A Growing Army of Financial Advisors Is Jockeying for Your Ear--and Wallet. How Do You Pick One?

Need advice on your finances? Don’t say so too loudly--or you may soon find a mob outside your door.

With aging baby boomers finally in their asset-accumulation years, and the nest eggs of many pre-retirees and retirees inflated by the long bull market in stocks, the potential audience for professional money help has never been larger.

So here come the would-be helpers. From major Wall Street brokerages to insurance companies to the horde of independent financial planners, a growing army of competitors is fiercely jockeying for position in the race to become the preeminent supplier of financial help to Americans who are willing to pay for it.

Nor are these advisors aiming only at the “rich.� Increasingly, personalized financial advice is available as you like it: a little or a lot, a la carte, and even for people whose portfolios aren’t yet very big.

And right behind the advisors are the watchdogs. State securities regulators are drawing up plans for a first-of-a-kind national competency exam for people who call themselves investment advisors.

At the same time, at least one consulting firm is readying a rating system for advisors, akin to Morningstar Inc.’s well-known star rating system for mutual funds.

In part, the financial service companies and the watchdogs both are responding to surveys showing that, despite the romantic image of Americans as hardy do-it-yourselfers, when the issue is money, most people go looking for help long before they build up large portfolios.

“It’s true as with every other aspect of our world: Money has become too complicated,� said Philip Feigin, securities administrator for Colorado and former chairman of the North American Securities Administrators Assn.

A national consumer survey by Boston-based financial consultant Dalbar Inc. last fall found that 89% of respondents said they were likely to seek advice or direct money management once their investable assets topped $100,000--a threshold many will reach sooner rather than later, thanks to employer-sponsored 401(k) investment programs and other pension-substitute plans.

But having plenty of choices for one-on-one financial help also means greater confusion. It isn’t easy to know which type of advice giver is right for you, what is a fair price to pay and, perhaps most important, how to judge the quality of the advice and/or personal money-management services you get.

Generically speaking, what most Americans want in an advice giver is obvious enough: a trusted source of help who unfailingly puts his clients’ interests ahead of his own.

And rightly or wrongly, most people view the traditional commission-based financial business--the image of the old-time stockbroker, for example--as neither trustworthy nor one that puts clients’ interests first.

Indeed, the Dalbar survey found that 70% of respondents wanted to pay a flat fee or an asset-based charge for advice and help, as opposed to a commission or sales “load� of any kind.

Not surprisingly, the financial services industry is rushing to get on the right side of that sentiment swing:

* Most major brokerages, such as Merrill Lynch and Smith Barney, in recent years have moved away from calling their representatives “brokers� and instead now refer to them as “consultants� who offer comprehensive financial planning.

More recently, many brokerages have stopped paying their reps more to sell in-house products (such as proprietary mutual funds) than independent products, and now allow reps to place clients’ assets in no-load mutual funds if the client so chooses.

Meanwhile, discount brokerage giant Charles Schwab Corp. is pushing hard into the advice business, indirectly: It now will refer clients who want their money professionally managed to specific investment advisors in their geographic area.

* Insurance giant Aetna Inc. in May agreed to pay $50 million for Torrance-based Financial Network Investment Corp., a network of 2,400 independent financial planners nationwide. Aetna will meld FNIC into its retirement services business--a way to dramatically increase the number of professionals Aetna can muster to serve the burgeoning business of advising 401(k) plan participants at the local level.

* Mutual fund companies, which hold nearly $4 trillion in investor assets today, increasingly are seeking to provide more than just a passive menu of funds for investors. Many of the biggest fund companies, including Fidelity Investments and Vanguard Group, offer do-it-yourself kits for basic asset allocation (i.e., deciding how much to have in stocks, bonds and money market accounts).

Other firms, such as Wells Fargo’s Stagecoach fund group, have designed “lifestyle� funds aimed at specific age groups, with the composition of each fund amounting to a generic asset-allocation plan for that group.

And some companies, including Vanguard and Scudder, Stevens & Clark, have recently begun offering by-mail financial planning, whereby the fund company will pick specific funds for a client and monitor that portfolio over time, for a fee.

* The ranks of independent financial planners and registered investment advisors continue to swell, so much so that infighting has broken out among subgroups over the issue of who best serves consumers’ needs.

The major battle is over the “fee-only� label: Some planners and advisors contend that the label is being abused by peers who may in fact earn commissions on some products they sell, even if the bulk of their business is fee-based.

* Many other aggressive competitors also are pushing hard into the advice business, including some banks, certified public accountants, services that link investors with compatible investment managers, and countless newsletters and Internet-based investment sites.

