Finding a financial planner

6 min read

True or false: Financial planner, financial consultant, investment adviser, stock broker — these are all titles for people who provide essentially the same types of services, right? Well, true. So there’s no need to concern yourself about how they differ from one another, right? False.

Actually, there’s a wide chasm between brokers and investment advisers, though you can hardly tell if you just go by their titles. Brokers who recast themselves as financial consultants are under pressure to sell securities (the top producers are in big demand), while advisers are obligated by law to serve your best interests. Of course, not all brokers are ruthless, nor are all investment advisers ethical. Any financial professional can break the rules and do a disservice to the consumer.

Finding the right financial planner takes a little detective work and interviews with several advisers.

They’re not all the same
Learn how to distinguish the pros from the cons, and the experienced from the inexperienced.
Tips for selecting a planner:
  1. Go online
  2. Compare credentials
  3. Do a background check
  4. Interview more than one planner
  5. Find out how the adviser gets paid

1. Start your hunt on the Web

Members of the National Association of Personal Financial Advisors, or NAPFA, are fee-only financial planners and are compensated solely by their clients. An investment adviser who is registered with NAPFA guarantees the complete disclosure of all fees before he is engaged as your financial planner. You can learn more about the association and find a NAPFA-registered adviser in your area by visiting the NAPFA Web site.

The Certified Financial Planner Board of Standards allows you to search for CFP certificants on its Web site while The American College’s Web site lets you search its alumni list for financial or insurance advisers.

Planning professionals with other professional designations may also be able to meet your need for independent advice.

2. Compare credentials

There’s an alphabet soup of financial adviser designations, and trying to decide what designation your adviser should have is easier when you know the differences. The following list, while not exhaustive, gives you an idea of what’s out there:

Chartered Financial Analyst (CFA): A designation awarded by the CFA Institute to experienced financial analysts who successfully pass three examinations covering economics, financial accounting, portfolio management, securities analysis and ethics; that have approved work experience; and meet other requirements. CFAs are more likely to work for mutual fund companies, institutional asset management organizations or pension funds. CFA charter holders are annually required to affirm their commitment to high ethical standards.

Certified Public Accountant-Personal Financial Specialist (CPA-PFS): An individual with a CPA title will have a more extensive background in tax issues. However, a PFS designation is awarded by the American Institute of Certified Public Accountants in New York City to CPAs who have taken additional training or already hold a CFP or ChFC designation.

Chartered Financial Consultant (ChFC): A professional with a ChFC designation should have a broad knowledge of all aspects of financial planning. Subject areas studied include securities, estate planning, insurance and taxes. The designation means the person has passed rigorous examinations and met certain requirements. The ChFC designation is earned through The American College in Bryn Mawr, Pa., and designees tend to work in the insurance industry.

Certified Financial Planner (CFP): The CFP is a financial planning credential awarded by the Certified Financial Planner Board of Standards, or CFP Board, to individuals who meet the CFP Board’s education, examination, experience and ethics requirements. A professional with a CFP designation should have a broad knowledge of all aspects of financial planning. Subject areas studied include investments, estate planning, retirement planning, insurance and taxes. The designation means the person has passed rigorous examinations and met certain requirements.

Certified Fund Specialist (CFS): A Certified Fund Specialist, or CFS, must have completed a 60-hour self-study curriculum on mutual funds and topics relating to investing in mutual funds and passed a national exam on this curriculum. The coursework is not nearly as rigorous as that for a Certified Financial Planner, who must cover several subjects in-depth, pass a national exam on these topics and meet work experience requirements. CFS training is received through the Institute of Business & Finance. Formerly known as the Institute of Certified Fund Specialists, this organization is located in La Jolla, Calif.

Certified Investment Management Analyst (CIMA): An investment consultant must already have three years of professional experience before being eligible to obtain this certification. The Investment Management Consultants Association, in Greenwood Village, Colo., teaches the CIMA courses.

Certified Life Underwriter (CLU): An adviser with a CLU designation has undergone expanded study in insurance planning. Those studies are also offered by The American College, so many of the planners with a ChFC will also hold a CLU.

