HOW TO VET YOUR FINANCIAL PLANNER

By on Nov 13, 2012 in Guest Post, Insurance, Money Management | 23 comments

Do You Need a Financial Planner?

Not everyone needs a financial planner. If you are happy with your investment results, have a financial plan and know that your risks are covered, you really don’t need to hire anyone. If anything, you should think about becoming a financial planner because it sounds like you really know what you are doing.

Do you need a financial planner?

On the other hand, if you are a little uncertain about any of the areas above, you might benefit by working with a professional. But if you go this route, be very mindful of who you work with. Just because someone is a professional financial advisor doesn’t mean that she’s better than you are when it comes to investing or planning. So how do you make sure you get the right person on your team?

How to Hire a Financial Planner?

The following five steps should help you make sure you are hiring the right financial planner:

1. Soul Searching.

Before you do anything, be crystal clear on the problem you want to solve and your goals. List your questions. Are you mainly focused on retirement planning? Are your investments a mess? Are you paying too much income tax? Are you in debt? Do you need an overall plan? Are you worried about having enough life insurance? Are you concerned about “all of the above”?

List and prioritize all your concerns. Which is the most important? What keeps you up at night? Which is least important? Why?

Spend 20 minutes on this step now. It will save you hours (and possibly thousands of dollars) down the road.

2. Look in the right place.

At this point, it’s time for a refresher course on how financial advisors work. Keep in mind that anyone can call herself a financial planner. But different planners work very differently and this is critical. The advice you get largely depends on how your advisor is licensed. Life insurance agents – if they are only licensed to sell insurance – can only sell life insurance. If you talk to such a person, the only “solution” they’ll ever offer is for you to buy more insurance.

Stock brokers work on commissions. This is not to say that they are bad people. But when someone works on commissions it’s very difficult to know who they are trying to help – you or themselves.

Fee only advisors work for you on an hourly basis or charge a fee based on the assets they manage for you. Fee planners are typically more objective then life agents or commission brokers but hiring one is far from a guarantee of competence, responsibility, or ethics.

Complicating this further is the fact that most advisors wear lots of hats. It’s not unheard of for one person to be able to act as a life insurance agent, commission broker and/or an hourly or fee-based advisor. It can easily get super confusing.

The easiest way to cut through all this fog is to ask two simple questions:

A. Do you work in any capacity based on commissions?

B. How much of your annual revenue is based on :

  1. Life insurance or annuity sales.
  2. Commissions from sales of financial products.
  3. Hourly fees or asset based fees.

Assuming your candidate tells the truth; the answer will offer insight into how this person works. If the majority of her income comes from insurance sales, she is going to try to sell life insurance. This is not necessarily bad. But if you need a financial plan and you are talking to someone who bases his business on life insurance, you aren’t going to get the kind of plan you want.

As you can probably see, I am a big fan of fee-only or fee-based planners. (Barb’s comment: I agree with Neal on this as well) I do want to disclose that I am a fee-based planner and that might be skewing my view. And as I said, just because someone is fee-based or fee-only, it doesn’t mean the person is qualified or a good fit for you. We’re going to have to go through all the following steps no matter who you speak with.

3. Questions

You can tell a great deal about your planner by the questions he or she asks. And on your first appointment the advisor should ask you lots of questions. Be alert. Are they interested in getting to know you or are they spending time trying to convince you how great they are?

Any planner worth his or her weight should try to really get inside your head. What is important about money to you? What do you like about your current situation? What needs to change? They should be interested in all these topics besides getting to know you financially.

Anyone who does not really try to understand you is someone you should probably remove from your list. Your relationship with your planner is very intimate. You want to be sure you are talking to someone who understands you and who cares about you.

Having said that, there are a few questions you need to ask as well. I mentioned that you should find out how the person you are speaking with makes most of her money and find out what licenses she has. But don’t stop there. Get the candidate to tell you who regulates their work. Then, ask for the contact information for those agencies.

