I have recently been asked to present the basics about personal financial planning and what to look for in hiring a financial planner. In short, a personal financial plan pulls your whole financial life together in one place. By doing so, it allows you to get a good picture of where you are right now. It also forms a foundation so you can prioritize your financial goals with a realistic understanding of what it will take to accomplish your objectives.
Financial Plan Basics
The scope of your financial life includes the following items:
- Cash flow management and budgeting
- Savings and debt management
- College savings
- Retirement planning
- Insurance coverage
- Estate planning
The key point to any financial plan is to ensure it meets your goals and objectives. I have found this very first step is the most important one. Everyone has different dreams for the future, a unique relationship with money, and varied perceptions of risk. All of these considerations need to be incorporated into your personal financial plan.
Your financial planner should be able to provide you an assessment of where you are now in terms of your cash flow and a listing of your assets and liabilities. From that foundation, some of the common questions that people often hope a financial planner will answer include:
- How do I prioritize my monthly savings and debt payments?
- What’s the best way to pay off my student loans?
- Should I prepay my mortgage?
- When can I retire?
- How much should I save each year to have a secure retirement?
- How do I minimize my investment risk?
- What kind of homeowners insurance do I need?
- Do I need a personal liability insurance policy?
- Should I place my assets in a revocable living trust?
Your financial plan should include answers and analyses that address your specific questions. The plan should provide, for instances, how it much you should be savings to fund your child’s education or it should outline the minimum requirements for your auto liability policies. The plan should also provide your with concrete steps to accomplish your goals and objectives as you identified them in the beginning of the process.
How Financial Planners Are Paid
In general financial planners are paid either by fees or by commissions (or a combination of both). Generally, there are three compensation models used by fee-based financial planners:
1. Assets Under Management (AUM): The planner will charge based on a percentage (1.0% – 1.5%) of investment assets managed. So if you have $500,000 in investable assets, the fee is $5,000/year.
2. Retainer or Subscription Model: The planner charges a monthly or periodic fee to develop a plan and to answer questions (e.g., $100/month) for defined period of time (1 year).
3. Flat Fee: The planner will charge a fee for a one-time evaluation (e.g., $1,000 – $2,500). These can be renewed on an as needed basis as circumstances warrant.
Each of these models can be supplemented by commissions on products that the planner sells, such as annuities, insurance policies, or estate documents. It is key to find out how your financial planner is compensated to make sure your interests are aligned with the financial planner’s.
There are multiple designations for the offering of financial planning services. Although I am biased, I believe the gold standard is the Certified Financial PlannerTM designation because of its rigorous knowledge, experience, and professional standards. The following list includes some of the more common designations:
All Purpose Designations
- Certified Financial Planner (CFP®)
- Personal Financial Specialist (PFS) – (a supplemental designations for CPAs)
- Chartered Investment Counselor (CIC)
- Chartered Financial Analyst (CFA)
- Chartered Financial Counselor (ChFC)
- Certified Retirement Financial Advisor (CRFA)
- Chartered Trust and Estate Planner (CTEP)
The most important thing I believe that a client should look for is to make sure the planner has a fiduciary duty to you, the client. Certified Financial Planners (CFP®), Registered Investment Advisors, Personal Financial Specialists all have this duty. They owe a fiduciary duty to provide advice or investment products that are in the best interest of the client.
By contrast, broker/dealers have a lesser standard in which they owe a duty to provide “suitable” products for the client. Often broker/dealers are found at brokerage houses and do not provide a full complement of financial planning services.
The Obama Administration has recently proposed to impose a fiduciary standard on any individual providing investment advice to individuals. These proposals have yet to be implemented.
10 Questions to Ask a Prospective Planner
The CFP Board suggests you ask the following questions when hiring a planner. Many of these questions can be answered by using the planner’s website or other material. The main point is to make sure you know the answer to each question before engaging a planner.
- What experience do you have?
- What are your qualifications?
- What financial planning services do you offer?
- What is your approach to financial planning?
- What types of clients do you typically work with?
- Will you be the only financial planner working with me?
- How will I pay for your financial planning services?
- How much do you typically charge?
- Do others stand to gain from the financial advice you give me?
- Have you ever been publicly disciplined for any unlawful or unethical actions in your career?
In my experience a successful financial planner-client relationship is one in which each party (the client and the planner) have realistic expectations on the outcome of the engagement. From the client’s perspective, I think the following considerations are the most important to make sure your expectations are met:
– Do you trust and like the planner?
– What are your obligations/responsibilities?
– What are the planner’s deliverables and what are the timing of them?
– How much will it cost?
Hopefully, these tips give you a good idea of the scope of financial planning services and some pointers to follow in hiring a planner.