A recent NYT article provided a quick and easy way to determine whether you need a financial planner. The article pointed out that since 2009, most folks believe their financial acumen has increased. But according to this quiz, which has been administered consistently for several years, overall financial acumen has decreased. Talk about mismatched realities!
The majority of the folks could only answer three questions correctly. You can take the quiz here.
The article points out that what you don’t know can actually hurt you. If you haven’t scored well, it may be time to consider a fee-only financial planner. Although I can’t offer beer and cash prizes, you may get some help in areas in which you are deficient!
How Can A Financial Planner Help?
A financial planner should review your cash flow and provide a snapshot of your assets and liabilities. He or she should also be able to answer any questions you have about debt repayment, savings, insurance, investments, retirement, etc.
A financial planner should listen thoroughly to your wants and needs and then act with your very best interests at heart.
I like to think of a great financial planning relationship as the one I had with my favorite aunt. She listened to me and commented based on my needs and desires. She didn’t push her agenda. But as my only aunt, I knew she always had my back.
The rub of course is to find a financial planner that is on your side. You don’t want to be exploited by those who may not have your best interests at heart.
Two questions can help you find a financial planner that is on your side:
- How are they compensated?
- Are they a fiduciary?
How Financial Planners Are Paid
Financial planners are paid 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: The planner will charge based on a percentage (1.0% – 1.5%) of investment assets managed. If you have $500,000 in investable assets, the fee is $5,000/year. The fee is deducted from your investment balance.
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 or insurance policies.
Find a planner who is compensated only by you for the services provided.
Fiduciary Status – Planner Designations
There are multiple designations for the offering of financial planning services. I believe the gold standard is the Certified Financial Planner(TM) 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)
- Registered Investment Advisor (RIA)
Look for a planner that has a fiduciary duty to you. Certified Financial Planners(TM), Registered Investment Advisors, Personal Financial Specialists have this duty. They owe a fiduciary duty to provide advice or investment products that are in your best interest.
By contrast, broker/dealers (e.g., stock brokers) have a lesser standard in which they owe a duty to provide “suitable” products to you. Often broker/dealers are found at brokerage houses and do not provide a full complement of financial planning services.
But be careful here.
If a CFP® professional or a Registered Investment Advisor has “dual registration” that this may raise a flag. The “dual” is that the advisor could be an RIA who has a fiduciary duty and a broker/dealer who does not.
What this means to you is that they are a fiduciary sometimes but not necessarily all the time – that ‘s when they are selling you a financial product.
My advice is to stay away from advisors that have dual registration. They often are aligned with a bank or investment house. Although they are RIAs and CFP®s with a fiduciary duty, they use the software and investments products provided by their employer (e.g., the bank, insurer, or investment house). They don’t necessarily need to find the absolute best product for you. In my experience they recommend products that benefit the house and not you.
You can always check any Registered Investment Advisor’s background and compensation model to see if they have dual registration. Pull their registration forms with the Securities and Exchange Commission or state regulators.
In sum, a successful financial planner-client relationship is one in which each party has realistic expectations on the outcome of the engagement. If you understand how they are compensated and whether they have a fiduciary duty to you then you will be in a better position to have a positive engagement.
And the next time you take the quiz you’ll score a perfect score!