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How to Pick a Financial Adviser or Planner

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Empty SuitsAnyone can call himself a financial planner.

Think about that for a second… anyone can call himself (or herself) a financial planner.

Given that, and the alphabet soup of certifications and titles, how in the world is someone like your or me supposed to effectively sift through the bums to get to the gems? I spent a few hours talking to a “financial planner” several years ago and while he was a nice guy to talk to, he did more than offer up a few high priced mutual funds and insurance ideas. While the talk did introduce me to the idea of disability and term life insurance, I wasn’t really interested in learning more about them at the time and so our relationship ended. Was he a good planner? I have no idea because I have no way of determining that.

Fortunately, a two year old article on how to evaluate a financial advisers from MarketWatch is still pretty accurate. They recommend that you review three factors in a financial adviser:

Credentials

First, you have evaluate their general credentials such as years of experience, number of clients, college degrees, and certifications. A planner should have a CFP (certified financial planner) certification from the CFP Board of Standards, Inc. and you can confirm this by using their search tool. An adviser should be an RIA (registered investment adviser) if they have their own firm or be an IAR (investment adviser representative) if they are independent contractors. RIAs and IARs will be registered with the Securities and Exchange Commission, you can look them up at the Investment Adviser Search tool. An IAR or an RIA is not a certification, it’s merely a sign that the individual or firm is registered with the proper government agencies. It’s mostly paperwork, but something that should be done by reputable firms (Thanks Lily!).

Ethics

Get the adviser’s or planner’s CRD (central registry depository) number and look them up at the FINRA (Financial Industry Regulatory Authority) BrokerCheck tool. This can tell you if there are any problems with the person you’re looking to deal with. Another suggestion they give is to check to see if your adviser has a criminal record because a criminal record doesn’t prevent someone from obtaining a securities license (surprising, but true). That being said, a criminal record doesn’t necessarily mean the person is a bad adviser or hasn’t been reformed but to each their own.

Business Practices

Ask how the adviser is paid. The rule of thumb is that you always want to pay an adviser for their time, i.e. a fee-only adviser, rather than someone who earns a commission based on the investments you choose. In my case, my adviser a few years ago was free but earned a commission when I bought insurance or mutual funds through him. That always brings up the question of conflict of interest, is he steering me towards a product because it’s the best one for me or because he earns a commission? After figuring out compensation, talk about how you will conduct business. How often will you meet, how often will you talk on the phone, who else will join you in meetings, etc. Get a good feeling for how things will proceed.

Lastly, they recommend that you don’t choose someone based on their personality or sales skills, which I agree. However, after you’ve done your due diligence in the three areas outlined above, I think it’s important that you do pick someone who you can get along with. It should be the last gate in the decision making process, not the only gate.

Jeremy at GenXFinance just pointed me to an article he wrote for About.com, “the best article ever written on the subject,” Finding a Financial Advisor that I found pretty informative. (Best? I don’t know… but pretty good :) )

Do you have an adviser or planner (or are you a adviser or planner) and have any insight into this?

(Photo: pgoyette)

{ 18 comments, please add your thoughts now! }

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18 Responses to “How to Pick a Financial Adviser or Planner”

  1. Sam says:

    The best credentials I would want to see is their bank accounts. If they are not good with their own money, I don’t want them handling mine. For this reason, I can’t see myself ever using a financial planner.

  2. Ken says:

    You want someone that is a fiduciary.

    From Free Money Finance.

    http://www.freemoneyfinance.com/2009/01/safeguard-1-do-not-allow-your-advisor-to-have-custody-of-your-investments.html

    “If your advisor is not a fiduciary, he or she has no legal obligation to act in your best interest. Only about 7% of those working in financial services are fiduciaries, so the odds are your advisor is probably not.

    Simply put, the term “fiduciary” applies to those who have the legal responsibility to manage other people’s money. Fiduciaries are required by law to act in the best interests of their clients, beneficiaries or retirement plan participants.

