How to Pick a Financial Planner

For all the grief I give financial planners, I do realize that they are useful for many people (those that can't or won't learn about finances themselves, those who are dealing with complicated financial issues, etc.) But the problem is, how do you find a good one? How do you find a planner that thinks of you first -- not one who's simply a salesman trying to turn your money into his money? The new York Times gives us four areas you need to consider to pick a good financial planner as follows:

Experts pinpoint four critical topics — credentials, experience with clients whose situations are comparable to yours, personal chemistry and the payment method.

They then give some details on each of these four. Here are the highlights for the credentials area:

Financial advisers and planners are not regulated by any government agency, but the industry has developed two sets of commonly used qualifications, one for a certified financial planner, or C.F.P., and the other for a chartered financial analyst, or C.F.A., who in addition to giving financial advice manages investments. Both require passing tests administered by industry-run boards.

Financial advice might also come from trust or tax attorneys, certified public accountants or a qualified person with a finance degree from a business school. “The single most important thing is to have a core degree” related to finance, said Rich Kohan of PricewaterhouseCoopers’ private company services unit, which provides financial advice to clients with at least $2 million in assets.

Education is good -- you want to be sure they know what they're talking about. But to me, experience is even more important. Their thoughts:

Of course, education is only the beginning. Experience is also important — in particular, experience with people like you.

Exactly. That's why I favor a planner with some time under his/her belt.

The piece also gives what I consider the best advice in getting a planner -- get personal references:

One of the best ways to find a planner is through references from friends in similar situations.

The only things I'd add are to get references from someone who's doing well financially and who's used the planner for a decent amount of time. These two steps dramatically improve your chances of getting a good planner.

By the way, once you get a recommendation, I suggest you also ask the planner for five more references from clients like you -- then call them and ask what they do and don't like about the planner.

The piece goes on to say that you should interview a potential planner before you select him -- another step I agree with. Your main objective here is to see if you're a "fit" with your planner. In other words, do you get along? Can you work together? If you can, it will make the process a lot better/easier. If not, it's probably best to pass on this planner and find one suited to your working style/personality.

Finally, the piece says you need to find out how the planner is paid:

Another large issue is how the adviser is paid. Planners can charge a flat retainer, an hourly fee, a percentage of the assets under management or a commission based on the products the client uses.

Avoid commission-based planners like the plague. Commission-based is simply another term for "salesperson" and it's likely they'll focus more on selling you stuff they earn money on than steering you to the right decision. Most "experts" agree that a fee-only planner (one who charges by the hour and/or task) is the best option for most people. I tend to agree.

Anything I missed? Disagree with me on any of these thoughts?

Comments

[Mark]

FMF, do you use a financial planner or do you manage everything on your own?

[FMF]

Mark --

Mostly on my own. I have a CPA for taxes, lawyer for estate issues and deal with agents for insurance and real estate (when needed), but I'm usually the one directing the efforts.

[Mark]

Nice...that is my goal over the next couple months as well...transfer my assets from my commission-based advisor into index-funds and then set it and forget it.

[scootdawg]

Well, I have one and he happens to be a friend of mine but he's very good.

I personally like his way of doing it. He uses the percentage (a low one at that) to make his money. He doesn't sell insurance or any other crap. Basically, the more I make, the more he makes! That's cool with me.

I get great quarterly reports showing me how I'm doing and where we need to be. He can move my money around as much as he wants but he doesn't profit from that. That, at least for me, is very cool.

[RDS]

In general, I agree with your advice. Referrals are almost certainly the best way to find an advisor. I think that generally fee-based advisors are better than commission-based advisors and generally an advisor with more experience is better than one with less experience. However, I think that there are exceptions to both of these rules of thumb.

Take the case of a young, self-employed, lower income individual with no savings or investments to speak of. He decides that he should start investing and can afford to save $50 or $100 a month. He is uncomfortable handling his investments himself and so he decides to see a financial planner. I think that this guy would be better off working with someone who would charge him a commission rather than a flat fee that would likely be equal to several months of his savings.

Also, while experienced advisors are generally better than new entrants to the field, one should consider that a less experienced advisor with a smaller number of clients will likely have more time to devote to you, your needs, and your questions.

Full disclosure: I was once a fee and commission based financial advisor - mostly commission. I switched careers in order to have the opportunity to live and work in different countries. However, I plan to return the financial planing field someday. When I do, I intend to work on a fee-based system only.

RDS

[Mark]

RDS,

I don't know if I agree with the idea that someone without a lot of money would be better off seeing a commission based advisor. When I graduated from college a few years ago, I sort of fit the bill for the person you are describing. I wasn't self employed, but I worked for a start-up company and I didn't have a lot of money to invest starting out. Not knowing better, I met with an advisor at a large brokerage firm, and invested in a couple of loaded mutual funds. Now that I've done some research, I realize that my expenses and fees are much higher than if I invest in index funds for about the same rate of risk/return.

