The Dow Generation--all the do-it-yourself investors--will soon turn to financial advisers, big time. Two life events will drive them there: inheriting money (how to invest it?) and pre-retirement planning (how to make my savings and investments last?).
It's one thing to make your own money decisions at 35, when the sums are small. It's quite another at 55, when you're looking at the biggest single payout you'll ever get in your life.
Financial planners are going to pick up the lion's share of this business. Among pre-retirees, they're already the adviser of choice, according to the Forum for Investor Advice in Bethesda. Stockbrokers are a distant second.
Most financial-planning firms run a traditional business, focused on selling products and earning sales commissions. (You know the kind I'm talking about. They assume you need a variable annuity, unless you can prove otherwise.)
But the future lies with firms that are good enough to sell pure advice for a fee. "Every major financial firm is trying to figure out how to do this," says Louis Harvey, head of Dalbar, a Boston-based consulting firm.
A couple of decades ago, it wasn't cost-effective to offer sophisticated advice to the middle class. It took too much time to develop and monitor personal plans, and people couldn't pay enough.
Technology has changed all that. Today, planning firms can draw on a wealth of low-cost tools and services for the routine work--say, preparing reports, allocating assets and calculating insurance needs. That frees the planners to handle more clients, all of whom need quality time.
Anyone can pass out a business card that says "financial planner," "financial adviser" or "retirement specialist." You want the card to say "CFP," meaning certified financial planner. CFPs have passed a rigorous course that covers all aspects of personal finance. They're also required to keep their education up to date.
As with any professional, there's no guarantee. But at least you know the planner has been soundly trained.
To start your search for a planner, ask for references from friends at work. Many CFPs specialize in certain professions--say, doctors, small-business owners or government employees. They'll be well versed in the questions you're most likely to have.
Stay away from rookies, even those who come highly recommended. I know that everyone has to start somewhere, but you don't want them practicing on your retirement fund. Five years of experience is minimal; 10 years is better.
If you can't get good personal references, try the International Association for Financial Planning (1-800-945-IAFP or www.planningpaysoff.org) or the Institute of Certified Financial Planners (www.icfp.org).
Either group will send you a short list of nearby planners to interview. Some of these planners live on the commissions they earn by selling products; others emphasize money management for a fee--typically, 1 percent of assets annually.
Two referral sources give you the names of planners that meet minimum requirements and have paid to be on the list: Advisor-Source, run by the brokerage firm Charles Schwab (1-800-979-9004), for clients with at least $100,000 to invest, and a new Web service from Dalbar (www.therightadvisor.com). Here, you fill in a short questionnaire and are matched, electronically, with planners who have said that they want clients just like you.
Talk with two or three planners to get a feel for how different people operate. Ask them each for both parts of their ADV form, suggests Cynthia Conger of the Arkansas Financial Group in Little Rock.
ADVs are government forms for registered investment advisers. Part II discloses their background, business methods, types of compensation and conflicts of interest, Part I notes any disciplinary problems and customer complaints.
On compensation, planners fall into one of two groups:
* Fee-only planners accept no sales commissions. They earn their living strictly from the advice and services they provide. Typically, they invest your assets in no-load mutual funds, charging you about 1 percent a year.
These planners tend to be a cut above average. Unfortunately, there aren't many of them. The fee-only National Association of Personal Financial Advisors (1-888-FEE-ONLY) has around 600 members. No more than 120 take clients with assets as low as $50,000 or so, says NAPFA Chairman Gary Schatsky, a planner in New York City. The rest may require anywhere from $100,000 to $1 million or more.
* Fee-based planners charge fees or commissions, depending on what you want. Their advice can be fine. But you do have to think about whether commissions are driving their recommendations.
Planners come in all shades: brilliant, good, mediocre, dim and dangerous. Work with them, but keep your humbug detector up.