    Both the National Association of Personal Financial Advisors and the Center for Fiduciary Studies require its members to sign and uphold a fiduciary oath. In contrast, brokers and agents are not fiduciaries and often must disclose the following in writing: “Your account is a brokerage account and not an advisory account.” And “Our interests may not always be the same as yours.” “

  3. I would only use a fee only financial planner. Yeah, they cost money, but you know exactly who they are working for. They don’t get commissions. This is what I want to be when I “grow up”. :)

    The national association of personal financial advisors (www.napfa.org) has a list of fee only financial planners, and you can search by zip code.

  4. tom says:

    Those are great points but I have a question.

    When should someone get a financial planner?

  5. Lily says:

    RIA / IAR designation should not be construed as a qualification. All advisory firms and employees of firms must be registered as RIAs and IARs respectively under federal and state laws. So you should definitely avoid any firm not designated as RIA or individual not designated as IAR. However, registration under these titles is mostly paperwork, and just because a firm has an RIA designation or an adviser has an IAR designation doesn’t make them particularly good. I’d definitely also look for a CFP designation, which requires passing a much more extensive test than the IAR designation.

    Also, IARs are by definition fiduciaries, so once again being a fiduciary isn’t a sufficient condition of being a good financial planner.

    • Jim says:

      Ahhh, good point, I’ll amend the article.

    • You are so right regarding the CFP exam. Not only is it more stringent, but it is just the first step in the process. Unlike many other designations, work experience is also a requirement (3 years actually). And, beyond that, the group Ashley mentioned, the NAPFA (which by the way is only comprised of fee-only advisors) also requires further testing in the form of real-world financial plans, which are reviewed for the application of theories and competencies, not just being able to memorize rules and standards. It is a long and arduous process to say the least.

  6. I have a problem with the notion that financial advisors are handlers of other peoples’ assets. The basic definition of the words “financial advisor” is someone who dispenses advice on financial matters. I like to draw the distinction that those who sell products are brokers and those that manage assets are (perhaps obviously) asset- or money-managers, who each may also provide advice.

    Personally, I’m working toward my CFP designation, and my company does not sell a single product. It is based on the concept of providing guidance and advice as opposed to making a profit on commissions or a % of assets managed. I’ve written multiple articles on my own blog about financial advising, and the truth is, it does take more than a few letters after a name to be a good advisor. Independence, transparency, the ability to listen rather than throw together a plan, and other intangible qualities are just as important.

  7. WJ says:

    I think Ashley’s right- if you really need a planner, you have to go with fee-only. Eric also hit the nail on the head.. the CFP title is indeed a great start, but it’s just the beginning. I tend to think about financial planners the way I think about auto mechanics- it’s tough to to find one you can trust, but when you finally do, they’re worth their weight in gold!

  8. Tom says:

    It’s funny how the top sellers are always the worst reps – I think this actually goes for any profession (real estate agents?)
    Ever since I read the book ‘The Naked Investor’ I am wary of financial planners who make commissions.

  9. Jeff Rose says:

    Jim-

    Nice look at a very touchy subject for all “us” financial planners. :)

    One thing to consider on your first line “Think about that for a second… anyone can call himself (or herself) a financial planner.” I don’t think that this is entirely correct. I’m not sure if this is an industry regulation or just brokerage firm specific, but unless you actually have the CFP credentials you are technically not allowed to refer to yourself as a “financial planner”. You can call yourself financial “advisor” or “consultant”, but not a planner. Both firms I have worked were very adamant about this. Trivial to most, but my guess that this was implemented to protect those that actually put the time and effort to receive the designation.

    That being said, if you meet with a somebody that refers to themselves as a “financial planner” and doesn’t have the credentials to back it up (Hint: Look at their business card and look for CFP after name), make sure to buy whatever they’re selling. NO! Casually excuse yourself and run the other way very fast.

