How to Hire a Financial Planner – Understanding their Value, their Credentials, and How they are Compensated

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Sometimes, it helps to have someone knowledgeable look at your finances. There are cases in which a financial advisor can help you create a plan for the future, as well as help you stay on track with a plan you might already have. On the other hand, some people may feel overwhelmed by trying to manage…

Sometimes, it helps to have someone knowledgeable look at your finances. There are cases in which a financial advisor can help you create a plan for the future, as well as help you stay on track with a plan you might already have. On the other hand, some people may feel overwhelmed by trying to manage their own investments, and may be better off hiring a professional to help them make the right decisions.

Whether you are a beginning investor, or putting together a debt reduction strategy, or figuring out how much you need to set aside for college, hiring a financial planner may be for you.

What is a Financial Planner?

How to hire a financial planner
Do your research before you trust someone with your money!

Financial planners are investment professionals who help individuals assess their long-term financial goals and then make recommendations for investment products and services that will accomplish those goals along with a detailed plan of action.

Some financial planners can examine and plan for every aspect of your financial life, including deposit accounts, investments, taxes, retirement and estate planning and more. Others offer a more narrow focus and range of services.

Why Do I Need a Financial Planner?

If you have a substantial level of wealth and would like to not only preserve it, but grow it, too, you will need a professional to help you. As Emma Johnson of MSN Money states, “the fact remains that the financial landscape is increasingly complicated, and most people are not savvy enough — or interested enough — to navigate [it].”

Even if you consider yourself a financially savvy individual, you’re better off at least consulting a professional at some point. No matter how much you may know about finances, a financial planner is the ultimate authority. Even if you choose to devise your own plan, it is wise to hire a financial planner to look it over and make any necessary revisions.

There are many reputable financial planners that will assist you in working out a plan you can follow on your own for a flat fee. Then, if you want to make your own tweaks to the plan later you can. Sometimes a second set of eyes can help you avoid a costly mistake, or give you reassurance your financial plan is on the right track.

Advantages of Using a Financial Advisor

Do you need a financial advisor?
Do you need a financial advisor?

The right financial planner can help you plot out your road to financial freedom. A financial advisor can come in handy if you aren’t sure how to put a retirement plan into action, or if you feel overwhelmed by your debt situation.

A good financial planner can look at your situation and recommend a course of action that can be beneficial to you in the long run. Your financial advisor looks at your entire picture, and then helps you figure out how to meet your goals.

You need a financial advisor if you start to feel overwhelmed at the thought of working out your own financial future. If you feel as though you are too disorganized, or if there is too much to do in order to get started, you could probably benefit from financial planning help. At the very least, you can get pointed in the right direction.

Criteria for Hiring a Financial Planner

The Securities and Exchange Commission lists a few questions you should always consider when hiring a financial professional. They include:

  • What are their credentials?
  • How are they paid for their services?
  • Can they provide references?

Understanding Credentials

A Certified Financial Planner is more likely someone to be trusted in the field than someone without the certification. In order to receive certification in financial planning, a person must hold a bachelors degree and have obtained a CFP certification. This includes courses in the mastery of over 100 financial topics like general principles of financial planning, investment planning, retirement planning and estate planning. Finally, they are given an exam, which they must pass to be certified.

A financial planner affiliated with the National Association of Personal Financial Advisors (NAPFA) is a huge plus as well and adds to their credibility.

How Does the Financial Planner Get Paid?

I don’t begrudge anyone from making a profit. Everyone should have the opportunity to be rewarded for their knowledge and hard work. But it’s important to be aware of how your prospective financial planner is paid. It’s possible the form of compensation they receive may affect the guidance you receive. Some financial planners receive commissions for investments they recommend. This may present a conflict of interest when it comes to the investment advice they give you, but it is not always the case. You want to make sure your financial planner has a fiduciary duty to you, meaning that your financial interests have to be put first.

In many cases, if all you want is a basic plan, and some general direction for your specific situation, you can pay a flat fee, or pay an hourly rate. However, if your finances are complex enough that you want a full-on financial adviser and money manager, you’ll need to pay attention to the way that your candidate is paid. You’ll want to know whether he or she receives a percentage of assets under management, and whether some of the income is based on commission. You may instead choose a fee-only financial planner who will charge you based on an hourly rate or as a percent of assets and does not stand to gain anything by making investment recommendations.

