Explainer: How to choose a financial planner
Here’s a question we get asked a lot on Marketplace Money: What’s the best way to choose a financial planner?
There’s no easy answer to this — a lot depends on your net worth and your needs. But the first step is to understand what’s out there in the financial planning world. Recently we invited Louis Barajas on the show. He gave us perhaps the most succinct breakdown of the financial planning world that we’ve heard yet. You can listen to his explanation here, or read on…
There are three kinds of financial advisers.
1. Commission-based
These advisers may not charge you a fee, but instead, they are paid commission on the products that they sell. In other words, they have a conflict of interest — the more commission-based products they sell, the more they get paid, so they have an incentive to sell you products. And the bigger the commission that comes with the product, the more they make. That’s not to say that the products they’re selling are necessarily bad, just that you should be aware of how your adviser gets paid, and who the adviser is really helping when he or she sells you on one of these products.
2. Fee-based
These people both sell you commissionable product AND charge you a fee to manage your money. So there’s less incentive to put you into a commission-based product.
3. Fee-only
These advisers don’t sell products; they don’t get paid commission; they don’t get referral fees for referring you to other agents. In other words, they don’t have any conflicts of interest. They tend to charge by the hour, although some may have different payment structures, depending on how you want them to help you, and what areas you need help with — such as taxes, real estate or legal issues.
Fee-only advisers are a bit like the Holy Grail of financial helpers. There aren’t that many of them out there, and they can be tough to find. Start with NAPFA, the National Association of Personal Financial Advisors, but also ask around — a personal referral is always good to get.
OK, you’ve got a name (or names). Now what?
1. Check their credentials
Is your adviser a Certified Financial Planner? They should be. They should be able to show you a certificate, but if they don’t, and you’re too shy to ask, you can check their bona fides by checking on the CFP Board of Standards website. The Find a Certified Financial Planner feature allows you to search by name. You’ll find out first if the adviser is registered as a CFP, and secondly if there have been any compliance issues with them.
But just because her or she is a CFP doesn’t mean they’re qualified to give good advice. So ask your adviser whether he or she is a Registered Investment Adviser. You can check them out with the financial industry’s regulatory body FINRA. Run a BrokerCheck search at FINRA.org and it’ll allow you to confirm your adviser has the requisite qualification, and whether they’ve had any compliance or other issues you’ll need to worry about.
2. Get references
A good adviser will not be afraid to provide you with names of other clients. Call them, and grill them. Ask how responsive the adviser is; how punctual; how much of a stickler he or she is when it comes to timekeeping; how good they are at running the basics of their own business (you don’t want to go with an adviser who can’t even run their own business properly).
3. Determine whether they’re a good fit for you
Your financial adviser is about to get to know you very well indeed. You’re about give him or her some of the most intimate details of your life. Are you cool with that? Take a long look at the person across the table from you. She’s all good on paper; she has a good track record; she looks 100 percent. But how does your gut feel about her? Is she irritating? Overbearing? Is she a little scatter-headed? Or too much of a people-pleaser? Is she too risk-averse, or too wiling to take risks? Are you going to be comfortable discussing your money issues and taking advice from this person? Be honest. If your instinct tells you this is not going to be a relationship you’re comfortable with, then look elsewhere. After all, you’re about to embark on a highly intimate partnership with another human being; perhaps one of the most important partnerships you’ll ever have.
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