Everyone who calls themselves a financial planner is not legitimate. A Financial Planning Services Board study found that just 22 percent of consumers feel strongly confident that they will achieve their financial goals, with only 17 percent believing strongly in their financial know-how, and 19 percent feel they are successful at sticking to their financial strategies. Among the consumers surveyed, 68 percent rate “trustworthiness” as a very important consideration when choosing a financial professional – higher than any other consideration.
Here are 11 questions developed to help you make a more informed decision to determine a financial professional’s trustworthiness.
1. What registrations, credentials, or specialized designations show their commitment to financial planning?
The answer should include designations such as Chartered Retirement Planning Counselor, CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant, and Certified Private Wealth Advisor. You may want to check out FINRA’s webpage for accredited designations.
Do you have any regulatory disclosures with FINRA or your designations Board?
If the planner is registered, you can find their regulatory disclosers at BrokerCheck, Investment Adviser Public Disclosure, or if a CFP® professional, the Verify a CFP® professional page at letskmakeaplan.org webpage.
2. What services do you and your firm provide?
While some CERTIFIED FINANCIAL PLANNER™ had to pass a competency exam in financial foundations, retirement, investment, tax, and estate planning, some opt to focus on investment advice. Others do comprehensive financial planning that includes retirement, insurance, estate planning, and tax planning. It is important to find out the planner’s focus and specialties. What you need is independent advice that looks at your whole financial picture.
3. As a financial planner are you a fiduciary?
A fiduciary is a person who must place the client’s interest ahead of his or her own. Investment fiduciaries must also disclose what their fees are, how they’re compensated, and any other conflicts or potential conflicts of interest that might influence an individual’s decision to use their services. In contrast, non-fiduciary financial advisors might receive a commission in exchange for selling you a particular investment that potentially isn’t the best for you – and not be obligated to tell you how they’ve profited from it.
However, a fiduciary may work for a company that only allows him or her to sell the company’s proprietary products. Some companies have both insurance as well as investment product divisions. While you may receive alternative choices in one planning area, you may not see that same diversity and another. As long as he or she discloses that to you, he or she is still a fiduciary, even if there are products outside of that company’s offerings that are better for you.
The Department of Labor has now established a law that makes all registered financial professionals fiduciaries when working on retirement accounts. That may muddy the waters as they do not have to be if they are working on non-IRA. You may be one of many people who have money earmarked for retirement that is not held in one of those tax-advantaged types of accounts. The financial professional is not obligated to work with your best interest in mind on those accounts. This is true unless a governing body such as the Certified Financial Planner Board of Standards or their registration as an investment advisor representative overrules.
4. What types of clients do you specialize in?
Some financial advisors have specialties such as helping business owners administer employer-sponsored retirement plans, incorporating socially responsible investments in portfolio design, high-income earners turn income into wealth, and near-retirees transition from accumulation to retirement income planning. Rarely is there a perfect match but asking more questions will help you find a good match.
5. How many clients do you have? How many do you plan to take on?
It is impossible for anyone to handle thousands of clients with a high level of personal service.
Make sure you feel you will be getting excellent service and advice, and won’t be just a number, in a too busy advisor’s schedule. And, it’s true that every advisor can handle a different client load. It depends on their personality, staff, resources, outside professionals, etc. Be sure to find out how they get things done, and how fast they can respond to your needs.
6. What level of independence do you have in your recommendations?
Some advisers are totally independent. Some professionals work for name-brand firms that may limit their set of recommendations and offerings. This may or may not influence the recommendations that come from their analysis of your situation.
7. Could I see a sample financial plan?
Now, a plan may be many things. It can be a short one-pager, all the way up to a thick set of charts and graphs. And, one is not necessarily better than the other. It just depends on how detailed your needs are. As financial planning means different things to different people, a sample will make things more tangible for you. You may want more or less depth. The planner may also explain why they feel their recommended level of depth is necessary.
The best planning we have seen is not due to the actual written length, but more of the depth of the interview. Asking for a sample may help the planner expound on their thinking. A planner should ask about a myriad of issues, even if you decide to only focus on a few. For example, they should ask about such things as the size of the emergency fund, credit rating, and debt situation, your taxes, college education funding, retirement goals, company benefits, insurance, estate planning, investments, etc. Be wary if they seem more excited to just the ones they can make money on.
8. What is your meeting model?
Some advisers call it their service model. For example, I believe in meetings in the first year which includes the original discovery meeting. In succeeding years, I believe in a semiannual schedule. However, as I take a customized approach there may need to be additional meetings because of the complexity of the situation. That is especially true if there are meetings required with other professionals to implement the plan.
It is important to remember that the advice should not end once your plan is written and the initial investments are selected and purchased.
9. How do you charge for your services and what are the payment terms?
Ask whether there’s an initial planning fee, and ongoing planning fee whether they charge a percentage for assets under management. If they say they do not charge for planning then be wary. Some firms provide a financial plan as part of their investment management service. While that may make sense in your situation, how do they discern between the results of their investment management versus the results of their financial plan?
If they don’t charge because you must buy an insurance or commission-based investment then I think you should be wary. I have seen where what I would see as an assessment was used to justify a sale of some financial product. It was not delivered by someone working in a fiduciary capacity nor who had any financial planning credentials.
If you are used to “bundled investment costs” some of this may be shocking. However, no that one way or another you have been paying these costs. If you are a participant in a 401(k) or profit-sharing plan have you read your participant fee disclosure? This should give you some idea of what I’m talking about. And if that is not the case, I recommend you work with a financial planner who can help you understand those fees.
10. What investment philosophy does the financial planner believe in?
If your financial plan is going to be tied to the investment management of the firm this is an important question. If you plan to be open to other financial professionals managing your investments this question can be put off until later.
Now, this is where you will really get a feel for their approach to investing. I believe the answer should include reliance on portfolio construction rather than picking investments from hot or trendy investment companies. You should be guided to invest according to what you value, and those values can help you reach your financial goals. Not necessarily what a financial planner or investment advisor is good at! A financial professional should help you buy quality investments to hold for the long run and ensure they are held in the most tax-efficient manner).
They should also ask you whether investing according to your social values and life passions is important to you? If you say yes, they should talk about their capability to support those goals rather than telling you why you will make less money. I was once told that I should invest in the advisor’s proprietary investments and that I could give the money to charity later. I had expressed wanting to invest in companies that supported women and minorities in their hiring. That did not seem to be charitable in my mind.
Prudent financial planning will help you match the right investment philosophy with the objectives of your plan. Financial planners look at what do you need to accomplish first, then align you with the most appropriate investment tools to do the work. Not show you great investment tools and try to determine where they may fit in. That’s backward!
11. Which outside financial planners do you bring in, and when do you bring them in?
No one person can know everything about money. It is impossible. Therefore, a good financial advisor will have one or more outside professionals they work with, such as lawyers, accountants, mortgage brokers, and so on.
A financial planner who says that they “handle everything” is fine. Just make sure that they bring in outside advisors when the need arises (and believe me, it arises every day!).
Don’t hesitate to ask these questions, even if it feels uncomfortable! We are talking about your money here.
We hope these eleven questions help you in your search for the right financial planner for you. If you would like to learn our answers please contact us.
The opinions voiced in this article are for general information only. This information is not intended to provide specific advice or recommendations for any individual.