With no shortage of money help available today, how do you pick the advice--and advisor--that’s best for you?

A better question to start with may be whether you really need much help--or whether you can devise a decent financial plan yourself, with some low-cost, or even free, a la carte help from mutual fund companies, specialized financial software or other sources.

After all, basic asset allocation isn’t rocket science. If your total portfolio is still under $100,000, you are relatively young and you are exclusively invested in mutual funds for the long term, dividing that sum among a few U.S. stock funds, foreign stock funds, perhaps a bond fund and a money market fund is easy enough. If you’re happy with the funds, you simply continue investing regularly in the same ones.

If that’s all you need, it may make little sense to pay someone to do it for you, let alone keep that person on retainer.

Wise financial planning “isn’t magic,� acknowledges Rick Weinlein, a principal at Glendale-based Wescap Management Group, a financial planning and investment management group. “This is something people could do themselves� if they had the time, inclination and basic skills, he said.

The problem for many people is either that they lack the latter or that they sense with age and with the growth of their nest egg that they need a comprehensive plan for their money and their family’s future.

Because inertia is such a strong--and sometimes dangerous--force, “one of the great services we provide to clients is that we actually get them to do something� about their finances, Weinlein said.

Janice Hobbs, veteran financial planner and owner of Innovative Financial Planning Services in Tustin, which counts 5,000 clients, said she often finds that “it’s an event in peoples’ lives that drives them to come see us.� That event could be a job change, a baby, a divorce, the purchase of a home or an inheritance, she said.

Once you decide you need professional help, you have three options: You can have a financial plan drawn up but keep control of your assets yourself; you can have a plan drawn up, then place your assets in the hands of the planner or an investment manager that you and the planner agree on; or you can skip the plan idea and just hand your assets over to an investment manager, who probably will not consider any other financial issues you may face.

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The cost and scope of a “comprehensive� financial plan can vary widely. On the low end, mutual fund giant Vanguard will perform one-time investment, retirement and estate planning reviews for clients for $500 per category.

To get you in the door, some brokerages offer free financial plans, usually computer-generated reports designed to identify your general needs according to certain predetermined models.

If you want a very personalized plan, however, you will probably need to sit down with a trained financial planner who will look at every aspect of your finances--your investments, your home, taxes, insurance coverage, family issues, retirement issues and even how you spend money.

Hobbs charges $300 to $500 for a written plan, depending on its complexity. Kenneth Gross, a principal at Fadden & Gross in Thousand Oaks, charges $120 an hour to produce a plan.

But professionals like Hobbs and Gross typically aren’t looking to do one-time plans and then never see you again. “Financial planning is not an event� but rather an ongoing process based on a relationship, Gross said.

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If, after an initial consultation, Gross and a client decide they are compatible, he would expect to spend 25 to 40 billable hours with the client over the course of the first year, including tax-return-preparation time, he said.

With most planners, whether you choose to let them manage your assets directly or simply advise you on what to do, you also will pay an annual management fee typically ranging between 0.5% and 3% of your portfolio’s value, plus trading costs.

Weinlein charges 0.9% on the first $500,000 and 0.7% on the next $500,000. Hobbs charges as much as 2% on smaller portfolios, with the rate sliding to 1% on larger ones.

Similarly, if you skip the planning part and hand your assets directly to a non-planner investment manager, you can expect to pay 0.5% to 3% a year in management fees.

Those fees often are the client-limiting factor for planners and managers: Many planners require a minimum portfolio of $100,000 to take someone on; independent managers often have higher minimums, from $250,000 to $1 million. (A few require less; see accompanying story.)

Assuming you meet an advisor’s minimum, how do you know if you’re paying a “fair� level of fees? The short answer, experts say, is that if you think you’re paying too much, you are--because the implication is that you don’t have complete trust in your advisor.

For the most part, state and federal watchdogs have stayed away from trying to regulate fee levels. Their concern is solely that advisors fully disclose all fees to clients--which any reputable advisor should do upfront.

Yet the disclosure mandate is at the heart of one of the biggest firestorms now raging in the advice business: Who, exactly, should qualify to call themselves “fee-only� advice givers?

As the story below notes, the National Assn. of Personal Financial Advisors thinks fee-only should mean the advice giver never earns a commission for selling a particular product.

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But some financial planners see that as too harsh. Hobbs argues that a planner who has an insurance license would have to drop that license to meet NAPFA’s fee-only requirement, to avoid insurance products, which typically carry commissions. But that then means the planner would have to force a client to buy insurance elsewhere--paying a fee to someone else while still paying the planner’s basic fees, Hobbs said.

