Finding a Good Financial Planner
IF you need one

by Ann Coleman (TMF

RESTON, VA (July 19, 1999) -- Retirement planning is an amazingly hot topic. That means that, in addition to a lot of interest on the part of readers, there is a lot of information and advice out there seeking an audience, and some percentage of those information purveyors are seeking to skim off a bit of your cash as well.

I'm all for the idea of paying for good advice. Two of my favorite Biblical quotes are "A workman is worthy of his hire," and "Thou shalt not muzzle the ox that treadeth out the corn," meaning that the beast that walks patiently in a circle all day stomping on the wheat ears to loosen the grains should be able to snatch a mouthful every so often. That's not only kindhearted advice, it's practical, since a well-fed and willing beast (or workman) will work harder.

But what about the guy who stands on the sidelines saying, "Move it a little to the right, guys?" That guy who, when a tire needs to be changed, is always the one directing traffic? You know the one. He's long on encouragement, short on muscles, and always the first to show off the group's accomplishment to anyone who wasn't there to observe the actual work getting done.

A good financial planner who can help you plan your future, set goals, and invest to meet those goals is worthy of his hire. In fact, the best can be worth far more than their hire. A financial planner who sees you as a meal ticket, however, isn't worthy of any hire.

In my previous incarnation as Customer Service Fool (actually a prestigious position here, as opposed to many organizations), I heard almost daily from people who had been the victim of very bad financial planning advice. It made me furious. I know that there are excellent financial planners out there, but there are also a lot of folks doing business as financial consultants (advisors, planners, managers, etc.) whose only interest in their clients is the commissions that they can generate.

So how do you find a good one, IF you think you need one? One clue is the term "fee-only". You might think that someone who charges you a fee for his/her service is the bad guy I am talking about. Nope. It's the other way around. It's the guy that doesn't charge you a fee that you have to be most careful of.

Some financial planners are nothing more than insurance salesmen with a nicer sounding name. Their idea of financial planning is to sell you an insurance policy or annuity that will line their pockets but do very little for yours. A fee-only planner will charge you a fairly stiff up-front fee but will be free to chose from a variety of options, including something as simple as the Foolish Four, that will be in your own best interests, because his interest (his fee) has already been taken care of. In many cases, his fee will be less that the commissions generated by the average commission-only planner, too.

Just being a fee-only financial planner doesn't guarantee competence, of course, but it should at least guarantee that your choices won't be limited to the companies that have agreed to pay the planner the highest commission.

Generalizations are very dangerous, of course. I'm sure there are commission-only financial planners out there who do put their clients' needs first. Just like there are car salespersons who will tell you that they saw just what you want at that used car lot down the street. Yes, there are such folks, and I love 'em. But there aren't many of them.

One sort of strange thing you might want to consider is just how good a salesperson the planner is. The more they make you really feel like you are missing the opportunity of a lifetime, the less likely they are to have your best interest at heart. (A fee-only planner, of course, will have no vested interest in a quick decision on your part.) So don't rule out the less articulate, less obviously friendly advisor. Sales talent and financial talent are not genetically linked.

The best way to find a good financial advisor is probably word of mouth. Ask your friends and relatives and then pay attention not only to how much they like their advisor, but why they like him or her and how well his or her advice has worked out. Here's a clue. If they like him because he listens to their concerns and bases his recommendations on their needs, that's good. If they like her because she takes all the work and effort out of the process by making all decisions for them, that's bad.

If she compares their investment return to a market benchmark, that is very good. Not all of your nest egg needs to be in stocks, but the portion that is should at least be keeping pace with the market over multiyear time periods. If your friends have no idea how their return compares to the market or some other benchmark, that's very bad. But you knew that.

So that leaves us with the question: Do you really need a financial planner? Probably not, if your estate is simple AND if you are willing to put in the time it takes to learn about investing and estate planning on your own. You certainly don't need to pay someone 1% or more of your portfolio every year to do something you could do just as easily yourself. But if you don't want to mess with it or if your planning needs are complicated, the good financial planners can be invaluable sources of information and workmen worthy of their hire.

Before signing off today we need to throw this column into reverse gear and backtrack to last Wednesday's column for a clarification. Ethan Haskel, who wrote that piece, left the country immediately thereafter and forwarded his mail to me. (Is there a link? You be the judge!) The mail pointed out that we need to clarify this bit:

Possibly without knowing it, many of us use leverage when we buy a house. Making a down payment of 10% on a $100,000 house costs us $10,000 up front. If the dwelling should appreciate 5% over the next year, you've gained $5,000. If annual interest mortgage payments total about $7,000 a year, your actual return that year would be not 5%, but rather 29% (a $5,000 profit on a total investment of $17,000).

As several folks pointed out, if you sold that house after a year for $105,000 and subtracted the interest paid ($7,000) from your gain ($5,000), you would have lost money. So here's what Ethan meant. Over the long term, as your house appreciates, the gross percentage increase in price (say 5% a year) is not the return on your investment. Your investment is your down payment, and the return on it is leveraged by your mortgage.

If you look at the dollars and cents, it makes sense to me to consider the interest you are paying on your mortgage as "rent." Most people have to pay cash for a place to live. In that case, the return on your down payment is the increase in the value of your house leveraged by the mortgage loan. This logic won't work with investments that you don't get the benefit of living in, of course, but it's quite a nice way to look at a home purchase.

You can come back now, Ethan, the coast is clear. (Note, he's on a long-scheduled vacation in a very exotic foreign city that I hope to visit one day before I die, and I'm green with envy, which is why I'm having a bit of fun at his expense. Any longtime reader of this column will remember far worse math errors by yours truly, who supposedly checked that column before it ran -- and missed this entirely!)

Fool on and prosper!

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07/19/99 Close
Stock  Change   Last
CAT  +1  5/16  60.25
JPM  +   5/8   138.00
MMM  +   3/8   88.31
IP   -   9/16  52.88

                  Day    Month   Year   History
        FOOL-4   +0.58%   1.19%  27.26%  29.15%
        DJIA     -0.20%   1.98%  22.64%  22.15%
        S&P 500  -0.78%   2.54%  15.09%  15.37%
        NASDAQ   -1.19%   5.39%  29.08%  30.85%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     60.25    39.86%
 12/24/98    9 JP Morgan    105.51    138.00    30.79%
 12/24/98   22 Int'l Paper   43.55     52.88    21.41%
 12/24/98   14 3M            73.57     88.31    20.04%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1446.00   $412.00
 12/24/98    9 JP Morgan    949.62   1242.00   $292.38
 12/24/98   14 3M          1030.00   1236.38   $206.38
 12/24/98   22 Int'l Paper  958.12   1163.25   $205.13

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5165.88