Looking for a Financial Planner or Advisor? Start Here.

A New Era Dawns in the Need for Personal Financial Planning 

As the chaotic behavior in the markets subsides, and with increased regulation of financial services on the horizon, a new era in retirement planning and financial planning will likely set in.  Tax rates will have to sharply increase to pay for recent government rescues and bailouts.  Baby boomers and others seeking to accumulate and preserve wealth will adjust their financial goals  and reconsider their present and future money strategies and tactics to achieve those goals. Many people will look to financial planners and advisors to assist.  Mr. ToughMoneyLove has some initial recommendations for those preparing to take that step.  These recommendations are intended to eliminate those planners and advisors who have conflicts of interest or who have questionable backgrounds.

Use a Fee-Only Financial Planner 

Much has been written about how financial planners and advisors are compensated.  Most of the “advisors” looking for your business are employed by a company that sells or brokers financial products, e.g., insurance companies, securities broker-dealers, and banks.  Cross these candidates off your list immediately.  Because their compensation is based (at least in part) on what they can sell you, they have an inherent conflict of interest.  The hard truth is that you will find it almost impossible to obtain objective advice from these folks.  Most of their energy will be spent on selling you, not advising you.  You may be tempted to use one of these advisors because you don’t have to directly pay them anything out of your pocket (except for the cost of the products they sell).  That is a distorted way of looking at the issue.  Believe me, your costs will be a lot higher if you act on non-objective advice.  The proper play is to just avoid any planner or advisor that sells or brokers financial products.  

A second category of financial planners are those that claim to be “fee-based.”  In actuality, they are charging you a fee that is based on a percentage of the dollar value of assets they are managing.  Avoid this group of candidates as well, for two reasons.  First, these advisors also have a conflict of interest.  By that I mean they are eager to have you transfer assets to them for management because that automatically increases their fee.  You might receive advice to liquidate assets and re-invest with them in ways that are not in your best interest.  (Mr. ToughMoneyLove has seen this happen with friends.)  Second, with the low returns available in today’s markets, it will be very costly to you in the long run to surrender 1%-2% of your returns to your advisor, year after year, as a fee.   Remember that this management fee is in addition to any management fees associated with financial products that you purchase.

How to Find a Fee-Only Planner 

The third and recommended category of financial planner is a “fee-only” planner.  A “fee-only” advisor will charge you an hourly fee (or sometimes a flat-fee) for providing the advice you seek.  A fee-only planner does not make any money on commissions or kick-backs.  They don’t sell you anything except their time.  With such an arrangement, there are no conflicts of interest because the advisor does not make any more or less money regardless of what advice is given or what actions you take in response to the advice. 

There are two easy ways to find a financial planner that is fee-only.  Members of The Garrett Planning Network are required to be hourly fee-only.  In addition, they must commit to provide services to clients without any required minimums as to income, assets, net worth, length of engagement, or revenues generated.  You can find a member by visiting the Garrett Planning Network website and using its online locator to find a planner in your area. 

A second easy way to find a fee-only planner is through the National Association of Personal Financial Advisors (NAPFA).  NAPFA registered advisors must have minimum training credentials, must be fee-only, and cannot be employed by a financial services firm (one that sells investment products).  This provides reasonable assurance that you will receive unbiased advice.  The NAPFA web site has a directory for locating a fee-only advisor in your area. 

Perform an Advisor Background Check 

The financial planning business is not well regulated.  In most states anyone can hang up a sign and call himself a financial planner or advisor.  However, some financial planners and advisors are refugees or outcasts from financial services industries that are regulated.  You want to make sure that the advisor you are considering does not have a record of being disciplined in an earlier position.  There are several different ways of running a background check on your proposed advisor. 

The Central Registration Depository System (CRD) is a database of licensing and registration information for stockbrokers and brokerage firms.  You will want to determine if the CRD database has information about the advisor you are considering.  You cannot access the CRD yourself but your state securities regulatory authority can do it for you.  To find the CRD contact in your state, use the North American Securities Administrators Association website.  Then use that contact information to request a background check of the CRD for the planning candidate you are considering. 

