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What are investment advisers?

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.simple-401k.com

Q. What is an investment adviser?
A. Investment advisers are in the business of giving advice about securities to clients. For instance, if they receive compensation for giving advice to a specific person on investing in stocks, bonds, or mutual funds, they are investment advisers. Some investment advisers manage portfolios of securities.
Q. What is the difference between an investment adviser and a financial planner?
A. Most financial planners are investment advisers, but not all investment advisers are financial planners. Some financial planners assess every aspect of your financial life-including saving, investments, insurance, taxes, retirement, and estate planning-and help you develop a detailed strategy or financial plan for meeting all your financial goals.

Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren't securities.

Before you hire any financial professional, you should know exactly what services you need, what services the professional can deliver, any limitations on what they can recommend, what services you're paying for, how much those services cost, and how the adviser or planner gets paid.

Q. What questions should I ask when choosing an investment adviser or financial planner?
A. Here are some of the questions you should always ask when hiring any financial professional:
  • What experience do you have, especially with people in my circumstances?
  • Where did you go to school? What is your recent employment history?
  • What licenses do you hold? Are you registered with the SEC, a state, or the  NASD?
  • What products and services do you offer?
  • Can you only recommend a limited number of products or services to me? If so, why?
  • How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
  • Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
  • For registered investment advisers, will you send me a copy of both parts of your Form ADV?

Be sure to meet potential advisers "face to face" to make sure you get along. And remember: there are many types of individuals who can help you develop a personal financial plan and manage your hard-earned money. The most important thing is that you know your financial goals, have a plan in place, and check out the professional you chose with your securities regulator.

Q. How do investment advisers get paid?
A. Before you hire any financial professional-whether it's a stockbroker, a financial planner, or an investment adviser-you should always find out and make sure you understand how that person gets paid. Investment advisers generally are paid in any of the following ways:
  • A percentage of the value of the assets they manage for you;
  • An hourly fee for the time they spend working for you;
  • A fixed fee;
  • A commission on the securities they sell; or
  • Some combination of the above.

Each compensation method has potential benefits and possible drawbacks, depending on your individual needs. Ask the investment advisers you interview to explain the differences to you before you do business with them, and get several opinions before making your decision.

Q. Do investment advisers have to register with the U.S. Securities and Exchange Commission?
A. Depending on their size, investment advisers have to register with either the SEC or the state securities agency where they have their principal place of business. For the most part, investment advisers who manage $25 million or more in client assets must register with the SEC. If they manage less than $25 million, they must register with the state securities agency in the state where they have their principal place of business.
Q. How do I find out whether an investment adviser ever had problems with a government regulator or has a disciplinary history?
A. Most investment advisers must fill out a form called "Form ADV." They must file their ADVs with either the SEC or the state securities agency in the state where they have their principal place of business, depending on the amount of assets they manage.

The ADV consists of two parts. Part I contains information about the adviser's education, business, and whether they've had problems with regulators or clients. Part II outlines the adviser's services, fees, and strategies. Before you hire someone to be your investment adviser, always ask for, and carefully read, both parts of the ADV. If an investment adviser won't give you Part I of the ADV, don't do business with them.

You can get copies of Form ADVs from the investment adviser, your state securities regulator, or the SEC, depending on the size of the adviser. You can find out how to get in touch with your state securities regulator through the North American Securities Administrators Association, Inc.'s Web site or by calling (202) 737-0900. Ask your state securities regulator whether they've had any complaints about the adviser, and ask them to check the CRD.

If the SEC registers the investment adviser, you can get the Form ADV at a cost of 24 cents per page (plus tax and postage) from the SEC at

Office of Public Reference
450 5th Street, NW, Room 1300
Washington, D.C. 20549-0102
phone: (202) 942-8090
fax: (202) 628-9001
e-mail: publicinfo@sec.gov
Q. Are investment advisers required to have credentials?
A. While some investment advisers and financial planners have credentials like CFP (certified financial planner) or CFA (chartered financial analyst), they are not required to by federal or state laws.  Unlike federally registered advisers,   many states do require their advisers and representatives to pass a proficiency exam or meet other requirements.

Investment advisers and financial planners may come from many different educational and professional backgrounds. Before you hire a financial professional, be sure to ask about their background.  If they have a credential, ask them what it means and what they had to do to earn it.



401K Facts:

According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

Conclusion

For more information about choosing investment advisers see Get the Facts, Invest Wisely: Advice from your Securities Regulators, and Ask Questions.

This Q&A is for the benefit of investors. Do not rely upon it to determine if you need to register as an investment adviser.


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