Financial planners advise clients on
how best to save, invest, and grow their money. They can help you tackle a
specific financial goal—such as readying yourself to buy a house—or give you a
macro view of your money and the interplay of your various assets. Some
specialize in retirement or estate planning, while some others consult on a
range of financial matters. Don’t confuse planners with stockbrokers — the
market mavens people call to trade stocks. Financial planners also differ from
accountants who can help you lower your tax bill, insurance agents who might
lure you in with complicated life insurance policies.
But CFP (Certified Financial Planner)
is the most significant credential. A CFP has passed a rigorous test
administered by the Certified Financial Planner Board of Standards about the
specifics of personal finance. CFPs must also commit to continuing education on
financial matters and ethics classes to maintain their designation. Typically,
financial planners earn their living either from commissions or by charging
hourly or flat rates for their services. A commission is a fee paid whenever
someone buys or sells a stock or other investment. For reasons we’ll explain
later, you may want to avoid financial planners who rely on commissions for
their income. These advisers may not be the most unbiased source of advice if
they profit from steering you into particular products.
Should You Use
a Financial Planner?
You can certainly go it alone when
it comes to managing your money. But you could also try to do it yourself when
it comes to auto repair. In both areas, doing it yourself is a brilliant idea
for some, and a flawed plan for many, many others. Mastering personal finance
requires many hours of research and learning. For most, it’s not worth the time
and ongoing effort. As you get older, busier and (it is hoped) more wealthy,
your financial goals – and options – get more complicated. A financial helper
can save you time.
Financial planners can also help you
remain disciplined about your financial strategies. They’ll make the moves for
you or badger you until you make them yourself. Procrastination can cause all
sorts of money problems or unrealized potential, so it pays to have someone
riding you to stay on track. We’re not suggesting that you ignore personal
finance and turn over all your concerns to an adviser. But even if you know the
basics, it’s a comfort to know that you have someone keeping watch over your
money.
It may sound crazy to give someone
1% of your annual assets to manage them, but you get a buffet of advice about
almost anything related to personal finance. The price becomes sensible when you
consider that you’re paying to establish a comfortable retirement, save for
your child’s college or choose the right mortgage when borrowing hundreds of
thousands of dollars.
How to Find
the Right Financial Planner
It’s best to go with a certified
financial planner (CFP), which is an instant signal of credibility – but not a
guarantee of same. To start, ask people like you if they can recommend a
planner. If you have kids, ask a colleague who also has children. If you’re
single and just out of college, check with a friend in the same boat. If
possible, you want to find a planner with successful experience advising
clients in the same stage of life as you.
A few more
tips for finding the best planner for your situation:
1. Consider the planner’s pay structure.
You typically want to avoid commission-based advisers. Planners who work
on commission may have less than altruistic incentives to push a certain life
insurance package or mutual fund if they’re getting a cut of that revenue. But
fee-based advisers aren’t perfect. Advisers earning 1% of your annual assets
might be disinclined to encourage you to liquidate your investments or buy a
big house, even if those are the right moves at a particular point in your
life, because their fee would shrink.
If
you’re starting out and don’t have a trove of assets, an planner who charges by
the hour could be the best fit. These planners are best for when your needs are
fairly simple. Typically, hourly planners are just building their practice, but
that usually means they’ll take the care to get your finances right. After all,
they’re relying on your recommendation to grow their business. Finally, many
experienced advisers do hourly work because they enjoy working with younger
clients who can only afford to hire someone at that rate.
2. Look for a fiduciary.
In
short, this means the planner has pledged to act in a client’s best interests
at all times. Investment professionals who aren’t fiduciaries are often held to
a lesser standard, the so-called sustainability standard. That means that
anything they sell you merely has to be suitable for you, not necessarily ideal
or in your best interest. This point is critical, and should be a deal breaker
if a prospective planner is not a fiduciary.
3. Run a background check on your planner.
Start with these two questions: Have you ever been convicted of a crime?
Has any regulatory body or investment-industry group ever put you under
investigation, even if you weren’t found guilty or responsible? Then ask for
references of current clients whose goals and finances match yours.
4. Check to ensure the credentials the person
claims to have are current.
Google them, see who administers the designation, then call that
administrator to verify that the credential is valid. If your advisor is a CFP,
discipline records are located here.
5. Beware of market-beating brags.
Warren Buffet outperforms the market averages. There aren’t a lot of
people like him. If you have an initial meeting with an adviser and you hear
predictions of market-beating performance, get up and walk away. No one can safely
make such guarantees, and anyone who’s trying may be taking risks that you
don’t want to take.
Asking
someone whether they’ll beat the market is a pretty good litmus test for
whether you want to work with them. What they should be promising is good advice
across a range of issues, not just investments. And inside your portfolio, they
should be asking you about how many risks you want to take, how long your time
horizon is and bragging about their ability to help you achieve your goals
while keeping you from losing your shirt when the economy or the markets sag.
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