Anyone 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)

A few years ago I met with a financial planner who was probably the same age, or a few years older, as me. We chatted a little, discussed some of my future plans, and basically he tried to sell me on some products. It was all in all not exactly a valuable meeting but part of that was my fault, I didn’t really have future plans. I had just graduated college, started getting my first few paychecks, and I had no plans for anything. I was just living life as best I could now that I had some real money. If I met with a financial planner now, it’d probably work out a little differently.

This guy lost $6M overnight. David Shorr had been a long time employee of Lehman and amassed quite a little collection of shares, all of which were rendered worthless on Monday. David Shorr works as a “wealth adviser,” a senior VP, at Morgan Stanley now and it made me wonder if I’d actually want the guy being my adviser (not that I’d be able to afford him!).

What if you found out that your financial planner was bad about his or her own finances? Or a financial advisor or broker whose investment portfolio was a mess? Would that change your perception of his or her advice? Would you drop them if you discovered they were bad?

I probably would.

I agree with the argument that being a good financial planner has nothing to do with executing a financial plan. A good financial planner needs strong organizational skills, good analytical skills, and a whole host of other skills that have nothing to do with sticking with a plan. A good planner can establish a savings plan that can set you up nicely to meet your future needs, given some assumptions, but it’s ultimately up to you to save. The financial planner with bad finances could simply be bad at that last part, the saving part. I agree with all that.

But would you hire a landscaper if his front yard looked like it hadn’t even been mowed in a year?

Today I have the distinct honor of posting an email interview I had with JLP of AllThingsFinancial. I befriended JLP through the course of writing this blog and I’m thoroughly impressed with his extension knowledge of all things financial, which is why I approached him. He was kind enough to agree to answer all my questions and I’ve printed them in their entirety without any alterations whatsoever. And if you haven’t been to AllThingsFinancial, I suggest you stop on over and read his daily postings because they’re extremely informative.

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