Finding a Financial Planner
by Dave Braze (TMF Pixy)
(July 28, 1999) -- When should you see a financial planner? How would you find one if you had to? What should you ask when you do? All of us need expert help from time to time. In this article, we explore a Foolish approach to solving that problem.
I personally believe that if we're organized and have our objectives clearly in mind, then we have little "need" for professional financial planners. Instead, we may "want" an expert opinion in certain areas to verify our approach or to suggest ways we could possibly improve our results. But a full-fledged, detailed financial plan? I know of no plans that don't require frequent modification due to changes in tax laws or personal circumstances. They probably worked great in the decades past, but no more. In my humble opinion, cradle to grave planning is valid now for those people who refuse to take charge of their own lives and make their own decisions. In short, they are for the unFoolish. The Foolish will use the professional financial planner only for technical advice on specific investment choices or objectives, estate problems, tax problems, insurance questions, and the like.
But when you need and want a financial planner, how do you find one and what do you look for? Well, if you're already using a tax advisor, investment advisor, or estate planning attorney with whom you're comfortable, ask one or more of them for a referral. The pros work together, know each other, and have opinions of one another. They make an excellent referral source. Or ask your friends and associates if they're using someone. If they are, find out who and what those experts do to earn their fees. Use the yellow pages under the heading of Financial Planners/Advisors. Get some names of local planners from the professional associations. Try the National Association of Personal Financial Advisors (NAPFA), the Institute of Certified Financial Planners (ICFP), or the American Institute of Certified Public Accountants (AICPA). All will give you three to five names of planners in your area.
Now you've got the names, so the next step is to call and make an appointment. The first hour should be free to discuss what you want done. Use that hour to your advantage by preparing in advance. Make sure you have -- in writing -- your net worth statement (i.e., current listing of your assets and liabilities), income statement (current listing of your monthly/annual income and expenses), and your objectives (investment and desires). The pros need that info anyway, so by having it in advance you'll be saving yourself $60 to $150 per hour (more in some areas) because you have already compiled that information. Take those materials to the interview just in case you need them. During the interview, outline what you need accomplished, and begin asking questions by using my favorite acronym: FACE. It will help keep you focused in your decision to use or reject the planner.
F=Fees. How much will a financial planner charge for this work? How do they get paid? Know this in advance so there are no surprises. Generally, financial planners are paid by commission only, fee and commission, fee only, fee offset, or salary plus bonus/commission. All are capable of good work, but you need to know how they're getting paid so you aren't surprised later. Anything that entails a commission is obvious: You buy something based on their recommendation and they'll collect a fee. The fee offset means they'll charge you an up-front fee, but if you buy on their recommendation, any commission the planner earns is subtracted from that fee. Which person will provide you the most objective advice? All can, but those who have no vested interest in whether or not you buy something tend to get my nod of approval first. If all they get is a fee, then they have no incentive to steer you into a particular product. Consequently, there is far less potential for any overt or latent bias in what they recommend.
A=ADV Form. This is a document you should request from the planner. It's what he or she files with the Securities and Exchange Commission to disclose educational and business background, fees, and investment methodology. It will give you a wealth of information about the person. They're not registered? Leave. Get out of the office. Don't do business with them under any circumstances. Along the same lines, ask for a copy of the Central Registration Depository (CRD) record. The CRD will give you a 10-year history of the person, including disciplinary actions, if any.
C=Credentials. Look for the diplomas on the wall and the initials after the name. You want to see something like Certified Financial Planner (CFP); Chartered Financial Consultant (ChFC); or Certified Public Accountant (CPA) with a specialty designation as a Personal Financial Specialist (PFS). These designations don't tell you the person does good work, but they do say the person has extensive training and experience in the field. The sad fact is anyone can call themselves a financial planner in most States. There is no licensing requirement and very little regulation. But the charlatans don't have and can't use these designations, so they become your seal of quality. For more on credentials and what they really mean, check out our recent feature on the topic.
I call myself a Certified Financial Planner (CFP). What does that mean? Well, it means that I had to take extensive courses in six areas of financial planning, sit through 18 hours of examinations, work at least three years in the field, and maintain 15 hours per year of continuing education credits. By doing all that and by adhering to a strictly applied code of ethics, I retain the right to use that designation. It should give you some degree of confidence that I know what I'm doing. But it doesn't in and of itself mean that what I'm doing is best for you. It's just an indicator, nothing more. That said, though, I'll hasten to add if I wasn't doing the "right" things, I would quickly be stripped of that designation anyway.
E=Experience. How long has the financial planner been doing business in this location/town/area? It almost goes without saying -- the longer the better. I like five years. Why? It tells me they must be doing something right because no one has run them out of town on a rail yet. Have they done similar work in the past? If so, ask for a sample of that work and get the names of three clients you can call for reference purposes. The good ones will comply with that request. Review the sample and call the people. As to the latter, you and I both know the planner is only going to give you the names of folks who think highly of him/her. Call anyway and ask one question: What don't you like about the services you receive(d)? People are basically honest, and they'll tell you. If what they say turns you off towards that planner, keep on looking.
So those are Pixy's Points on Finding Financial Planners. Use them as guidelines and I believe you'll eventually come up with the person you need and with whom you are comfortable. It may take a while, but so what? When you need expert advice, you want to be certain you have found a person competent to give it, and one who will be acting in your best interests rather than their own. These tips will help you do that.