The Real Deal On Finding A Good Financial Adviser/Planner

The following piece is written by Free Money Finance reader BigBuddha. He and I had a discussion on my post titled How to Pick a Financial Planner and I offered him the chance to express his views on a post.

Let me say this right up front, I am a Financial Planner (FP), I own my business a FP business.  I have seen, heard and read a lot of things about how to find a good Financial Adviser/Planner (FP).  Generally most will rank these in this order of importance.

1. Fees - how much and how they are paid
2. Potential investment returns
3. Education and Experience Level

Although these factors are important they pale into comparison to what I think is the most important factor. STRUCTURING.  A really good FP will always look towards structuring your financial and personal situation first.

When you wish to engage an FP, the FP should always during the initial stages talk about how to structure your situation.  This is the core of things, can the planner take away most of the financial risks to your current and future estate through structuring your financial situation appropriately and regularly reviewing it.

Firstly Personal Insurance in all it's forms should be discussed, because if you are inadequately insured, what's the use of a wealth creation plan when you don't have the income or capacity to produce income any more due to ill health, injury or death.  Insurance is, at least in my eyes, the base platform, and Income Protection (IP) is crucial.  Look at it this way, if you had a machine that could produce money, would you insure it? Of course you would.  Well, you are that machine, you work, you earn income, you must protect your earning potential, it's that simple.  Other forms of insurance like Trauma, Death/TPD are also very important for crisis and estate planning issues.

The next stage, should be all about structuring your cashflows (hopefully increasing it) and taxable income payable (hopefully reducing it).  Before you start looking at any fancy investment strategies or products, you have got to look at your cashflows.  I like to make clients look at their cashflows and finance like they would a business.  Cashflow in should hopefully be greater than cashflow out, and if it's not, the FP should be able to make structural changes to balance the equation.  Some people say why wouldn't I look at my cashflows before the personal insurance,  look at my cash machine statement again I made earlier.

Unless you are already paying no tax, then there's room for potential improvement, now I'm not against paying your due income taxes, but I'm against giving the government a free ride with my hard earned cash.  Reducing your tax payable, through proper and legal structuring is ethical, financially sound and is what all business do, so you should to.

Finally, we come to the "sexy" part of FP work, investments and retirement accounts.  I know a lot of PF Blogs are pro-index funds and etfs.  As a qualified FP for the last 8 years, who must do at least 50 hours each year on investment, tax and insurance education, I whole heartedly agree. 

Index Funds/ETFs are a great tool and I would highly recommend them to form the "core" of your investment assets, other actively managed investments or managed/mutual/unit funds or trusts can be used as "satellites" to your core of funds to help smooth out returns over the medium to long run.

ASSET ALLOCATION is where most of your returns will come from, and buying at good value is as well (yes I'm a Ben Graham/Warren Buffet fanatic).  Trying to chase returns will get your caught out.  If the best investment minds in the world can't do it consistently, and that's all they do, then I'm thinking someone with a full time job and family commitments probably can't do it to successfully either over the long run.

If your potential FP stalks talking about investments straight away, just walk out the door friends, these people are just salespeople nothing more nothing less.  The proviso to this is if the adviser is just that, an INVESTMENT Adviser (IA)

I think there's a lot of confusion in the general public about the difference between an IA and an FP, they tend to think the two are interchangeable or the same.  An IA only looks at investments (think stock broker types), a true FP does all the things I discussed earlier and structures it properly.

Now let's touch on fees.  It is my greatest belief is that how a professional is paid is between the professional and the client.  They should agree upfront how much things are going to cost and how that cost should be born.  It shouldn't matter whether the fee is charged via upfront fees, charged on an hourly basis, or a flat fee for service or that most dirty of words, commission.  As long as both parties fully understand the cost and why's it's being charged, that should be adequate, end of story.

Education and experience, well education should always be a given when seeking advice from any professional, why even bother giving that as a TIP, if you’re someone who ignores someone’s education level on the field they say they are a professional in, then you deserve to lose out.

Experience well, each to there own on this issue, in my view, if the person is fully versed in the area I am looking for advice then that really trumps any so called "experience" that person has, I know people who say that they have 20+ years in an area of work, but don't really know squat, they have just stumbled there way through moving from company to company, leaving train wrecks behind them.

Well that's pretty much it from me, I would like thank FMF for allowing me to have my rant.

