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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
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.