How to Hire a Financial Planner – Understanding Their Value, Their Credentials, and How They Are Compensated

Sometimes, it helps to have someone knowledgeable look at your finances. In some cases, a financial advisor can help you create a plan for the future and 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 investments and may be better off hiring a professional to help them make the right decisions.

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

What is a Financial Planner?

Financial planners are investment professionals who help individuals assess their long-term financial goals and recommend investment products and services to accomplish those goals, along with a detailed action plan.

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 narrower focus and range of services.

Types of Financial Advisors

Depending on your needs, several professionals can help you reach your goals.

Financial Planners

For general money advice — including anything from investments and retirement to life insurance, savings, taxes, and estate planning — a Certified Financial Planner (CFP) is your best bet. These financial jacks-of-all-trades are an excellent resource for the average investor, as they can help you get a clear picture of your entire financial situation.

Financial Planners will generally offer a free first meeting, where you can ask questions about how they can help you reach your goals. From there, the planner may charge hourly (a good idea if you have a couple of specific questions), by the project (great for those who need help in only one area), or on retainer (for those looking for a long-term relationship).

Although anyone can call himself a financial planner, a Certified Financial Planner is a title regulated by the CFP Board. Those professionals must abide by standards of practice and a code of ethics.

Stockbroker

Most individuals think of this sort of money manager when you mention getting investment help. Stockbrokers (also known as investment managers or wealth advisors) work to maintain the best possible returns for your investments.

In most cases, using a stockbroker is for relatively high rollers — those with a portfolio of anywhere from $50,000 to more than $100,000. That’s partly because you’ll pay around $100-$200 per stock trade, which is too rich for many casual investors.

If you are willing to do your research, you can use a discount broker— someone who trades for you at a lower fee than a full-service broker. Discount brokers generally charge less than $10 for an individual online trade.

Specialist

Sometimes, you need help in a particular area. Want to figure out how to leave all your money to the whales? Want to know which 529 plan will be best for your kids? Want to figure out how to minimize your small business’s tax bill? In each of these cases, a generalist might be able to help, but for the best advice, find someone who specializes in the area where you need help.

It could be financially dangerous to simply hire anyone who has put out a shingle for services. This is where getting a reference from your CFP could be invaluable.

Advantages of Using a Financial Advisor

The right financial planner can help you plan your road to financial freedom. A financial advisor can come in handy if you aren’t sure how to implement a retirement plan or feel overwhelmed by your debt.

A good financial planner can review your situation and recommend a course of action that benefits you in the long run. Your financial advisor looks at your entire picture and helps you determine how to meet your goals.

You need a financial advisor if you start to feel overwhelmed by the thought of planning your financial future. If you feel too disorganized, or if there is too much to do to get started, you could benefit from financial planning help. At the very least, they can point you in the right direction.

Research Financial Planners Before Hiring

It is always a good idea to do a background check or research an individual or company before hiring them to help you manage your money. Start with an online background check on the financial advisor, which you can usually do for free in a few minutes. Suppose you are satisfied with what you find online. In that case, it’s a good idea to interview the financial planner to understand how they get paid, their investment philosophy, how they can help you, and whether or not you are comfortable with the individual or company. If something doesn’t feel right, don’t be afraid to look elsewhere.

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 to be trusted than someone without the certification. To become a certified financial planner, a person must hold a bachelor’s degree and earn CFP certification. This includes mastering over 100 financial topics, such as general principles of financial planning, investing, retirement, and estate planning. Finally, they must pass an exam to become certified.

Being affiliated with the National Association of Personal Financial Advisors (NAPFA) is also a huge plus and adds to their credibility.

How Does the Financial Planner Get Paid?

I don’t begrudge anyone for making a profit. Everyone should have the opportunity to be rewarded for their knowledge and hard work. But it’s important to know how your prospective financial planner is paid. 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 regarding their investment advice, but it is not always the case. You want to ensure your financial planner has a fiduciary duty to you, meaning your financial interests come first.

In many cases, if you want a basic plan and some general direction for your specific situation, you can pay a flat fee or 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 how your candidate is paid.

You’ll want to know whether he or she receives a percentage of assets under management and whether some income comes from commissions. You may instead choose a fee-only financial planner who charges an hourly rate or a percentage of assets and does not stand to gain anything from making investment recommendations.

References Are Important – But Don’t Have Blind Faith

References matter, as with hiring any professional. A person may be a self-proclaimed financial planner yet be completely inept. Another consideration is whether to hire a financial planner from a large company or an independent financial advisor. Both have pros and cons.

Also, never hire the first planner you meet unless they are the best after several interviews with others. Your trusted friend may have given you the name of a planner who did great things with their portfolio. They very well may have, too. They may not, however, be the best fit for you. You will only know if you spend time with several financial planners to discuss the above points first.