References Are Important – But Don’t Have Blind Faith

References are important as well, as with hiring any professional. A person may be a self-proclaimed financial planner yet be completely inept. Another consideration is hiring a financial planner from a large company, or an independent financial advisor. There are pros and cons to both.

In addition, you should never hire the first planner you meet unless they are the best out of several interviews you have conducted with others. Your trusted friend may have provided you with the name of planner who did great things with their portfolio. They very well may have, too. They may not, however, be the best fit for you. The only way you will know is if you spend time with several financial planners to discuss the above points first.

Finally, it is a good idea to run a background check on the financial advisor before you hire him or her. A background check can alert you to consumer complaints, see if they have had any disciplinary actions, verify their licenses and certifications, and more. Also, consider checking online for reviews, or with the Better Business Bureau. If a financial planner has been problematic, that will show up, and you can consider it a red flag to stay away.

How to Interview a Financial Planner

You have come to that point in your life where you have realized that you cannot do it alone. That you need to plan for retirement, but you just don’t quite get it, so you need to find and hire the right financial advisor to help you along the way. Whenever you actually sit down and meet with that person, here are some general guidelines and questions you can ask that person to find out if he or she is the right fit for you.

1. Are you certified?

What I mean by that is finding out if that person is a Certified Financial Planner™. I don’t know the exact number, but there are approximately between 800,000 and 900,000 supposed financial advisors in the country. Of that, there are only approximately 61,000 who are CFPs or Certified Financial Planner™ professionals.

How do you know if that person is a CFP®? One really quick way to find out is if he or she has the credentials on his or her business card. Having “CFP®” after the name is a pretty good sign that he or she is certified. Another way to find out is to go to cfp.net and do a quick name search to see if that person comes up. The CFP® designation is one of the most recognized designations in our industry, and for those that have taken the time and extra effort to get that, it just says a lot about his or her commitment to the financial planning process.

Find out what it takes to become a Certified Financial Planner™.

2. How do you get paid?

There are many, many different combinations of this. It is just important to understand the way that you are going to be paying for that person’s services. One method is called commission, and that is kind of like the brokers of old where they sell and buy stocks for you and they get paid a commission from it. The obvious question here is if he or she is getting paid a commission for selling you an investment product, does he or she really have your best interest at heart? I am not saying that every commissioned advisor our there is bad. It is just something of which you need to understand the process.

Other forms of getting paid are fee-only where that person may be getting paid just for his or her work per hour. Maybe you pay him or her for 5 hours of producing a financial plan for you. That way you know the rate that you will be paying him or her per hour, so you know up front exactly how much you will be paying.

Another form could be (this is also fee-only or fee-based) where you are paying a percentage of the assets that the advisor is managing for you.

For example, let’s say that you have a sizable 401K that you rolled over to that advisor and he or she is collecting 1% on those assets; that is how he or she gets paid. You are paying him or her a percentage of whatever he or she manages.

You also want to make sure that that is clear and that you understand that that is the only thing you are paying for. In some cases, there could be underlying fees associated with that. You want to make sure you understand from the get-go how much you are actually paying for his or her services.

3. What is your investment philosophy?

how to interview a financial planner
Are your investment philosophies similar?

What I mean by that is is this person an active trader or is he or she a buy and hold? Does he or she believe in active or passive management? It is important to know this especially if you have a certain investment philosophy yourself because you just want to make sure that his or her investment philosophy matches yours.

For example, if you are completely into indexing and completely passive investing and yet you are hiring a manager who is doing more active management, even though he or she might be more than qualified to manage your finances or do your financial planning, the investment philosophies might not mesh.

If you don’t see eye to eye that might cause strain on the relationship going forward.

You just want to understand up front what his or her investment philosophy is. If he or she can also show you some model portfolios that maybe he or she has used for current existing clients, you can kind of get a sense of what he or she is investing into and how he or she invests.