For life insurance agents, that would be the State Insurance Commission (possibly under a different name) in your state. For brokers it’s FINRA and for fee-based advisors it’s either the State Department of Corporations or the SEC. Contact these agencies to see if there have been any complaints leveled against this advisor. Finally, ask for professional references like CPAs and attorneys. Then ask to speak with 2 or 3 clients who are more or less in your situation.

4. Verify

Even though your advisor will direct you to professionals and clients who offer positive feedback, talk to them. Ask how long they’ve known the person. Ask what they like about the relationship they have. Ask how they think the advisor could improve. Then ask if they have referred others to the advisors and about their personal experiences with the advisor.

5. Gut Check

At the end of the day, you have to like, trust and respect the people you work with. If your gut tells you something is wrong, it probably is. Never enter into a professional relationship with an advisor who doesn’t treat you respectfully and with humility.

Summary

When you hire a financial planner, first be sure you know what you want and expect. Look for an advisor who can provide those services. Evaluate the questions they ask you and how comfortable you feel with this advisor. Then check with the regulatory agencies, along with professional and client referrals.

Finding the right financial planner (if you need one) can make all the difference between having financial peace of mind or not. Take the extra time to vet your advisor. You will not regret it.

What other ways do you suggest people vet their financial planner? What has been your experience?

This post was written by Neal Frankle. He is Certified Financial Planner in Los Angeles and blogger at www.WealthPilgrim.com. One of his most recent detailed posts was CIT Bank Review.

image credit-google images; finance-business info

    23 Comments

  1. Good post. I would agree as well that a fee only, or fee based advisor is generally the way to go. I completely agree with #5, in the end you have to go with your gut. If they’re talking about themselves as opposed to you and your long term needs than you need to look elsewhere.

    John S @ Frugal Rules

    November 13, 2012

  2. John, Agreed! Way too much conflict of interest if a planner is compensated on a commission basis.

    Barb

    November 13, 2012

  3. Nice detail post. But like you mention not everyone will need a planner and I prefer to go to someone that has been a referral from a friend. It cuts down the chances of just getting someone who will waste your time. If possible check up on time and make sure they know what they are doing. Nothing worse then having a planner who knows less then you.

    Thomas S. Moore

    November 13, 2012

  4. Although I never had a fiancial planner, I would start with friends and ask for referrals. I would also talk to my CPA, banker, and attorney for referrals. I would still follow your other points once I had 2 or 3 choices.

    krantcents

    November 13, 2012

  5. Hi Thoomas and Krantc-AS you both highlighted referrals are really important. I think interpersonal fit is also key. AFter all you are trusting you planner with confidential information.

    Barb

    November 13, 2012

  6. I like fee only advisors. They are doing the same work no matter how much your investment is. The financial industry needs a SERIOUS overhaul. I personally would like to be able to trade my own 401K! =)

  7. Fee only is definitely the way to go if you need one. We used to have one but we found that with our extensive PF knowledge, it didn’t make sense to keep using them. We already knew what they were going to tell us.

    Miss T @ Prairie Eco-Thrifter

    November 14, 2012

  8. @Brick-I have a tip. If you can, open a ROTH IRA in a discount brokerage and start contributing in addition to your 401 K. You can manage the funds in the ROTH.
    @Miss T- If one has the interest and aptitude one can easily go it alone. There’s plenty of help and resources.

    Barb

    November 14, 2012

  9. Hey Barb!

    What are your thoughts about age, years of experience, and net worth of the financial planner? For example, what if you are more experienced and have a 3X net worth than your planner. Is that weird?

    Sam

    Financial Samurai

    November 14, 2012

  10. Hi Sam,

    I would definitely want someone that had quite a large amount of assets under management and years of experience if I had a large net worth. Otherwise, I might weight more heavily their personal style and recommendations. In either case, I’d follow up on references and check their credentials with the rating agencies.

    Barb

    November 14, 2012

  11. Another question you may want to ask (and it’s something I suggest in my book)”how do you define your client-advisor relationship?” Sometimes clients are not aware they, too, need to contact their advisors.

