When Do You Need a Qualified Financial Advisor?

This weekend, we’re hosting a horse-training clinic at our new farm. We’ve had some amazing weather this week, so we’ve been able to get a lot of spring-cleaning done just in time for our guests to arrive this afternoon.

We also had some big projects going on. We needed a permanent fence for our dogs, to divide up some pasture and string new fences for visiting horses, muck out the barn from winter, level the pole barn floor with some new footing so we have an arena to work in during the clinic, and hang some lights in the arena.

Some of these things we did ourselves: The grunt work of mucking out the barn and pounding t-posts for new fencing was simple and just required time and energy.

But then I tried to hang some lights in the arena… And that’s where I ran into trouble.

The work itself didn’t require a lot of knowledge. We had bought three strings of work lights to hang from the trusses of the pole barn, so all the “wiring” we needed was a plug and some extension cords.

The trusses are about 20 feet high, so I needed a good, long ladder to get up to them. The thing is, good, long ladders are heavy, and I was working on my own. I got the first couple eye-hooks in just fine, but when I had to move the ladder to the next truss, the weight of it was too much for me to handle, and I ended up hurting myself.

Not too seriously… or at least, things could have been a lot worse. But it put me out of commission for at least a couple days, and put my attendance at the horse clinic in jeopardy. I’m still not sure if I’ll be able to handle my horse safely.

I think you can see where I’m headed with this analogy.

There are some things individual investors can handle on their own, and there are some things that require the help of an expert, or at least someone more experienced. When you get in over your head, a single bad decision can set off a number of other consequences.

Having someone who knows the ropes can help you make better decisions, and keep you from making poor ones.

It’s understandable, however, that many investors are wary of seeking help through a broker. Trust is a hard thing to earn, and with all the underhanded, backdoor deals we hear about so often between the people we put in charge of our money and the companies with their hands out, it’s not surprising that many investors would rather go it alone.

This can lead to some costly mistakes.

So here are some tips on choosing the right expert to help manage your investment.

Paid for Time, Not Commissions

There are many brokers out there who get paid commissions for every trade they “help” you make. This invariably leads to some selfish decisions on the part of the broker. He doesn’t really care if your investment is a winner or loser, per se, so long as you’re trading, he gets paid.

(Of course, it’s in his best interest to get you winning trades, but sometimes in his mind, quantity is better than quality.)

So the first tip is to find a broker or advisor who gets paid for their time, rather than on commissions. These folks are more likely to adhere to your best interests, and they’re more likely to understand the investments they’re recommending to you.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)

Do a “Background Check”

Employers conduct background checks on potential employees all the time… Why shouldn’t you do the same with your financial advisor? You’re essentially hiring them to manage your investments.

This takes a little more effort than some research into the fine print of your advisor’s disclosure statements, but it doesn’t require you to hire a private eye, either. For U.S. investors and advisors, you can investigate a broker (or a brokerage) for disciplinary problems or other information by requesting information from the Financial Industry Regulatory Authority.

(International investors should contact their home-based regulators for information on how to check on brokers in their country.)

You Don’t Have to Limit Yourself

You can shop around for different brokers and advisors. You don’t have to be limited to just one firm. If you’re comfortable investing in stocks on your own, you can choose a discount broker or online broker to help save some cash, but for more intricate trading strategies — and even retirement planning — you may want to go with a full-service advisor.

If you’re going to use different financial advisors, be sure to keep close track of where your money is, and what you’re spending to keep it there. The more complex the distribution of your investments, the more likely it is for errors to occur… and the harder it is to keep track of performance.

The Bottom Line

The key to everything is to know what you can manage on your own, and when to lean on the expertise of a qualified financial advisor. The fees that you pay may end up saving you money in the long run as you make fewer and fewer bad decisions.

So do your research and background checks until you find someone you can trust, and who can help you tailor your investments to your own personal goals.

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