finding a competent professional, start your search for an investment guru by looking for one of three professional designations: broker, registered investment adviser or certified financial planner. Brokers and investment advisers are registered with regulators, and certified planners undergo a rigorous education program.

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Each type plays a different role. Your choice will likely hinge on the level of advice you want and your investment style.

First, decide if you need advice at all. Do-it-yourselfers should consider a no-frills discount brokerage account. You'll be charged for each trade, but your costs will be lower than using a commission-based account at a full-service brokerage firm.

Most discount firms, such as TD Ameritrade, Firstrade and Scottrade, offer both online and broker-assisted options. Some mutual-fund companies, such as Fidelity, Vanguard and T. Rowe Price, also provide brokerage services where you can buy and sell stocks, bonds and mutual funds. Trading costs range from about $8 to $50, depending partly on whether you're trading online, by phone or with a broker's help.

If you buy and sell a lot, look for a firm with low commissions, but compare other fees, too. Some discounters levy annual fees, inactivity fees or fees for transferring your money to another broker.

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Broker, Investment Adviser or Planner?

For more help with trading as well as investment advice, consider a broker-dealer at a full-service brokerage firm. A broker can use the firm's research to help you decide what to buy and sell. Commissions are generally higher than a discount broker's.

A broker should ask you about your financial goals and investing style before making recommendations. There are many great brokers who really care about your investments. But brokers are also salespeople who charge for each trade.

Keep in mind that brokers do not have a fiduciary duty to a client, meaning that they're not legally required to work in the client's best interest. Rather, they must meet a lesser "suitability" standard, selling you securities that are appropriate based on your financial circumstance and risk tolerance.

If you use a broker, you'll need to be a hands-on investor. A broker should get your okay for each trade, and you'll need to carefully review the recommendation. Ask how each recommendation fits into your investment strategy and whether there are alternatives that can provide better returns at lower costs.

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You can check out brokers and securities firms by using the Financial Industry Regulatory Authority's BrokerCheck tool at www.finra.org.

Many brokers may call themselves "financial advisers." But if you want someone who has fiduciary duty to you, choose a registered investment adviser. An investment adviser will develop a comprehensive investment strategy and ensure that your portfolio is appropriately diversified. As your fiduciary, the adviser is required to put your interests above all else. For instance, an adviser should keep your costs down even if a firm could make more money recommending other investments.

You can open an advisory account at a big financial-services firm, such as Morgan Stanley or UBS. Or you can go to a smaller concern, which may describe itself as providing asset-management or wealth-strategy services. Some smaller firms offer private equity and real estate investments.

Advisory firms that manage more than $25 million must register with the Securities and Exchange Commission. Check for potential conflicts of interest, any disciplinary actions and other background by reading an adviser's Form ADV, which is available at www.adviserinfo.sec.gov. The individual managing your account may be called an investment adviser representative. Firms managing less than $25 million must register with their state securities regulator.

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Advisory accounts come in two forms. A discretionary account usually requires a six-figure minimum investment. An adviser arranges for trades and sends you regular reports. If you're comfortable with someone else handling your investment decisions, go with a discretionary advisory relationship. It's a good idea to stay in regular touch with your adviser.

With a nondiscretionary account, you must give your approval for each trade. Minimum investments are usually lower than with discretionary accounts. For instance, UBS's minimum is $50,000 for its Strategic Advisor nondiscretionary account.

Unlike commission-based brokers, investment advisers who manage a discretionary or nondiscretionary advisory account usually get paid a fee based on a percentage of assets managed. The better your investments do, the better your adviser does. Rates range from 1% to 3% a year, but ask about additional fees.

If you want someone to fit your investment strategy into a larger financial picture, add a certified financial planner to the mix. A planner will make sure your investments enable you to meet other goals, such as retirement income, estate planning, insurance and charitable giving. A certified financial planner must meet strict ethical standards set by the Certified Financial Planner Board of Standards (www.cfp.net).

You can go one of several ways. You can find a registered investment adviser who is also a certified financial planner, or ask your investment adviser to refer you to a planner. Some firms that market themselves as financial planners may do asset management.

You're best off with a fee-only planner, who will charge by the hour, service or assets under management. To locate a fee-only planner, check with the National Association of Personal Financial Advisors (www.napfa.org) or the Garrett Planning Network (www.garrettplanningnetwork.com).

Monitoring Conflicts of Interest

The distinctions between broker and investment adviser can sometimes blur. In many cases, a firm, or the individual, can be registered as both an investment adviser and a broker.

When a firm acts as both adviser and broker, fiduciary protection only covers the advisory role, says lawyer Peter Gulia, of Fiduciary Guidance Counsel in Philadelphia. "Firms will limit the scope of the advisory relationship," he says. For full fiduciary protection, make sure that the agreement is comprehensive.

The law requires that the adviser disclose potential conflicts between the firm's interests and yours. Besides reviewing the adviser's ADV form, ask whether the firm makes a profit from executing trades in your account, recommending securities in which the firm is the underwriter or selling you proprietary products. Be aware that broker-dealers are not required to reveal potential conflicts, which is why you should keep close tabs on recommendations.

For instance, brokerage firms make money if they sell securities from the firm's inventory. Typically, firms buy securities and later mark the price up or down when they're sold to clients -- a practice known as principal trading. "Anything coming from inventory is going to have high costs," says Thomas Meyer, chief executive officer of Meyer Capital Group, a wealth-management firm in Marlton, N.J.

Now, nondiscretionary advisory account holders have reason to be vigilant about markups. The SEC recently issued a temporary, two-year rule making it easier for brokerage firms to engage in principal trading in these accounts. Under the new rule, the adviser must get oral consent from the investor before each trade.

Christopher Cannon, chief investment officer of FirsTrust, a wealth-management group in Daytona Beach, Fla., suggests asking your broker or adviser if there will be principal markups, and if so, how they'll be disclosed. If you're not comfortable paying markups either in an advisory or brokerage account, ask for another investment or place your money with a firm that does not conduct principal trades.

The SEC's rule followed a federal court decision that banned brokers from charging a flat fee for managing accounts. About one million investors and $300 billion were in fee-based brokerage accounts. These assets had to be moved either to commission-based brokerage accounts or to advisory accounts.

Nondiscretionary advisory accounts are similar to fee-based brokerage accounts. But investors who were in fee-based accounts should review this option carefully. These advisory accounts are slightly more expensive than the old fee-based accounts. If you're a light trader, you'll likely be better off in a commission-based brokerage account.