2torial #0667:
Learn2 Choose a Financial Planner

A simple plan

Perhaps you're trying to find something wise to do with your retirement savings. Maybe you need help managing some funds you've inherited from a relative's estate. Or maybe you just need someone to help you identify your fiscal problems and objectives. Whatever the reason, a good financial planner can assess your financial situation and formulate a plan that will help you reach your financial goals.

But finding a good financial planner can be tricky. A large number of self-proclaimed planners are really just people looking to make some extra money. By knowing the right questions to ask, you'll be able to quickly weed out unqualified "planners" and hire someone who'll give you sound advice.

Before you even think about hiring a financial planner, learn as much as you can about personal finance. After all, there's no way you'll be able to fully utilize the planner's services without knowing the right questions to ask. If you're counting on your financial planner to magically solve all of your money problems, you're headed for trouble.

Read about mutual funds, investments, and the ins and outs of insurance. A good financial planner will try to guide you toward making decisions that will optimize your finances, but in the end, you're responsible for these choices. Besides, the more you know about your finances, the less of the financial planner's costly time you'll need to pay for--which is better for you financially.

Get a recommendation

Choosing a financial planner is a bit like choosing a doctor: The best method is to get recommendations from friends and referrals from professionals. Ask friends if they've used the services of a financial planner. If they have, ask how long they've worked with the planner, what his or her specialties are, and the benefits of their financial plan.

If you've worked successfully with someone in the finance field who's not a planner, such as an investment advisor or a tax attorney, call and ask if he or she can recommend someone. Also ask about the planners you've heard about from your friends, as he or she may know something about their professional reputations.

If you don't know anyone who can give you a personal referral, call professional associations to get some names of planners in your area. Look online or in the phone book for information about national accounting and financial planning trade organizations.

Although referrals, both personal and professional, are great starting points for your search, you should never rely solely on someone else's word. Even if you trust the person completely, be it a work colleague or relative, he or she shouldn't be held responsible for your final decision.

Check credentials

Now that you have some names of financial planners, call them and ask what certifications they have. Again, you shouldn't base your decision on credentials alone. This person won't automatically become your ideal financial advisor just because he or she has a piece of paper. A certificate does, however, tell you that this person is intelligent enough about finance to pass a somewhat difficult test, and that he or she is dedicated to finance as a profession.

The most common and widely regarded financial planning certificates are:

CFP. A Certified Financial Planner has completed a self-study course and passed a final examination given by the Institute of Certified Planners. CFPs are required to have a minimum of a bachelor's degree or more than five years of financial planning experience.

PFS. Personal Financial Specialists are licensed accountants who have three years of planning experience and have passed an examination given by the American Institute of Certified Public Accountants.

ChFC. Chartered Financial Consultants have passed an examination given by the American College, a private college in Pennsylvania.

Determine fees

Now it's time to find out how your potential planner charges clients. Is this person strictly a planner, or a salesperson as well? Ask each of your candidates over the phone whether they are fee- or commission-based. Here's what their responses mean:

Fee-only planners receive no commission, and only benefit from the flat or hourly fee you pay. In theory, after paying their rate, you should be able to walk out of their office with a good financial plan outlining your future actions, and never talk to them again. Ideally, these planners have no conflict of interest, and can help you make objective decisions about which investments to make or what funds to buy.

Note: Some fee-only planners operate this way because they're underqualified and have no certification. They, therefore, aren't allowed to earn commissions by selling investment products.

Commission-only planners charge no fee, because they receive commission from whatever investment products you decide to buy. Initially, using a commissions-based planner might seem like a good idea, as you pay nothing unless you decide to accept the plan they present to you. However, there's an obvious conflict of interest, as they cannot be objective about what plan is best for you, because the amount of money they make depends on what you invest.

Planners who charge an asset percentage will handle your investments long-term. Because they receive a percentage (usually 1 or 2 percent) of everything their clients have, they have incentive to increase their clients' total wealth. While this can be a great idea, because it gives both the client and the planner the same goal of increased wealth, the total amount you pay the planner is usually higher than with either of the other methods.

Ask each planner for a written explanation of how he or she charges fees. Also ask for the planner's ADV form, or Uniform Application for Investment Advisor Registration, which is a document filed with the Securities and Exchange Commission that discloses educational background, fees, investment methodology, and Central Depository record. The ADV gives a 10-year history of the person's professional accomplishments, including any disciplinary actions.

Interview the planner

Now it's time to interview your final candidates. Set up an appointment, but be clear that the meeting is only for you to ask questions. The planner should not charge you for this time--nor should he or she be hesitant to set up this meeting, as it's a fairly standard practice. Bring your list of questions. You may want to leave space to record his or her answers and keep the document for your records.

How long have they been in business?

A good amount of time is three years or more.

What services do they offer?

Some may provide advice in related areas such as estate planning or tax matters. While it's nice to have a multi-talented planner, be wary of those who might be spreading themselves too thin.

Decide what services you're looking for before you begin your search. If you want a specialist, ask them to demonstrate their background in that particular area of financial planning. If you want your planner to give you recommendations on all aspects of your financial situation, a specialist who will focus on one particular area may not be the best option for you.

What is their approach to financial planning?

Make sure their approach matches your goals and attitude toward risk.

What type of clients and financial situations do they usually work with?

Ideally, their clients will have profiles similar to you. Ask to talk to them as references.

Do they carry liability insurance?

Insist on a planner who carries protection, in case they make an investment mistake for which they're liable.

Will they provide strategies and product recommendations that you can implement on your own?

Find out if your planner's goal is to only provide you with a plan that you handle yourself, or to manage your assets as well.

If you're happy with the overall picture once the interview is over, then it's time to set up a consultation where you can talk about specific goals and planning schedules.

A good planner won't be daunted by your questions, and will probably even expect them. Whoever you choose will be given the enormous responsibility of planning your financial life. By demonstrating to the planner that you're serious about your financial decisions, you'll establish a relationship based on mutual respect.

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