4. Who is behind the scenes?

What I mean by this is does the advisor work for a completely independent firm? Or are they represented by a brokerage firm or an insurance company?

By asking this question, hopefully, you will be able to find out if he or she is able to offer unbiased investment advice or if he or she works for an outfit that is pushing certain investment products to you.

Most likely if he or she is only able to sell his or her own products, then that advisor might not have your best interests at heart. It is important to understand what conflicts of interest that may exist. If he or she has the best investment product known to man (if you find this be sure to let me know), then maybe that is ok. You just need to understand where he or she is coming from and make sure there is no outside influence on any recommendations he or she has for you.

5. How often do I expect to hear from you?

What you can find out here is how many clients this advisor is servicing. If he or she is trying to service between 500 to 1000 clients and you are number 1001, how much service can you expect to get?

Maybe they have a good system and team in place where they can service that many clients. If that is the case, then so be it. But you just need to find out where you fit in that advisor’s business plan. More importantly, you want to know how much attention you are going to get compared to everybody else. There’s not much worse than feeling that you aren’t important.

6. Has anyone filed a complaint against you?

Finally, the last thing that you are going to want to find out is if there any skeletons in that advisor’s closet. What I mean by that is I read this report where only one-third of all clients will do a background check on their potential financial advisor. So more than two-thirds do no background check whatsoever on that person who is getting ready to handle their retirement and investing.

That just amazed me!

You are completely turning that over to this stranger and not doing any background check on them?!?! That stat that I just shared with you was right about the time the Bernie Madoff Scandal went down.

I would like to be optimistic and think that that number has changed or improved since then, but my hunch is that most likely it has probably stayed the same. In the event that you are getting ready to hire someone, it never hurts to do a quick background check on him or her.

It is free. It is easy. You can do it in less than 5 minutes.

Here’s how:

The first site you want to go to if he or she is a registered representative is finra.org and do a user broker check function to find out if there are any reports against him or her for wrongdoings.

If he or she is an investment advisor, you can go to sec.gov and do a quick background check to see if there are any wrongdoings there.

Finally, if he or she is a Certified Financial Planner™ professional, you can go to cfp.net and do a quick search to see if there are any complaints filed there. You can also find out if the advisor has filed bankruptcy or has been charged with any other crimes.

These sites, as I said, are all free. It is an easy check. It takes you literally less than 5 minutes to do it all. You can find anything there you need to know about that potential advisor.

If you are heading out and going to meet with that financial planner for the first time, I wish you the best. Take a notepad with you to ask questions. If that question you ask brings on more questions, then ask them because you want to make sure that you walk out of there with a clear, concise understanding of the whole process: how it all works, how the advisor is going to get paid, how they are going to serve you, and how he or she is going to take care of your money. Good luck!

Choosing Your Financial Planner

As you decide on a financial advisor, you need to make sure that you are working with someone you feel comfortable with. Most financial advisors are willing to speak with you for up to an hour, getting a feel for your financial situation, and allowing you to vet them. This can be helpful as you choose someone to act as an adviser.



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About Jeff Rose, CPA

Jeff Rose is an Illinois Certified Financial Planner and Iraqi combat veteran. He is passionate about Roth IRA's, term life insurance, Cross Fit, Double-Double's at In-N-Out Burger, and smart financial decisions. You can find Jeff around the web at Good Financial Cents. You can follow his updates on Twitter: @jjeffrose.

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    These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

  1. Bern says

    My number one tip: Hire a financial planner that does what he/she is advising you to do and make sure it aligns with what you are trying to accomplish.

    He/she will be able to guide you in your decisions because he/she is or has done the same thing.

    Keep in mind that you might outgrow your financial planner. If you do, address the situation because you may need to move on.

  2. Kim says

    Ryan,

    Just as a background info, back in the early years when the CFP group was trying to establish themselves, they were hawking the CFP credentials to anyone who was willing to pay a few hundred dollars a year. No experience or training required. They mailed flyers to every financial advisors in the industry. Many of those CFPs are still around because all they need to do is to renew the fee every year.

    It’s still buyer beware when it comes to credentials.