You should also check for background information about an advisor and his or her firm using the Financial Industry Regulatory Authority (FINRA) website.  FINRA offers a BrokerCheck database that you can access online.  Your advisor may not be listed but you will want to find out and then see what is there.

Finally, you should access the Investment Advisor Public Disclosure online database published by the Securities and Exchange Commission.  You can search by the name of the firm that the advisor works for or previously worked for. 

By limiting your search for a financial planner or advisor to fee-only professionals, and by performing a due diligence background check on your candidates, you will increase the likelihood that the advice you receive will be objective, honest, and competent.  The steps that I have described will go a long way toward narrowing your search to those planners and advisors who can do the best job for your financial future.


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Comments

8 Responses to “Looking for a Financial Planner or Advisor? Start Here.”
  1. Russ says:

    Great post.

    Another simple way to determine if an advisor is a good candidate is to ask if they act as a fiduciary for their clients and make sure they’re willing to put this in writing.

    Regardless of how an advisor is compensated, make sure you have a fiduciary working for you who is required to serve their clients’ best interests.

  2. Russ: Excellent suggestion about obtaining written assurance that the advisor is acting as a fiduciary. That creates legal obligations that increases the odds that you will obtain unbiased advice.

  3. Probably the best article I’ve read on this subject to date. Very link worthy!

  4. Matt – Thanks for the comment. I know a lot of non-fee-only planners will take issue with my comments. I also know that many people object to paying an hourly rate for anything but they need to make an exception in this case.

  5. Evan says:

    TML we have talked in the past but for the benefit of your readers…I am a director of financial planning at a wealth management firm. We have both fee and non-fee based planners here. Our clients range from those just getting out to college all the way there (the highest case I ever worked on was for someone that was worth well into the $30 million range).

    But I digress, our most successful guys say up front something like…”I get paid in 3 ways, fee, product and referrals.”

    This leads to an interesting relationship. If the person was looking for just an investment product or life insurance product, then the financial planner relationship may not happen but there was still a sale. THIS IS NOT EVIL, nor is it indicitive of an unscrupolous advisor.

    That being said, our best (multi-generational) relationships occur when there is a fee involved. It hightens the relationship to a professional one, and takes the question of “how we get paid” out of it.

    While I have rambled on long enough – my main point is that, just because a planner doesn’t take a fee in a certain case does not make the relationship worthless. In a lot of cases, a fee is unwarranted.
    Example: 30 year old couple each making $80K just need some investment advice and life insurance to protect their new born. Does this warrant a fee? for a fee’s sake? I don’t know but if the planner doesn’t choose to utilize one…does not make the relationship inherently bad.

    It becomes inherently bad when you have a few guys out there that shouldn’t be giving anyone advice on anything trying to make a quick buck placing products where products are unnecessary. I am sure you have to defend attorneys on a daily basis because we aren’t ALL bad people…just the blood sucking PIs, escrow stealing jerks, and/or heartless Defense Insurance bastards (I obviously don’t feel that way…just examples).

    Just a few thoughts from someone that is in the world. I have a feeling though I am going to get a “matter of fact” TML response.

  6. Evan: I understand your point and agree that planners who earn commissions or no direct fee at all are not per se giving bad advice. On the other hand, if the advice includes buying something that the planner makes a commission on, the consumer has every reason to question the objectivity of the advice. If the consumer goes in looking for that specific product, fair enough. As long as the consumer understands that and that he/she has other options, it’s buyer beware. My point is that if you are looking for a comprehensive financial plan, get it from someone who is 100% objective across the board.

  7. Evan says:

    TML,

    I guess in the end, I just dislike the blatant and stereotypical attack on the profession. Not all commission based planners are selling products to those that don’t need it. It is the same thing when people attack PI attorneys.

    The only profession that we all can attack are those running auto body shops and mechanics LOL! Obviously joking.

  8. Peter watking says:

    truth is always hard to digest

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