    Ornella @ Moneylicious

    November 14, 2012

  12. Great advice, Neal! Also, some great discussion here in the comments. I’d only add that FINRA has a page called BrokerCheck where you can find out if your advisor has had any record of disputes. For example, if you checked mine, you’d see that in nearly 16 years of practice, I have one complaint. One person accused another advisor to buy an annuity and I didn’t recommend they cancel the product (the fees were gi-normous to cancel it and doing so would cost far more than the fees they’d been leveled by the initial advisor). They reported the initial advisor AND me…and that’s on my permanent record.

    AverageJoe

    November 15, 2012

  13. In trying to find an adviser that will assist me a couple of times a year on an hourly charge, I am coming up empty. My accountant and broker both told me that most fee only folks want a take of my assets.

    Your thoughts?

    Marie at Family Money Values

    November 15, 2012

  14. @Ornella,Great idea to help connect with someone that fits your philosophy and personality.
    @Average Joe-This type of detailed information is quite helpful. The FINRA page seems like an easy way to check out the background of an advisor. But, as your example highlights, you may want to follow up to get the details regarding a complaint.
    @Marie, Just recently, I contacted a friend who is a money manager, Dan Goldie author of The Investment Answer. Although he normally manages peoples entire portfolios, he gave my portfolio a quick glance with his insights. I was looking for someone to double check my asset allocation and portfolio selection to see if I was missing anything. I did give him a spreadsheet of all of our assets. I don’t think anyone can really help you without seeing your assets. I know there are people that will look at your portfolio on an hourly basis and give you a consult. Email me and I’ll give you some ideas.

    Barb

    November 15, 2012

  15. This is great advice, thanks! I don’t have a financial planner since I don’t have a whole lot in the way of assets, but as my net worth grows it will be something I’ll look into, and I will absolutely keep your advice in mind!

    Gen Y Finance Journey

    November 15, 2012

  16. Another way to do it is to concentrate on a niche market only, study that and become your own expert. It seems to me that the fee charged by a financial planner – as a commission or as a direct fee – would make it unviable for a small investor, which is actually when you need the best advice.

    Eventually you should be able to do a lot of your own planning, possibly with the help of an accountant who can read and understand the annual accounts.

    John@MoneyPrinciple

    November 15, 2012

  17. @Gen Y and John- As you both alluded to, this is a topic that I believe one can handle on their own. There are abundant resources to assist with money management. In fact one of my favorite books is only 100 pages, and a classic; The Elements of Investing, Burton Malkiel & Charles Ellis.

    Barb

    November 16, 2012

  18. I completely agree with finding a fee only advisor and finding and advisor who will try to get to know you, rather than sell themselves. I’ve met a lot of financial planners who come across as used car salesmen, they definitely aren’t the type you want to invest your money with.

  19. @First Million-Nicely stated. AS in any intimate relationship, it’s so important to use your own judgement and analysis to choose someone who is both competent and a good fit with your needs.

    Barbara Friedberg

    November 17, 2012

  20. As a financial advisor, I say yes you need a financial advisor. Hire me! :-)

    Dominique Brown

    November 19, 2012

  21. Fee-only means fee-only, no revenue from the sale of financial products, no trailing commissions, no 12b-1 fees, etc. (full disclosure I am a fee-only advisor). Advisors who work on commission are compensated from the sale of financial products, trailing commissions, etc. Fee-based advisors from what I have seen often do a financial plan for a fee then implement their recommendations via commissioned products. My point is that fee-only and fee-based are VASTLY different forms of compensation and although they sound similar they are not similar at all. The only commonality is the use of the word “fee.” NAPFA has published this excellent guide to finding an advisor that might help your readers (please feel free to delete as I normally don’t like to leave links in comments) http://napfa.org/UserFiles/File/FinancialAdvisorFieldGuidev13.pdf

    Roger Wohlner

    November 21, 2012

  22. Hi Roger, Thank you for the excellent addition to this article. There is so much confusion in the area of financial advisers and your link is a helpful addition to this topic.

    Barb

    November 21, 2012

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