EFFECTIVE LEADERS KNOW WHEN AND HOW TO DELEGATE: FINDING A FINANCIAL ADVISOR
WOMEN’S FINANCIAL REALITIES ARE SOBERING
In our first entry, “Taking the Lead: Facing the Financial Realities Unique to Women,” we saw the stark effect of the financial realities that women face. Since women are in a position where, on average they earn less, yet live longer; they must be excellent financial stewards to make sure that they are able to enjoy retirement in good financial standing.
SAVINGS: THE SECRET TO LONG-TERM SECURITY AND CONFIDENCE
Clearly, in order to be excellent leaders, it is vitally important to take care of our own financial houses. In the second installation of the series, we learned the importance of savings and how to get started. We saw how small changes made a big difference and could contribute to our overall confidence and presence. For reference, “How Saving and Investing Your Money Strengthens Your Confidence and Leadership Presence” is available in Part 2.
THE CRUCIAL INVESTMENT DECISION: ASSET ALLOCATION
Once we’d implemented a consistent savings plan, we were ready to invest. We felt more confident, as we learned that the most important decision regarding our investment was the strategic asset allocation—how much we have invested in stocks, bonds and cash. We learned to start there rather than focusing on trendy stock tips that pop up everywhere. You can review this information in, “Asset Allocation: Savvy Investors Know this is the Crucial Investment Decision,” which is available in Part 3.
DIVERSIFICATION: DON’T PUT ALL YOUR EGGS IN ONE BASKET
When it was time to invest, we learned that it is crucial not to put all your eggs in one basket, but to diversify broadly. Diversification will help our portfolio remain strong despite news related to one stock or industry. We learned to diversify in stocks as well as bonds. You can check back on this important key in Part 4.
SAVVY INVESTING TAKES DISCIPLINE TO STAY THE COURSE
Next we learned that a critical part of investing is to develop the confidence to stay the course, even when markets are volatile. We saw how investors have a tendency to trade on emotion in ways that cost them money—buying at the peak and selling at the trough. Instead we saw the benefit of staying the course to improve long-term wealth. You can review this in Part 5.
KNOW WHEN TO DELEGATE: FINDING A FINANCIAL ADVISOR
In managing your investments, there is a lot to know and a need to provide consistent, ongoing vigilance while avoiding emotional decisions. As a leader, if you are serious about this area, you may hire an advisor for this responsibility. You will still manage your investments, but by managing and choosing a financial advisor; not by managing your assets on a daily basis. This way you can gain the expertise of a qualified professional and you will have someone who is watching over your financial house consistently.
CHOOSING BETWEEN A FEE-ONLY, INDEPENDENT ADVISOR AND A RETAIL BROKER
Today, there are several types of individuals that could help you, but they have vastly different purposes and structures. In choosing who to hire, you will want to consider:
- Retail Brokers
- Independent, Fee-Only Financial Advisors
- Financial Planners
A retail broker acts as an agent for their firm. This is important, because even though you are a customer and the broker may be trying very hard to provide you great service, a broker’s legal responsibility is to their firm. When you open a brokerage account, the broker is not held to the standards of the Investment Advisers Act of 1940. Therefore, it is not required that the broker disclose any conflicts of interest.
You should be aware that a broker is typically limited to selling investment products approved for use by the firm. The broker will further be incentivized to push certain products as he will be compensated more for selling those products than others. And, a broker is also incentivized (through better compensation) for producing more trades.
Independent, Fee-Only Advisors
In contrast, an independent fee-only advisor is legally required to act as a fiduciary to their client. This means that they must put their client’s best interests first.
Generally, independent fee-only advisors will calculate their fee based as a percentage of the amount of money that they manage or advise for you. The compensation should be described in a straightforward and visible fashion. Also, an independent, fee-only advisor does not receive compensation from any of the investments that are recommended to you. Unlike a broker, a fee-only advisor does not receive compensation from executing trades between investments.
An advisor will also help you with broader financial decisions, such has determining when to retire, answering estate planning questions and helping you plan for children’s or grandchildren’s college educations.
A financial planner will provide only financial planning, giving you a snapshot of your financial position. They will usually charge a one-time fee for a one-time service. This can help you clarify your goals and what you will need to do. But, a financial planner will not provide you ongoing investment advice. They will address issues such as how much you need to save for retirement, when you can retire, how to plan for college education, etc.
If this causes you some concern (and it should!), you will want to verify if you are dealing with a broker or an independent investment advisor. As easy as that sounds, it is not always as easy in practice! A broker may call himself any number of names from financial advisor to financial consultant to a title containing the word independent. The best way to clearly identify a broker is to ask if they are a “Registered Representative”. If so, they are a broker and are not truly an independent advisor.
If someone is an independent advisor, they are a “Investment Advisor Representative”. You should receive a document from them called the Form ADV, which outlines all the practices of the firm as well as information on the individual that you are meeting with. The current regulation requires that an investment adviser provide you Part 2A and Part 2B of Form ADV.
Another red flag is commissions as compensation. Brokers and sales representatives are paid in commissions. Independent investment advisors are paid with fees, which they disclose.
OTHER IMPORTANT CONSIDERATIONS
The person you select for this role will be an important advisor. It is key that you find someone with whom you have a personal connection and feel you can trust. You will be sharing valuable information with this person in order for them to provide the best advice to you. You will need to have a good platform to work together.
It is also important that you identify someone that uses an investment philosophy that you believe in and that you can feel comfortable with. An investment advisor should be able to clearly articulate their investment philosophy for you.
Of course, you should review the range of services that will be provided. Some advisors offer only asset management and some offer personal financial planning and a range of additional services. You should make sure that your advisory needs are covered or that you have a resource for those other areas, like financial or tax planning.
It is always good to understand what types of clients that your advisor works with and what type is an ideal client for them. It is best to pick an advisor where your needs are well described in the areas that the advisor focuses on. This way you know that all of the experience will also apply to you.
It is also good to learn about an advisor’s background, experience and education. Then you know what they are bringing to the table as part of your advisory team.
Most importantly, feel free to ask questions. A good advisor will be happy to help you by providing information and written materials about their business.
I hope you have enjoyed this series on developing your leadership in making investments as well as your corporate and community leadership roles!