I suppose I'm more active in my research now than most people who just want to save for retirement, and maybe I was better off at the time to do that than not save at all. My return minus the fees and expenses was probably still more than I would have got if I just saved it in an online account or CD's. But still, now that I want to lower my expenses I have to go through the process of transferring the money from one institution to another, and paying the commissions to get out of any B-loaded funds.

[RDS]

Mark,

I agree with you that it is a generally better strategy to invest in low fee index funds rather than actively managed funds with a commission. While I believe that there is no reason that anyone can;t put together a portfolio of low cost funds for themselves, the fact is that not everyone is comfortable doing so or wants to do so. The guy in my example might be better off managing his money himself. However, if he does not want to, then meeting with a good commission based advisor might make sense for him.

Like you, this fictional guy someday will probably be better off moving out of those higher fee funds. However, as you note, the nest egg that he started will almost certainly be larger than if he had just left the money in the bank. Combine that with the fact that he very well might not have left the money in the bank, but rather spent a good chunk of it, and it becomes clear to me that this guy was helped out by his advisor.

Generally speaking, I think that fee based is a better approach then commission based. However, there are situations in which commissions might make sense. Also, just because someone is fee-based does not mean that they are upfront about the costs of hiring them. Back when I was in the business I saw some fee based guys do some very shady things with wrap accounts.

My two cents,
Ryan

[Bigbuddha]

This is particularly stupid articles on this blog I have read. Generally I'm pretty ok with whats written here.

Who cares how people get paid, whether it's by commission or upfront fees.

A True FINANCIAL PLANNER is more than just about investments. It's about STRUCTURING your financial affair so that it all works towards achieving your lifestyle goals.

Money is just a means to acheive these goals, it's not the be all and end all of financial advising. What about the emotional impact of personal insurances, how does it impact on your long term estate planning issue's, has your insurance agent ensured that you minimise the tax liability associated with payouts to your estate or beneficiaries, has your lawyers taken these things into account, has your accoutant. If not how come?

That's where a TRUE financial planner can help you in spades, the initial upfront costs are nothing compared to the fact that you can save 100's of thousands from planner FORWARD planning and structuring.

Put it this way, if you had to pay $5000 for a plan but that plan saved you $50,000 in taxes or made you that in return, would you do it?

or if you paid that $5,000 you can ensure that your estate is well looked after and structured properly.

It's not all about the fee's guys, it's about the value you are receiving,

Free Money Finance, I'm really getting the feeling you really don't know anything about financial planning or it's true impact.

I mean why do the wealthy have financial advisors? Because there needs are complex yes, but they also want to protect what they have through proper structuring and properly research advise.

Now, wouldn't a start up family looking to start their life achieve much greater results if they could get the advise, from the begining that a wealthy family/person is getting right now. Doing it all yourself is crazy.

Anyways that's enough from me.

PS Yes I am a financial adviser, fee only generally, naturally, but if my clients would rather pay me via commissions because they don't want it to come from their own cashflow, so be it. I always agree with them upfront how much things will cost and how much ongoing servie will cost. If the commissions generated go above this level I rebate them back to the client. Can't get any fairer than that.

Regards,

[FMF]

Big --

First, a few responses to quotes:

"Who cares how people get paid, whether it's by commission or upfront fees?"

The person paying the fees. Why? Because the person generating the fees may act more in his/her own interest that in the interest of the client.

"If you had to pay $5000 for a plan but that plan saved you $50,000 in taxes or made you that in return, would you do it?"

Of course, who wouldn't. But I'd prefer paying $500 to save $50,000. Or better yet, learning how to do it myself so I can save $50,000.

Your example is a false one to prove your point.

"Free Money Finance, I'm really getting the feeling you really don't know anything about financial planning or it's true impact."

I'm getting the feeling you're:

1. Mad. That's ok. It's fine to disagree and be upset.

2. Biased. Don't think so. Re-read your comments in light of what the average person deals with financially.

3. Mis-guided. You're using issues that relate to a very few people and trying to generalize them to most people. More on that later.

"Now, wouldn't a start up family looking to start their life achieve much greater results if they could get the advise, from the begining that a wealthy family/person is getting right now. Doing it all yourself is crazy."

I own a bike. Do I need the same advice as someone owning a Lexus. Not really.

Are my needs much, much simpler. Yep. Will they be for quite some time -- maybe forever? Yep.

Can I learn how to take care of my bike on my own? Are the mechanics simple enough that I can learn them and manage without outside help? Yes.

The same example holds true with financial planning. A couple starting out simply needs the basics: a spending plan, savings goals, investing, basic insurance, etc. Do they need a $5,000 financial plan? No. Will they ever? Maybe. But realistically, most people never get to the point where they need complicated tax planning services (like an estate plan), complicated insurance, and so on. And what they do need, they can easily learn themselves.

"Yes I am a financial adviser."