Chartered Investment Counselor (CIC): To receive the CIC designation, an individual must already be a CFA. The program focuses on portfolio management and is offered through the Investment Adviser Association in Washington, D.C.

Registered Investment Adviser: All financial planners/investment advisers are required to be registered with the Securities and Exchange Commission. The SEC does not use the acronym “RIA” to avoid the implication that mere registration equals financial expertise.

3. Do a background check

Different financial advisers must abide by different ethical standards. For instance, registered investment advisers, who typically buy and sell stocks for clients, must act solely in their best interests. This is generally regarded as the highest fiduciary standard in the industry. Overseen by the Securities and Exchange Commission, investment advisers must file Form ADV if they manage more than $25 million in assets. Advisers that manage less than that must register with the state securities regulator where the adviser’s principal place of business is located. Form ADV discloses information about any disciplinary actions taken against the adviser, as well as data about services and fees.

Brokers, who are regulated by the Financial Industry Regulatory Authority, or FINRA, must adhere to a looser “suitability standard,” rather than the stricter fiduciary standard. It simply means that brokers must choose products that are suitable for their clients based on age, goals and risk tolerance. On the FINRA site you can conduct a background check on brokers.

The SEC’s Central Registration Depository lists any disciplinary actions taken against brokers and advisers, as well as the firms for which they work. Another good source is the North American Securities Administrators Association, an organization comprising consumer groups, state securities regulators and investment providers dedicated to investor protections. The NASAA published a guide about investment professionals called “Cutting through the confusion” that’s worth reviewing.

The Certified Financial Planner Board of Standards conducts investigations of complaints filed against Certified Financial Planners and lists any disciplinary actions taken on its Web site.

4. Interview several planners

The key in choosing a financial adviser is in finding one who will work to identify your goals and needs and recommend a range of financial products to meet those goals and needs. A stock broker, for example, may not focus enough on your insurance needs, while an insurance agent may focus too much on those needs.

Find the best fit by interviewing several advisers.

Ask key questions. When interviewing advisers, find out what professional designation(s) they hold and learn what it took to earn that designation. Of course, designations alone don’t translate to sound financial advice, so make sure to get references. Always ask for a work history, credentials, education and even possibly a client list. Use this work sheet as a guide.

5. Find out how the adviser gets paid

Whether it is commissions, fees or a percentage of assets under management, the adviser is paid for advice. Understanding how — and how much — an adviser is paid is an important part of establishing this relationship.

Always consider whether a planner’s compensation requirements will interfere with his objectivity. Is he selling you a product because it’s a good product for you or because he gets a larger commission on it? Some commission-based advisers associated with institutions such as brokerage firms or banks might have a quota they need to fill in order to keep their jobs, and the products they’re pushing might not be the best for you.

If your adviser, broker or planner gets paid a commission, it does not necessarily mean that he or she isn’t looking out for your best interests. But the potential for a conflict of interest is greater. With that in mind, don’t be afraid to ask how much the planner is making off a product sale.

Fee structures for financial advisers:
  • Commission-based. Many financial planners earn income through commissions on sales of products, such as stocks, bonds and mutual funds. This model has the weakness of requiring you to be sold something to compensate the planner for his or her time.
  • Combination of commissions and fees. Some planners not only earn commissions from the sale of products but charge a flat fee, or a fee based on a percentage of the assets they manage. The flat fees can range from $500 to $5,000 annually.
  • Fee-only advisers. These advisers do not take commissions, but instead charge either set fees or asset-based fees. Asset-based fees are typically on a sliding scale, with larger accounts paying a smaller percentage of the assets under management. Small accounts are often discouraged through a minimum annual fee. The percentage charged varies from company to company and region to region. A typical fee-based arrangement might be 1 percent of the first million dollars of assets under management, 0.75 percent of $1,000,001 to $2 million, and 0.5 percent for everything over $2 million.
  • Hourly. This option is not as common for a long-term investment relationship. An hourly-fee model has you paying for the time the planner spends on your account. Hourly rates vary, but expect to pay $150 to $300 per hour for basic financial planning.

Lastly, don’t forget about personality. Just as equally qualified doctors can have different bedside manners, so can financial advisers. Make sure that you feel comfortable with the way an adviser explains things to you. After all, it’s your money.