Comments

[Mr. ToughMoneyLove]

"It shouldn't matter whether the fee is charged via upfront fees, charged on an hourly basis, or a flat fee for service or that most dirty of words, commission." I have to disagree with this part. It is almost impossible for someone who is paid on commission to be 100% objective in providing advice. It's not that they are evil, it's that they have an inherent conflict of interest. There are plenty of planners who will work on an hourly rate basis so why risk getting biased advice from a commission-earner?

[savvy]

I agree with ToughMoneyLove. In addition to considering the compensation structure, people should look for a professional that is fidicuary (meaning obligated to look out for your best interest). A lot of commission-based planners/advisors don't meet that standard.

[FS]

I concur with the first 2 above commenters re: conflict of interest. Three strikes, your out (voted) on this one BigBudda. Even the best-intentioned advisor can't avoid acting in own self-interest. Fee-only financial planners/advisors are the way to go.

What about individuals with Certified Financial Planner (CFP) designation? I understand this is the gold standard of certification for professionals that advise people on money, similar to CPA for accountants.

Also, I would be interested in your thoughts on membership in National Association of Personal Financial Advisors (NAPFA). As I understand it, NAPFA members to sign a fiduciary oath and must be strictly fee-ownly (paid by client for advice) rather than commission or other arrangements by their company or an affiliated company. Thanks in advance.

[Bigbuddha]

Hmm ... FS ... my opinion of the CFP status is pretty low. In fact I think they should scrap the CFP status altogether and rebuild it. It's highly flawed, doesn't take much mental prowess to complete and compared to a CA or CPA it's like this .. a CFP = elementary school ... CA/CPA = college/university degree

Mr. ToughMoneyLove ... once again i'll say it ... planner structuring is the most important ... fee's are secondary to that.

[GenYRetireRich]

I'm sorry but i don't agree that actively managed funds should be used along with index funds to smooth out the rough spots. Either you believe that index funds, over the long haul, will do better than actively managed funds, or you don't believe it. If you believe the former, then index funds should be used exclusively, both for the core and the satellite, whatever that means. And make sure they are low cost funds. Avoid index funds sold by fund companies (usually through brokers and FPs) that have commissions and 12b-1 fees embedded in them. Vanguard offers just about any index fund anyone could possibly need, and their fees are usually the lowest. I don't work for Vanguard, but most of my money is in Vanguard Index Funds (core and satellite, whatever that means).

If you believe that actively managed funds, over the long haul, will beat the indexes, then you should do more research, because every impartial study I have seen says the opposite. But I would be glad to look at any new evidence that has come along recently.

[Paul Williams]

I have to also agree with the commenter above (FS) who said even the best-intentioned adviser can't avoid acting in self-interest. Bigbuddha, if you're a Buffet fan then you're probably a Munger fan as well. Read up on what he's said about Incentive-Caused Bias - the idea that people will do things you never expected if the incentives are there to cause that behavior. So even the most honest advisers in the industry will start to justify their actions if they get paid in a way that provides incentives (lots of money) to get them thinking that way.

For example, look at fee-only planners who charge a percentage of assets under management (AUM). If they charge 1%, then the guy with $100k pays the planner $1,000 every year. The guy with $200k pays the planner $2,000 every year. I can just about guarantee you they're getting the exact same services and value for their money, but the guy with $200k has to pay more just because he has more money. How is that fair and equitable at all? How would you feel if a restaurant only charged me $1 for a piece of cake but charged you $3 just because you have more money? Financial planning isn't the same as cake, but from the investment management side the results are usually not very different. I've heard planners try to justify the AUM model various ways, but again...it's that Incentive-Caused Bias.

I think the real reason you don't see many planners working on an hourly or flat-fee basis is because they can't make as much money that way as they can with an AUM model or commissions. If you sell your time, your income is limited to the amount of time you can sell multiplied by your hourly rate. Also, if you're using that AUM model, then the planner's revenues can increase over time at the long-term average return of all the assets he manages (which would be much higher than inflation).

I'm a financial planner, and I'm tired of an industry that justifies its actions because of Incentive-Caused Bias. I'm starting my own business in the next year or so that will be based on a fee-only, hourly model. I've done the research and the math and I'm confident it will work as a business model. No, I won't make $400,000 a year like some of the "planners" I've met and worked with, but I'll still be able to make a good enough living for me and my family. Just enough is enough for me.

[financial advisor]

There are good and bad CFPs, there are good and bad commission-based advisors, and there are good and bad fee-based advisors. The real key is finding someone with experience helping people in your financial situation. Many people don't realize that there are financial advisors who specialize in helping divorced women, business owners, union retirees and socially responsible investors.

[income protection]

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