(NAPFA counters that there are commission-free insurance products.)

Likewise, major brokerages are emphasizing the “fee-only� aspects of what they provide, but their reps certainly still may earn commissions. An investor weighing whether to avoid a brokerage rep because of commissioned products should also consider the access those reps have to a vast array of investments, research and services that the average financial planner may not have.

Ultimately, most financial advisors naturally argue that they are judged less on the question of fees than on what clients believe they got for their money. Did the advisor enhance the portfolio’s returns? Save the client taxes? Improve insurance coverage? Develop a sound plan for funding the client’s kids’ education or the client’s own retirement?

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Yet judging the quality of advice given is perhaps the most difficult challenge of all, because it must be done over time and because it can’t solely involve measuring absolute portfolio returns. The level of risk taken and clients’ comfort level with an advisor also are paramount in gauging the advisor’s overall performance.

For an investor hiring an advisor for the first time, the act is by definition a gamble: You can’t know in advance whether that person will fully meet your needs; you can only make an educated guess.

Two recent developments may help improve your odds, however. For one, because almost anyone can now call himself or herself a financial planner, state regulators are seeking to introduce a uniform entry-level competency exam for all financial advisors, said Don Reis, Nevada’s deputy secretary of state for securities regulation. The test would ensure that all advisors have some minimum level of knowledge about the trade if they don’t have other certification (such as a certified financial planner designation), Reis said.

Second, consulting firm Dalbar plans this fall to roll out a rating system for financial advisors based entirely on feedback from the advisors’ clients, Dalbar President Louis Harvey said.

An advisor would pay Dalbar $500 to be rated, and the firm would then independently contact clients for input--asking, among other things, whether the advisor has performed up to expectations and whether the advisor has continually kept the clients’ interests ahead of its own.

Critics of Dalbar’s planned rating system say only those advisors who think they’ll be highly rated will bother to invite--or publicize--ratings. Robert N. Veres, publisher of the well-read financial planning industry newsletter Inside Information in Kennesaw, Ga., worries that the rating system “will tend to attract not the top people in the business, who already have more clients than they really need, but the average and below-average--those who crave credibility� and who might be able to coerce clueless clients into giving glowing recommendations.

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Harvey, however, is undaunted, and points out that the rating system will only accept advisors who have been in business at least five years, among other qualifications.

“We believe it has become easy for consumers to find an advisor but increasingly difficult for consumers to identify those who provide quality advice,� Harvey said, explaining Dalbar’s motivation.

In the financial planning business, he said, “we’re convinced there is going to be more demand out there than supply of qualified people.�

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GETTING HELP: A RESOURCE LIST

If you’re interested in finding a financial advisor but aren’t sure where or how to begin, here are some resources that can help.

For starters, many people ask friends or family for referrals of advisors. That isn’t a bad idea, but just because a friend uses a particular advisor doesn’t mean that person is right for you.

Your best strategy is to get a list of advisors in your area who handle clients with similar finances and goals. That will take a lot of phone work on your part--first to get advisor names, then to call them and cull perhaps four to six who might be compatible.

After that, you will face still more research, checking advisors’ backgrounds, getting more referrals and, finally, interviewing each advisor one-on-one.

A lot of work? Of course. But what is a more serious issue than your long-term financial well-being?

REFERRALS: PROFESSIONAL GROUPS

These groups will send you lists of member advisors in your area.

* American Institute of Certified Public Accountants

(personal financial planning division)

Phone: (800) 862-4272

* Institute of Certified Financial Planners

Phone: (800) 282-7526

Web site: https://www.icfp.org

* International Assn. for Financial Planning

* Phone: (800) 930-4511

Web site: https://www.iafp.org

* Licensed Independent Network of Certified Public Accountants

(fee-only CPAs)

Phone: (800) 737-2727

* National Assn. of Personal Financial Advisors

(fee-only planners)

Phone: (800) 333-6659

Web site: https://www.napfa.org

REFERRALS: PRIVATE FIRMS THAT SCREEN ADVISORS

These companies will recommend a list of advisors who have been screened for certain qualities. The advisors pay to be evaluated by the programs. Ask the referral firms for details and for minimum required investment amounts.

* Charles Schwab Corp.

(AdvisorSource)

Phone: (800) 278-2820

Web site: https://www.schwab.com

* AdvisorLink

Phone: (800) 348-3601

REGULATORY AGENCIES

Under a new federal law, regulation of financial advisors will be split between the federal Securities and Exchange Commission and state securities regulators beginning July 8. Generally, advisors who manage more than $25 million will be regulated by the SEC; those who manage less than $25 million will be regulated by their state securities administrator.