Finally, running a background check on the financial advisor before you hire them is a good idea. 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, it will show up, and you can treat it as a red flag and stay away.

How to Interview a Financial Planner

You’ve reached a point in life where you have realized you cannot do it alone. 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 meet with that person, here are some general guidelines and questions you can ask to determine if he or she is the right fit for you.

1. Are you certified?

The term “financial advisor” isn’t regulated. Almost anyone can use it. Find out whether the advisor is a Certified Financial Planner™, Registered Investment Advisor (RIA), a stockbroker, or an insurance agent. Knowing an advisor’s designation tells you how they earn a living and what kind of products they’re likely to recommend.

What I mean is finding out if that person is a Certified Financial Planner™. The U.S. has hundreds of thousands of people calling themselves “financial advisors,” but only a fraction hold the CFP® certification; you can check the CFP Board’s current numbers for exact figures.

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.

2. How do you get paid?

There are many different combinations. It is essential to understand how you will pay for that person’s services.

Commission-based financial planners:

One method is called commission, like the brokers of old who sell and buy stocks for you and get paid a commission. The obvious question is, if he or she is getting paid a commission for selling you an investment product, does he or she have your best interest at heart? I am not saying that every commissioned advisor out there is bad. It is just something that you need to understand about the process.

Fee-only financial planners:

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 hourly rate, so you know how much you’ll pay upfront.

Assets Under Management:

Another form could be (this is also fee-only or fee-based), where you pay a percentage of the assets the advisor manages 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.

What Additional Costs Are There?

Find out whether you’d have to pay out of pocket for expenses like account set-up fees, transfer fees, or maintenance fees. Get any additional charges disclosed in writing before you agree to use the advisor’s services. Also, find out if you’d be required to sign a contract to retain the advisor’s services.

You also want to make sure 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 paying for his or her services.

3. What is your investment philosophy?

What I mean is: is this person an active trader, or a buy-and-hold investor? Does he or she believe in active or passive management? This matters, especially if you have a certain investment philosophy yourself, because you want to make sure his or her philosophy matches yours.

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

If you don’t see eye to eye, that could strain 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 model portfolios he or she has used for current clients, you can get a sense of what he or she is investing in and how he or she invests.

4. Who is behind the scenes?

What I mean 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, you can find out whether he or she can offer unbiased investment advice or works for an outfit pushing certain investment products.

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

Additional questions to ask the financial planning firm:

• How long have you been in business?
• What additional services do you provide? Ask about specific services you need, such as investment management, retirement, college, estate, tax planning, or insurance analysis.
• Ask about their typical client. Do they specialize in military families? Do they have experience building financial plans that feature pensions?

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

Find out how often you’d receive updates, phone calls, and statements from a financial advisor. If up-to-the-minute information is vital to you, ask whether you can check your account status online.

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

Maybe they have a sound system and team where they can service that many clients. If so, then so be it. But you must find out where you fit in that advisor’s business plan. More importantly, you want to know how much attention you will get compared to everybody else. There’s nothing worse than feeling unimportant.

6. Has anyone filed a complaint against you?

Finally, the last thing you will want to find out is if there are any skeletons in that advisor’s closet. What I mean is that I read a report saying only one-third of all clients do a background check on their potential financial advisor. So more than two-thirds do no background check on that person 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 checks on them?!?! That stat I just shared with you was right about when the Bernie Madoff Scandal went down.

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

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

Here’s how:

If they are a registered representative, start with finra.org and use the BrokerCheck function to see whether there are any reports of wrongdoing.

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 they are a Certified Financial Planner™ professional, you can go here and do a quick search to see whether any complaints have been filed. You can also find out if the advisor has filed for bankruptcy or been charged with 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.

Additional Questions About The Business

If you are heading out to meet 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!

Do You Need a Financial Advisor?

Knowing if you’re ready for a financial advisor can be challenging. Many wait for a significant life change to call in the big dogs. There’s nothing like getting married, having a baby or changing a career to make you realize it’s time to get your finances in order. And there’s absolutely nothing wrong with that kind of timing.

If you ever feel like you don’t know what else you need to do to reach your financial goals, schedule a meeting with a pro then and there. It will help you find direction or give you peace of mind that you’re on the right track.

Choosing Your Financial Planner

Interviewing a financial planner and asking the right questions will help you understand what an advisor can do for you and what they can’t. They should also ask you lots of questions and offer specific information about the services and typical results they provide for average clients.

It’s wise to interview at least two or three people, so you have something to compare. They might even teach you something you didn’t know about what to look for in a good advisor. If you don’t like a prospective advisor or their firm, simply thank them for their time and move on to the next candidate.

As you choose a financial advisor, make sure you work with someone you feel comfortable with. Most financial advisors are willing to speak with you for up to an hour, get a sense of your financial situation, and let you vet them. This can be helpful as you choose someone to act as an adviser.