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finding a financial planner

The time and research you should put in to finding a financial planner is no different than the time and research you should put into finding a good family doctor. You are looking for someone you can trust and guide your financial health, after all. But how should you start your search? According to the National Association of Securities Dealers (NASD) there are no fewer than 69 different financial credentials that you may run into. This article will attempt to help you narrow down your search before you even pick up the phone and start calling prospective planners.

 
As with a family doctor, the best place to start your search is referrals from friends and family and ask who they work with. The best planners out there will tell they get the majority of their new clients from referrals. You can also use the internet to look for planners in your area. A few websites out there provide good starting points: www.fpanet.org and www.napfa.com. The FPA website includes planners who are fee-only, fee-based, or commission-based. The National Association of Personal Financial Advisors (NAPFA) website only includes those planners who adhere to a fee-only compensation model. All three compensation models will be explained below.

When deciding what type of planner best fits you and your family’s finances there are four areas to consider: credentials, experience, how they are compensated, and to what regulatory standards must they adhere to.

Credentials


Of all the credentials in the financial world, the four most common are CFP, CPA-PFS, ChFC, and CFA.

  1. Certified Financial Planner (CFP) – 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 including investments, estate planning, retirement planning, insurance and taxes. The designation means the person has passed rigorous examinations and met certain requirements.
  2. Certified Public Accountant – Personal Financial Specialist (CPA-PFS) – CPAs, by trade, have a more extensive background in tax issues. A PFS designation is awarded by the American Institute of Certified Public Accountants to CPAs who have taken additional training or already hold a CFP or ChFC designation.
  3. Chartered Financial Consultant (ChFC) – Earned through The American College in Bryn Mawr, PA, and designees tend to work in the insurance industry. A professional with the ChFC designation should have a broad knowledge of all aspects of financial planning, including investments, estate planning, insurance and taxes. The designation means the person has passed rigorous examinations and met certain requirements.
  4. Chartered Financial Analyst (CFA) – Awarded by the CFA Institute to experienced financial analysts who successfully pass three examinations covering economics, financial accounting, portfolio management, securities analysis, and ethics. CFAs are more likely to work for mutual fund companies, institutional asset management firms, or pension funds. CFA charter holders are annually required to affirm their commitment to high ethical standards.

 

Experience

With the impending onslaught of baby boomers nearing and entering retirement, the financial planning profession has become a second-career choice for many planners out there today. You will want to keep this in mind when you interview potential planners. Ideally, the planner has been in the profession for more than five or ten years and has an educational background in the profession. The number of colleges actually offering degrees in Personal Financial Planning and Counseling has exploded over the past decade. One of the most well-known programs today is right up the road in Lubbock, TX at Texas Tech.

Compensation

Understanding how – and how much – a planner is paid is an important part of establishing the relationship. Always consider whether a planner’s compensation requirements will interfere with their objectivity when it comes to your financial plan.

There are three general compensation categories that a planner will fall into: commission-based, fee-based, or fee-only.

Commission Based – Planners in this category earn their paycheck through commissions on sales of products, such as stocks, bonds, mutual funds, and insurance. Some commission-based advisors associated with banks or brokerage firms may have sales quotas they need to fill in order to keep their jobs, and the products they are recommending may not be the best option for you. If the planner is paid a commission it does not necessarily mean they are not looking out for your best interests. But the potential for conflict of interest is greater.

Fee-Based – Planners in this category usually have their compensation based on a flat fee or percentage of money under management as well as commissions on sales of products such as stocks, bonds, mutual funds, and insurance.

Fee-Only – Planners in this category do not sell any commission-based product, instead charging an agreed-upon flat fee or a percent of assets under management. It is argued that removing any incentive to buy or sell a particular investment for a client also removes any conflict of interest and the planner is making their recommendations based on what is best for the client, not the planner.

Which compensation model is the best? I’m willing to guess that planners in each category will make their argument as to why theirs is more advantageous to their clients. In the end, you must be not only comfortable with how your planner is compensated, but you should have an understanding as to how much they are being paid for each recommendation they make. If they do not volunteer that information to you, simply ask! If they value you as a client they will have no issues in providing that information.

Regulatory Standards

Financial planners will fall under one of two standards with their clients. These two standards are “suitability” and “fiduciary”.

Brokers, also known as ‘registered representatives’ may call themselves financial planners but they are basically employees of a stock exchange member firm who act as account executives for their clients. These brokers fall under the jurisdiction of the self-regulatory Financial Industry Regulatory Authority (or FINRA) and are held to a less stringent “suitability” standard. This means their recommendations must be “suitable” to their clients (e.g. be in line with the client’s risk tolerance and long-term goals). Therefore, a broker is legally free to recommend an investment that pays his firm (and himself) a higher commission over a similar lower-cost fund as long as the investment is suitable to the client’s situation.

In stark contrast, planners held to a “fiduciary” standard could not do that. If held to a fiduciary standard the planner, by law, must place the client’s interests first. CFPs and Registered Investment Advisors (RIA) are held to the strict fiduciary standard. (Registered Investment Advisors are simply planners who are not employed by, nor have any affiliation with, brokerage firms or other financial institutions, and must register with the U.S. Securities and Exchange Commission and/or state regulators)

If you are comfortable with your planner not being held to a fiduciary standard, at least ask them to explain precisely the reasons for their recommendations, including what’s in if for them.

In Summary

Finding a financial planner for your family ultimately comes down to trust. Regardless of the planner’s association to a certain firm, their compensation structure, or experience you must feel a strong connection between the two parties. Your relationship with a financial professional is, above all things, a partnership. It is worth taking the added time to find the right planner upfront because you want this relationship to last a lifetime.

Matthew T. Russell, CFP®
President, MTR Financial Services, LLC
www.mtrfinancial.com