Money or investment advice from a family member or friend may be helpful and free, but it is not necessarily the best approach for solid financial planning. A financial advisor could be your most profitable investment. A financial advisor is a professional who receives compensation for providing individual clients with financial guidance, advice and services such as investment management, income tax preparation and estate planning.

Financial advisors can carry one or more designations. Each designation holds its own requirements, and the majority of certifications require candidates to put in many hours of study and meet high ethical and professional standards. The more common financial advisor designations are:

• Certified Financial Planner® (CFP®) – Financial advisors with the CFP® designation have demonstrated competency in over 100 areas of financial planning, including stocks, bonds, taxes, insurance, retirement planning and estate planning. The CFP assists individuals by helping them understand financial options and make financial decisions based on their personal situation and future goals. The program is administered by the Certified Financial Planner Board of Standards Inc., which posts information on its website about current licensees and whether CFPs are in good standing.
• Certified Public Accountant (CPA) – The CPA designation is for professionals who have completed coursework in accounting and tax preparation, but not in other areas of finance. American Institute of Certified Public Accountants is sets ethical standards for the accounting profession and develops and grades the Uniform CPA Exam.
• Personal Financial Specialist (PFS) – A PFS is a financial planner who is also a CPA. PFSs have competency in all areas of personal financial planning, including estate, retirement, investments and insurance. The PFS designation is awarded by the American Institute of Certified Public Accountants to individuals who meet the educational criteria.
• Certified Fund Specialist (CFS) – These advisors hold a certification as an expert in mutual funds, often advising clients on which funds to invest in, and if they have their license, will buy and sell funds for clients.
• Chartered Life Underwriter (CLU) – This designation is issued by the American College, and those who hold it work mostly as insurance agents. The CLU designation is given after completion of a 10-course program of study and 20 hours of exams. Topics in this course include life and health insurance, pension planning, insurance law, income taxation, investments, and financial and estate planning.

Understanding a financial advisor’s compensation
Financial advisors receive compensation and charge fees in a variety of ways. Each person’s financial situation is different, so not every method of paying a financial advisor makes sense for everyone. Before working with an advisor, be sure to ask for clarification about how fees are charged and what specific services are provided. Financial advisors may charge fees in any of the following ways:

An hourly rate – A pre-determined hourly amount charged for advice given and planning guidance. Rates vary depending on the experience level of the advisor.

A flat fee for a specific project – This fee is not tied to investments. It is a quoted and agreed upon rate and a clear description of what services are provided for that fee needs to be included.

A quarterly or annual retainer fee – This type of fee works well if the client has a complex financial situation. This may include a small business, rental properties or if regular income from investment is required. A written contract detailing all of the fees and services should accompany this arrangement.

A fee charged as a percentage of assets – The advisor charges a fee that is based on a percentage of your account value. The financial advisor’s compensation is directly correlated to your account value, so the advisor has the incentive to grow your account and to minimize losses. Typical fees range from 0.5 to 2 percent per year. The more assets a client has, the lower the fee percentage.

Commissions received when a client purchases financial or insurance products through the advisor – Commissions are paid on the front-end of a sale when a client purchases particular financial products. The client may ask the advisor how much the advisor is paid when investment or insurance products they recommend are bought.

A combination of fees and commissions.

Fee-only vs. fee-based
An advisor’s compensation is either fee-only or fee-based. Fee-only advisors can only receive compensation from the client, not a brokerage firm, mutual company or insurance company. This may be as an hourly rate, a flat fee, a retainer or as a percentage of the client’s assets.

On the other hand, fee-based advisors can receive compensation from the client and commissions paid by a brokerage firm, mutual company, insurance company or investment partnership.

Asking questions to find a good financial advisor
Dana Anspach, CFP, RMA is founder of Sensible Money, LLC and a contributor to the About.com Guide to Money Over 55 for investors over 55 years old. She recommends asking the following questions over the phone and prescreening a potential financial advisor, saving the face-to-face appointments for a couple of advisors you liked during the phone conversation.

1. Can you tell me about your ideal client? – Any good financial advisor will have an area of expertise. The ideal financial advisor is someone who has expertise in working with clients who fit your profile in terms of asset level, stage of life and age.

2. Ask a potential financial advisor to explain a concept to you. – By asking a question like one of the questions below, you are determining if you can understand the advisor’s explanation. The goal is to find someone who will be able to explain financial concepts in a language that makes sense to you. Consider asking:

• What is passive versus active investing?
• How do you determine what percentage of my money should be in stock versus bonds?
• What do you think of annuities?
• How do you determine how much cash I can withdraw each year without running out of money?

3. What assumptions do you use when running retirement planning projections? – The advisor should be able to project a retirement plan for you. This helps you see how much money will be available to spend each year, taking into account life expectancy. The projection includes assumed rates of return for your assets, inflation rates, and personal spending needs and habits.

4. How are you compensated? – The financial advisor should be able to detail all fees and services. You should ask questions until you completely understand how the compensation is paid.

Fees paid to financial advisors can be complicated. It is important for you and your financial advisor to establish a good rapport and regular communication from the onset of the relationship. You should always feel comfortable approaching the financial advisor, otherwise the arrangement may need restructuring or termination. A financial advisor should clearly understand your goals and risk tolerance before making investment recommendations. At that point, the advisor can develop a customized long-term financial plan for you.