    • pjt says:

      Designations & registrations are fine, they don’t hurt, but they don’t necessary help. Case in point: Bernie Madoff was a “Registered Investment Advisor”. Michael Jordan & I could go to the same basketball camp, so what would it mean if you were trying to choose between him & me and all you knew was that we both attended the same camp? He’s a better player than me due to raw ability/talent and there’s no way to pre-determine it until we both start playing. Referrals/recommendations from others may be a good start. Your personality and ideology should mesh with the Adviser’s. When he/she says something, ask them why or what they’re reasoning is – that will tell you a lot. Trust no one until they prove to be trust-worthy and never let them hold the money – a third party fiduciary should. Never give any “Adviser” everything.

    • pjt says:

      That is incorrect – anyone can actually call themselves a Financial Planner but one cannot call themselves a Certified Financial Planner (CFP) unless they have satisfied the requirements of the Certified Financial Planner Board of Standards, Inc – i.e. passed a test, have 3 or more years related experience, adhere to ethical standards, participate in annual continuing education activities etc. Be careful when placing faith in credentials – some of the best artists/musicians in the world never went to formal school for their craft.

  10. Michael harr says:

    I couldn’t disagree more with the selection process outlined here and a few of the comments, while seemingly logical, are far from the truth. I’ve been a financial planner for more than a decade and am a registered principal (FINRA Series 24), registered rep (FINRA Series 7 & 63), and investment advisor representative (FINRA Series 66)…well for about three more days anyway–leaving to grow a related company that puts me in conflict with my current broker/dealer and RIA.

    The first and most important things you should explore are the advisor’s values. If you’re frugal, are they? Do you drive a used Accord but he/she pulls up in a new BMW? If you see great disparity in values, find someone else.

    Second, the fee versus commission is completely overblown and if you do the math you’ll see the problems with it. The Mutual Fund Store, Fidelity, Vanguard, etc. are all pushing fee based accounts where they manage the portfolio for you. The fees usually start at 1.50% and go down from there. Compared to a low cost load fund, it’s not even close in expenses…the commission fund destroys the fee based account. Personally, I like the hourly fee for the occassional consultation route for do-it-yourselfers. For the less confident/knowledgeable/inclined/etc., a long-term relationship with an advisor is more appropriate.

    Of course, one of the critical questions to ask is “How many accounts do you manage and how many clients do you service?” I’ve seen advisors that handled over 1,000 clients and several thousand accounts. Personally, I never went past about 60 clients. That gave me about 4 business days annually with each person. Remember, there are only 220 or so business days so you’ll want to be sure the advisor can handle your business with the appropriate amount of attention.

    Switching gears a bit, if you put yourself out there as a financial advisor, charge fees, and aren’t registered, you will have a fine levied against you and risk jail time. This is completely false that anyone can pass themselves off as financial planner/adviser/advisor. You must be licensed with a firm in good standing. Granted, you can say you’re an advisor, but I can also say that I’m a doctor.

    As for the credentials, they help, but not as much as you might think. The CFP is a lengthy course, but it’s not a pre-req for good advice. In fact, I have a few problems with some of their ideology, but I digress. The reality is that I’ve met many CFPs that were as slick as the slickest of used car salesmen. The designation just means they’ve passed a test and will get slapped harder on the wrist if they screw up.

    Again, the most important questions relate to values, total cost, availability, and service history. I would not work with an advisor unless they’ve been in it for five years or more, are properly licensed, have a clean CRD report, and were agreeable to my personality.

    Sorry for the long comment, but I think advisors get knocked far more than is necessary. The web will put the bad advisors out of business soon enough;-)

  11. thomas says:

    Fee-only. Next topic.

  12. Eric N. says:

    Bookmarked!

  13. Kristin says:

    Nice summary. Many people don’t realize there is tremendous credential and difference between financial advisers and certified financial planners.


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