Yep.

Here's my problem with most of what you're saying:

You're taking issues that apply to a very few (the wealthy) and saying that everyone needs to work on them (and thus needs a planner). This is inaccurate -- by a long stretch. Most people do not need the services of a financial planner and what they do need they can learn on their own.

Certainly, there are people who have more complicated issues and may need help (as I note in the post). But these are in the vast minority.

I'm surprised that you have an issue with the post. It says to make sure your planner is educated, has experience, is recommended, and has no bias in how he's paid. If you really have issues with these, then, yes, we disagree in even the cases where people can't do it themselves and need to go to a planner for help.

[bigbuddha]

Hmm.. FMF

Hmm ... so your saying that my example of $5000 fee to provide a plan to save $50,000 in taxes or combination of tax savings and return is a false one and I just throw those numbers up to prove my point.

Mate, if that's how people in america think then I feel very sorry for them, that's the most backwards statement I've ever heard.

Sure you could learn how to do it, in between working a normal job, spending time with your family, relaxing with what few hours you have left. Yeah sure, learning to do something is always possible. But busy professionals or tradespeople have a finite amount of time on there hands.

Like I said, a high percentage of wealthy (in australia at least) have an adviser and stated that if they had had that level of advice earlier on then they would be in a much better position.

So those starting out, if they are helped and guided early on, provided appropriate structuring (ie insurance, investments, estate planning), surely they must be put in a position to be able to do better latter on in life.

There are alot of "dodgy" or down right dishonest financial planners out there, but there are plenty of those in any profession or trade.

LOOK PEOPLE ... if you want to find a FINANCIAL PLANNER a good one.

Heres the real tips

1. the planner should always put STRUCTURING your financial affairs ahead of any product they recommend (that includes recommending INDEX FUNDS, which I happen to like)

2. The planner should always talk to you about propert structuring before talking to you about any products

3. the planner should always look for changes in your circumstances to make sure your STRUCTURE is appropriate and flexible enough to provide future improvements.

4. IT's all about STRUCTURING

As with most things in life, you pay for what you get, cheap plans usually equals cheap results and worthless.

[FMF]

Big --

"So your saying that my example of $5000 fee to provide a plan to save $50,000 in taxes or combination of tax savings and return is a false one and I just throw those numbers up to prove my point."

Maybe it came off that way, and if it did, I apologize. I didn't mean that, but re-reading the words, I can see how it might have been interpreted that way. Here's what I meant/think:

1. Your example may be one that actually happened. If this is what you've done for someone, then so be it.

2. That said, it's "false" in the sense that it's set up to get an obvious result and lead the reader in a specific direction. But the underlying assumptions are false. EVERYONE would spend $5k to save $50k. But do the circumstances that apply to everyone allow for a $50k savings on a $5k investment? No. Only VERY FEW PEOPLE are in a situation where they can save $50k. So saying that this example is normal, average, likely, etc. (whatever word you'd like to use) or even implying it (as you did) is mis-leading. This is way I said it was a false example.

The rest of your examples are based on the same flaws. You're taking issues that relate to the wealthy and saying everyone should take the same steps. Well, most people aren't that wealthy and the simple steps they need to be well-off don't require the help of a planner.

Obviously, you're biased. And if you disagree with the issues the post suggests (making sure your planner is educated, has experience, is recommended, and has no bias in how he's paid), then yes, we do disagree on this issue.

[dbb]

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[Bigbuddha]

FMF, my apologies if I've my responses have been somewhate heated.

Your site is one of the first I had ever seen as a truly good resource for personal finance. In fact yours was the first personal finance blog I had ever seen. So congrats and keep up the good fight.

It is just that I am such a huge believer in educating people into bettering their situation, not just financialling but personally and emotionally.

And providing people the guidance early on, structuring their affairs appropriately and succintly, giving them appropriate and effective tax reduction strategies whilst creating effective wealth strategies, can in my belief only serve to enhance their future well being and in effect reduce the amount of time that it takes to fulfill their core values.

If the process was "simple" alot more people would do it, or find the time and impetus to do it, and do it early on. But as you know they don't, most if not everyone needs some guidance. It's just like being educated, most would agree that education is the key to getting out of a poverty situation.

At the end of the day, being financially stable allows people to persue the things that satisfy their core values, things like protecting their families financially, being able to reduce their "normal" work hours to do volunteer or community work, retiring early.

Money is just a means to an end to fulfill those core values. The actual amount and type of financial assets needed are always different for anyone because every has a slightly different set of core values and beliefs.

[FMF]

Big --

If you'd like to write a piece detailing your thoughts, I'd be willing to post it.

[BigBuddha]

Sure, I would more than willing to do that, if you could provide the details of where to send the article I'll have it to you within a couple of days.

[FMF]

For those interested, a piece by BigBuddha will run on October 1.

[rocky]

This is such a poor list of things to look for in a financial planner.