    Investors should also ask what does the planner bring to the table? Are they just going to spit out a plan from a computer program and does the planner understand all the concepts. If so, the planner needs to be savvy enough to challenge the calculations from the computer. Even the top of the line program in the industry has mistakes in their coding and calculations. They will fix it if someone brings it to their attention.

    There are many bitter people out there who uses a $10,000 plan from a CFP as a doorstop.

    • Ryan says

      Thanks for the insight, Kim. I wasn’t aware of how the CFP designation was bandied about in the early days. From what I understand, it’s a fairly rigorous process to get the certification now.

      Thanks for the additional tips. Computers are great, but most people have unique situations that require an additional human element and decision making. I’ll keep this in mind when I go seeking a financial advisor!

      • Kim says

        Ryan,

        It is a much more rigorous process now which I approve of. However, the testing is still on the level of the SAT because it’s a standardized test. It doesn’t test knowledge as much as memorization and how to do the test. The test is also graded to purposely fail about 66% of the takers. The passing score changes from year to year depending on how well the entire pool test.

        The modules required before the test takes a couple of weeks per module to do. There are 6 of them that you can take online. Most people spend more time studying how to take the test than the materials on the pre test unless you studied through a college program.

        One of my friends runs a 6 six week program for people to cram for the CFP test and she cautions long time professionals all the time to stop using their brain when studying and taking the test. CPAs tend to fail the tax section. Lawyers tend to fail the legal section. This happens because they apply real life instead of just reading the test question and only answer within that scope even if it is wrong for real life.

        Even with the drawbacks, it is still better than nothing. At least it exposes people to all the different arenas that they need to consider when giving advice.

        The BA requirement is new as of 2009, I think. (Can’t remember the year without checking.) Before that, you didn’t need anything including a high school diploma. They also added a requirement of a few years in the financial industry before you can take the test.

        I think it gives people a great foundation to start from if they are planning to work in the industry.

        What would be more interesting is to see how many existing CFPs would fail the test if they have to retake it every two years.

        • Roger Wohlner says

          Kim I took the exam about 15 years ago and it was a killer. Ten hours over two days. I spent several months prepping for the final as well. Out three kids ranged in age from 3-7 at the time, my wife said she felt like a single parent for first half of that summer.

          Like any test it is about passing the test. In fact the instructors for the prep class that I took stressed looking for the right answer even if it goes against your own experience. I taught a similar review class several years later and stressed the same thing to my students.

          The ongoing learning is in the CE that we are required to take to maintain the certification. For the CFP designation it is 30 hours every two years, mine is double that due to the NAPFA requirements.

  3. Robert says

    There is so much information out there on the internet, I think the need for financial planners has decreased (just my opinion). Let’s be honest, if you have 10K and are just going to open an account and break it up in a few mutual funds, why do you need advice? A 30 min search on the internet can get you the same thing.

    However, if you are looking for things outside the box, a financial planner might be a good option. Things like private REITs, certain municipal bonds, etc maybe instruments you want to work with a financial planner on.

    • Ryan says

      basicmoneytips, you’re probably right about someone who has limited funds, but using a financial advisor can be a great way for many people to plan for their entire future, not just investments. Insurance, estate planning, business advice, and other aspects of your financial plan can come into play. I think a lot of it depends on where you are in your stage of life.

  4. Michael J. Sloan, CRPC says

    What amazes me is the ignorance of your guest editor. Their definition of a “Financial Planner is incorrect. They post:

    “Financial planners are investment professionals who help individuals assess their long-term financial goals and then make recommendations for investment products and services that will accomplish those goals along with a detailed plan of action.”

    A financial planner will evaluate and advise on 5 key areas of your finances.
    1. Risk Management- do you have adequate and appropriate life, health, disability, property casualty insurance coverage etc.

    2. Investments–Do you have an investment plan that is suitable to your specific goals and risk tolerances

    3. Taxes– are you taking advantage of all appropriate tax saving possibilities

    4. Retirement Planning– helping you develop and implement a retirement strategy depending your whether you are saving for retirement or in retirement and need help designing an retirement income strategy

    5. Estate Planning– helping you design a plan that will transfer your assets to to your heirs and beneficiaries in a timely and efficient manner both through gifting while alive and at death.