* Securities and Exchange Commission

Phone: (800) 732-0330

Web site: https://www.sec.gov

Useful for: Guidance on evaluating SEC-regulated advisors, literature on general questions to ask when interviewing an advisor.

* National Assn. of Securities Dealers Regulation

Phone: (800) 289-9999

Web site: https://www.nasdr.com

Useful for: Requesting disciplinary histories on brokerage representatives and broker-dealers, general information on avoiding fraud.

* Certified Financial Planner Board of Standards

Phone: (800) 237-6275

Web site: https://www.cfp-board.org

Useful for: Checking on planner’s CFP designation and disciplinary history.

* California Department of Corporations

Phone: (213) 736-7588

Web site: https://www.corp.ca.gov

Useful for: Obtaining information on state-regulated investment advisors, including disciplinary histories.

* National Fraud Exchange

(Mortgage Asset Research Institute)

Phone: (800) 822-0416

Useful for: Comprehensive one-stop background searches for investment advisors, financial planners, brokers, etc. Fee: $39 per report. Ask for details.

* Investor Protection Trust

Web site: https://www.investorprotection.org

Useful for: Excellent site for links to other regulatory agencies, plus advice on investing wisely and investigating investment advisors.

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INTERVIEWING AN ADVISOR: WHAT TO ASK

Once you have narrowed down the list of financial advisors who may suit your needs--and who have agreed to consider accepting you as a client--there are many questions you will want to ask each in a one-on-one interview.

Don’t feel intimidated asking tough questions--or simple ones--counsels Nancy Smith, head of the federal Securities and Exchange Commission’s investor protection unit. “You can never ask a dumb question about your money,� she says.

Here are some areas you will want to explore with an advisor:

EXPERIENCE

An advisor should:

* Disclose in writing his or her professional background, including education, employment history, philosophy of service and areas of specialization.

* Explain succinctly his or her philosophy of financial planning and/or money management and the general categories of investments used (e.g., individual stocks and bonds, load or no-load mutual funds, futures contracts, etc.).

* Be willing to share public regulatory documents related to the practice. In particular, investment advisors who register with the SEC should be willing to show you copies of their form ADV, Parts I and II. The ADV is the uniform application for investment advisor registration. Part I includes any disciplinary history.

The ADV forms are also available via the SEC.

REFERRALS

* An advisor should be willing to provide names and phone numbers of at least three current clients.

* Other referrals that may be useful would include the advisor’s banker and/or lawyer, although obviously you would not want to rely too much on these or any other advisor-picked referrals.

PERFORMANCE

* An advisor should be able to show you how accounts the firm has managed have performed over time and compare them to well-known stock or bond market indexes that represent similar classes of assets.

* If the advisor shows a “model� or “composite� portfolio’s performance as a benchmark, ask how that performance has translated into real profits for individual accounts.

* How have total assets managed by the advisor, and total number of accounts, changed over the last five years? That is, has the advisor been gaining or losing business?

* What was the advisor’s worst-ever month in terms of performance? Worst-ever year? (This data will give some idea of how much risk the advisor has taken in the past with money.)

* What services won’t the advisor perform? For example, is tax preparation included?

COMPENSATION

An advisor should:

* Disclose all fees, commissions and other compensation that may be received based on services provided and investments purchased for you. Will you pay brokerage costs? Will you pay an account maintenance fee of any kind, beyond the advisor’s standard annual asset-based charges?

* Disclose any potential conflicts of interest that might affect the professional relationship or compromise the advisor’s responsibility for putting your interests first at all times.

EXPECTATIONS

* What does the advisor believe to be a realistic annual return that can be achieved on your portfolio, given your risk tolerance and long-term goals?

* How often can you expect to hear from the advisor in terms of performance reports and updates on financial issues important to you?

* Are you comfortable with the type of account statements and other forms the advisor uses in communicating with clients?

MISCELLANEOUS

* Where will your assets actually be held? A reputable investment advisor will have your assets held by a third-party custodian or brokerage firm, to limit the possibility of theft by someone at the advisory firm.

* How much power of attorney will the advisor want beyond the right to issue buy and sell orders on your account’s behalf?

* Who will handle your account--the advisor you are interviewing or someone he or she designates?

Sources: Government agencies and self-regulatory groups, Charles Schwab Corp., AdvisorLink

Getting Help: A Resource List and Interviewing An Advisor: What to Ask, Compiled by Times staff writer Tom Petruno