Financial planning is more than money management. An experienced planner should be able to help you determine your short and long-term financial goals and create a balanced plan to meet those goals.
Here are four questions to ask any financial professional you’re thinking of working with. The answers you get should:
Make you feel confident that you are getting an appropriately licensed and experienced professional who can provide the general and specific services you will likely need.
Confirm that you will be able to define and set reasonable, realistic, and achievable expectations and goals.
Help you feel comfortable, in control of your finances, and on plan for the life and future you’d like to create.
Q1: Are you a financial advisor or a certified financial planner?
Choosing the right professional to manage your money greatly determines your financial future. There’s no federal law that regulates who can call themselves a financial advisor or provide financial advice. Beyond a recommendation from someone you respect, it’s important to know if your candidate is a Certified Financial Planner, or a Financial Advisor. There's a big difference.
“Certified Financial Planners” (CFPs) are the highest educated, trained and tested financial professionals. All CFP’s are also fiduciaries, meaning that they must act in your best interest.
“Financial advisors” are trained and tested too.But they do not share the same standards as a CFP. Planners are not fiduciaries. Meaning they are paid based on their ability to sell financial products not on whether or not that product at that time is in your best interest.
Before sitting down to talk to a candidate, you can quickly check their qualifications and see if there are any professional complaints against them through the Certified Financial Planner Board of Standards, a non-profit organization that serves the public by fostering professional standards in personal financial planning.
Q2: How do you get paid? Are there any additional commissions or fees I should know about?
Every Certified Financial Planner is different, but anyone you consider should be able to clearly tell you exactly what you will be paying for their services. If the waters are muddy in any way, ask again. Being clear about complicated finances is exactly why you’re interviewing this candidate. If they can’t help make their own fee structure crystal clear it’s a sure sign you are not talking to the right person.
What you should expect is one of the following models, or in some cases, a combination of these models.
Commission: The planner makes income based on the products he/she sells you. Commission-only planners should be considered very carefully. They represent and sell a limited set of products for a bank or insurance company. It’s in their nature to convince you to buy what they have. Some of those products may be very good–but the timing may not be right for you. Also, by looking at an off-the-shelf set of products, you may miss out on a range of options that could be better suited for you.
Assets Under Management (AUM): Some planners charge a percentage of the total assets they manage for you. This makes a lot of sense to some people because it seems like the advisor succeeds when you succeed. For people who only care about their annual rate of return, that’s OK. But if you have a broader view of financial planning that person may be limited in what they can do for you. Keep in mind that in an asset under management model, your advisor is motivated to manage as much of your money as possible. You shouldn’t expect them to enthusiastically engage with you in any discussion about removing funds they manage for a vacation, new business venture, or real estate purchase. Those decisions, which may be right to consider, literally take money out of their pocket.
Flat fee: A flat fee model simply means you pay for the services and the level of attention you need on a quarterly or semi-annual basis. There are no hidden fees, and your advisor can focus entirely on decisions that are right for you without it affecting their bottom line. Keep in mind that some financial products like life insurance are only sold under a commission model. So a fee-based planner who helps you review and find the perfect insurance policy will receive a commission. But because they can find the ideal product for you, as opposed to selling for any given insurance company, you can feel confident they are acting in your best interest.
Q3: Do you like to focus on retirement planning and returns on those investments or do you have a broader approach on day-to-day, year-to-year financial management?
Most Certified Financial Planners are excited to discuss a broader approach to financial management than retirement planning. Look for someone who sees retirement planning as a part of a much bigger picture. A good planner should ask you about your life goals, how you feel about risk and appropriate insurances, and if you work with other experts like CPAs or lawyers for tax mitigation, estate planning, trusts, etc.
Any good planner also recognizes that you can’t make a straight line plan to retirement, put a set amount away every month, and never vary from it. Life and priorities change too fast for that. Some clients need to work on setting up an adequate cash-on-hand emergency fund. Change in employment or family size can affect expenses and cash reserves or the right sizing of insurance. Planning today has to be flexible. Your planner may have specific areas of strength/weakness but they should be able to discuss the following:
Budgeting help. You need someone you can feel honest with. A good planner will open your eyes to where your money is going. And help you with budgeting or other tools that can help you bring new focus on your big picture financial goals.
Debt management. If you have high interest credit card debt, a financial planner will prioritize a plan for repayment so you can protect your credit, get out of debt, and get interest working for you instead of against you.
Insurance coverage. As life changes, most people fail to change their policies. Any planner should ask to review your current policies to see if you are underinsured and have an important gap to fill. Or if you’re overinsured and could be saving some serious money.
Investment advice. Instead of chasing stock tips, or being tempted by “can’t lose opportunities’, let a qualified planner research different options and present opportunities that let you explore while still maintaining a consistent level of risk.
Tax planning. You should use a CPA for your tax prep, but a planner should be willing to collaborate with your tax professional to develop the right balance in your tax reducing and retirement planning strategy.
Retirement planning. Find someone who can help you build a plan for the ultimate long-term goal, retirement. Once you’re retired the world won’t stop changing. You’ll want help managing expenses, especially healthcare as you pass through the phases of retirement.
College planning. There are more choices than ever before if you want to help someone achieve a higher education degree. A planner can help you navigate what’s available and be sure that an education fund works in conjunction with your other financial strategies.
Estate planning. If you want to leave a legacy for family, friends, or charitable causes, a planner can dot every i and cross every t to make sure your intentions are clear and put into action as they should be.
Q4: If I have questions outside the typical services you manage, for example, if I start debating buying or leasing a new car, or if I’m getting anxious about the state of the stock market, can I ask for advice on those things as part of your services?
A financial advisor should always want to help you make the best decisions and feel both comfortable and confident in any part of your life. In addition to investment management and financial planning, financial advisors should have the personality and communication and “soft skills” to discuss finances from an emotional perspective. People have very complicated emotional and behavioral relationships with money.
When choosing a financial planner be sure to look beyond the charts, graphs and percentages. Make sure the human being across the table is as equipped to talk to you about hopes and dreams and fears as they are to talk about changing interest rates, portfolio diversification, or IRAs.