    I say this not to diminish the work of investment advisers but to inform the public that there is a huge difference between just advising someone on their investments and being a true Financial Planner.

    • Ryan says

      Michael J. Sloan, CRPC, it appears as though you missed the following sentence in the article, in which the definition of financial planner goes on to state,

      “Some financial planners can examine and plan for every aspect of your financial life, including deposit accounts, investments, taxes, retirement and estate planning and more.” (emphasis mine).

      The only line item in the article not specifically mentioned in your comment is risk management.

      The definition given in the article on my site is also similar to the definition found at the U.S. Securities and Exchange Commission.

      While the SEC is not the authority source regarding professional designations, it is generally respected as an authority for other laws and regulations in the financial industry and is full of valuable information for financial professionals and lay people alike. I highly recommend spending a few moments at the SEC website when you get the opportunity.

      I would also like to point readers to the Financial Industry Regulatory Authority (FINRA), which is a highly respected organization in the financial industry.

      “Financial Analyst, Financial Adviser (Advisor), Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific designation.” (Understanding Professional Designations – FINRA)

      It is important to note FINRA does NOT approve or endorse any professional designation; this list is merely provided to educate individuals regarding generic, but official sounding, titles. The list provided by FINRA is by no means inclusive of all generic financial professional designations. One notable example of a generic title that was left off the list on the FINRA website is the term “financial services professional,” which is used by many individuals of varying levels of qualifications and/or certifications.

      Michael J. Sloan, CRPC, thank you for taking the time to comment on my website. The additional research carried out to answer your response should help many individuals understand the difference between official financial designations, and self-proclaimed titles such as, “financial services professional,” which are more or less titles that sound nice, but have no real meaning.

      By the way, I would like to point out an area of improvement on your website, which provides the following definition for a financial planner, “A person who helps you plan and carry out your financial future.”

  5. Roger Wohlner says

    Ryan I appreciate the link to the NAPFA site. As a NAPFA registered advisor I am certainly biased but I think the fee-only approach is generally the best for folks whether they are seeking full-blown ongoing wealth management services or hourly advice on an as-needed basis. As the regulators debate whether a Fiduciary standard is needed and what that standard should look like, NAPFA registered advisors sign a Fiduciary Oath when they join and reaffirm that oath at each renewal. While this is not an iron-clad guarantee against the worst aspects of human behavior (we’ve had two former NAPFA presidents indicted/accused) it is a great starting point for investors to know their advisor puts their interests first.

  6. Tom Strauss says

    Excellent advice, Jeff! Some people just aren’t wired to adequately handle all financial issues that arise. Better to get professional advice than to let pride put your financial future at risk.

  7. Chris @ Stock Monkeys says

    There are so many financial resources online now that even if you do hire a financial planner customers can be better prepared to protect themselves and their capital. It’s one thing to deal with a shady mechanic who may cost you a couple grand but bad financial planning advice could cost someone everything.

  8. Snarkfinance says

    I think it is always best to learn the basics yourself before seeking “professional” help. Nobody can ever be a substitute long term for ignorance.

  9. KC @ genxfinance says

    These are great tips. There are a lot of benefits in getting a financial advisor. He can he help you maximize your investment and know where it will get a higher return, save you money. But you also need to do your part. Learn the basic knowledge about managing your finances and research well for a good advisor that you can trust.

  10. Roger @ The Chicago Financial Planner says

    Nice post, Jeff. My exceedingly biased opinion is that investors should only work with a fee-only advisor, there are certainly many competent advisors who are paid via commissions or work as fee-based (a confusing term for a combination of fees and commissions) but there is always the inherent conflict of interest. Is he/she recommending this financial product because it is best for me or because it will pay the advisor a handsome commission?

    While many folks may be capable of managing their own finances, at some point the advice of a competent, experienced professional can provide a detached 3rd party perspective.

  11. Ashley Maxwell says

    Thanks for your comment about how it is important to hire a financial planning expert to help you get prepared for the future. I like how you said that they can help you with your investments and saving strategies. My husband and I are considering hiring a financial planning business to help us prepare to start our family.

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