NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. Please consult with your financial advisor before taking any action. For planning advice contact Polaris Financial Planning. It can be argued that the best way to invest is to do all of the work yourself, for some people this is true. If you are really interested the subject and willing to spend the time needed you will likely do well.
However, most people are busy and there are other demand on their time. Often jobs, kids or other project keep them occupied. If you aren't careful with your investments you can make big mistakes. In a busy life, we often use experts to help us. Instead of learning all of the legal details, you can hire an attorney to create a will. Instead or working on your own car you can hire a mechanic. You can do these things if you spend the time needed to acquire the skills or, you can hire an expert and have more time to do the things you want to do. I see investing the same way.
When you are looking for a financial advisor you need to know, there are two types:
Most advisors collect a commission to sell product to you! However, a small percentage collect a fee from you these are Fee-Only advisors and they are paid by you. Therefore, they work for you. They focus is on getting the best results for their clients, not selling more stuff to make more commissions.
A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or from any other source than you. This means they represent you and your interests when giving you advice. After all, think about where someone's paycheck comes from, and that will tell you quite a bit about where their loyalty lies.
When selecting an advisor you should ask these two questions:
1) "How are you paid?"
2) "Where do you invest your money?"
An advisor that is paid by commission may have to make choices based on how much commission is paid by a specific investment product. Some complex insurance product may pay an advisor 10-15% commission and a managed mutual fund may pay up to 8.5% commission. Do they want to make 3% or 15% helping you "invest" the $100,000. What would you do? There is the temptation for a commission advisor to put your money in a product that pays the higher commission so they can make more money. They may be able to resist this temptation - but how will you know?
As I have discussed before, one of the single best things to use for investing is low-cost index funds. However, these funds do NOT pay a commission. A commission based advisor would have to choose between getting paid or getting you the best product. I suggest you avoid being put into this situation and get a Fee-Only Advisor!