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Seven Steps to Finding a Financial Planner from Morningstar
Seven Steps to Finding a Financial Planner by Christine Benz | 01-11-05 | 06:00 AM
Maybe you need help solving a particularly knotty financial problem, such as exercising your company stock options without getting murdered on taxes. Or perhaps
your portfolio's bear-market performance was so poor and its rebound so lackluster, that you've realized you need guidance to get it back on track.
Or maybe, to paraphrase the title of a current bestseller, you're just not that into it.
Whatever the reason, you've decided to seek the help of a financial planner. I'm not going to try to talk you out of it. True, I believe that many individual investors can
assemble perfectly decent portfolios on their own, provided they take the time to educate themselves on the basics of investing. (That is the purpose of The Short
Answer, after all!) But if you have no time, interest, or aptitude for financial matters and many very smart people fit one of those descriptions, I'll be the first to
concede that you're better off leaving your investment planning to someone who does.
Unfortunately, your work isn't over once you've decided to ask for outside help. Certain Web sites, including www.fpanet.org and www.napfa.org, can help you find a
financial planner in your geographic area, and you might also consider asking friends and relatives if they've found a planner they trust. But even if a financial
professional comes highly recommended, you owe it to yourself to conduct your own due diligence to ensure that the person is a good fit for you and your goals.
Here are some key steps to take as you go about evaluating whether a certain planner is right for you or not.
1. Determine what you're trying to accomplish.
Before you set out to find a planner, an essential first step is determining your goals. Are you looking for assistance with every stage of your financial life, from
selecting insurance to investment planning to managing your taxes? Or are you seeking help with a specific problem, such as a one-time portfolio overhaul?
Knowing how much or how little assistance you need will go a long way toward finding the right person to help you reach that goal.
2. Understand the different types of advice.
Wealth manager. Financial consultant. Financial planner. Welcome to the Wild West of financial advice.
Because there are currently very few regulations surrounding the credentials one needs to proffer financial advice, don't let a fancy title lull you into a false sense of
security. Certain individuals calling themselves financial planners are primarily in the business of selling securities and may have little substantive educational
background in providing financial advice. Additionally, they are not necessarily bound by a fiduciary duty to put you in the best investments for your needs.
In a similar vein, you shouldn't be unduly impressed if there's an alphabet soup of designations following a certain individual's name. Some financial planning
related designations require an extremely rigorous course of study and ongoing education, while others do not.
Finding an individual with the right background and educational experience gets back to what you're trying to accomplish. If you're seeking broad financial-planning
assistance, your best bet is to seek out a Certified Financial Planner (CFP), a Chartered Financial Consultant (ChFC), or a Certified Public Accountant-Personal
Financial Specialist (CPA-PFS). Individuals who have earned the right to use one of those designations have passed a series of courses and/or exams relating to
a broad range of financial-planning topics, including taxes, investments, and insurance.
If your planning needs are more focused, you might seek out individuals whose designations relate specifically to that area. For example, if you need tax-planning
help, look for a Certified Public Account (CPA) or enrolled agent. If you're looking for someone with specific expertise in analyzing individual securities, you'll
probably want to look for someone who has earned the right to use the Chartered Financial Analyst (CFA) designation. Many financial professionals have earned
more than one of these designations, and many large financial-planning firms employ individuals with a broad range of specialties and designations.
3. Check up on regulatory and disciplinary history.
In addition to checking up on credentials, take the time to make sure that any planner you're considering has never faced disciplinary action for unlawful or
unethical behavior in his or her profession. Unfortunately, this can be tricky work, as not all planners and advisors are regulated by the same entities. Registered
investment advisors must file what's called a form ADV with either the state or the SEC. In it, you can see details about the advisor's practice as well as any past
regulatory transgressions. The NASD's Web site also has a handy tool that lets you view a given broker's employment history and find out if he or she has ever run
afoul of NASD regulations.
4. Assess experience level.
In addition to making sure that an individual has completed a rigorous course of study in financial planning and hasn't run afoul of regulators, you'll also want to
interview prospective planners to ensure that they've had hands-on experience with your specific problem or issue. How long has the individual been in practice?
Does the profile of his or her typical client match yours? Ask the planner to provide you with references. Call those references. True, few planners will give you the
names of any dissatisfied clients. But by asking clients what type of advice the planner provided and whether they were satisfied with it, you'll have a better sense of
whether that planner is a good fit for you and your needs.
5. Understand the costs.
Figuring out how much good financial advice will cost you is almost as confusing as discerning what the various designations mean. In general, planners and
advisors get paid in one of three ways. First, they can charge you a percentage of your assets on an ongoing basis (say, 1% a year, not including brokerage costs
or any expenses associated with mutual funds). Other planners charge a dollar rate on a per-job or hourly basis. Finally, others earn commissions on any products
they sell you. Some planners may use a combination of these fee structures for example, a planner might charge you an hourly rate to set up your plan and also put
you in funds on which he or she earns a commission.
Knowing which fee structure makes the most sense for you relates directly to your needs and what you're trying to accomplish. If you're seeking soup-to-nuts asset
management on an ongoing basis, it may be more cost-effective to pay your advisor an annual percentage of your assets rather than paying for advice a la carte. If,
however, you need help with a focused goal say, a one-time portfolio overhaul you may want to seek out a planner who charges a flat fee. If you're not investing a
huge sum of money, it may be more cost-effective for you to pay for financial-planning advice via commissions.
When interviewing prospective planners, don't be shy about asking for details about how they're compensated. You should also feel comfortable asking for an
estimate of the costs of any work to be performed. Insist that the estimate be inclusive of any commissions the planner will earn when buying and selling the
specific securities he or she is recommending.
6. Ask about investment approach.
If you're seeking help with your investments, ask the planner some questions about his or her investment philosophy. What criteria does he or she use to pick
individual securities? It can be a red flag if the planner is focusing strictly on past performance and not considering more fundamental factors, such as the quality of
the fund family or manager. What role do expenses play in the advisor's fund selection? (If the answer is "none," that's another red flag.) What would prompt the
planner to sell a given fund? Does he or she employ a buy-and-hold philosophy or trade frequently? (I'm definitely biased toward buy-and-hold strategies, as I've
rarely encountered investors who can add value by trading frequently.)
7. Weigh the intangibles.
Last but not least, ask yourself how well you and this person click on a personal level. No, your planner needn't be someone you'd want to hang out with in your free
time. But you should feel that you can trust this person. If you don't, move on to someone you can.
Christine Benz is Morningstar's associate director of fund analysis and editor of Morningstar Mutual Funds. She can be reached at
christine_benz@morningstar.com.
Maybe you need help solving a particularly knotty financial problem, such as exercising your company stock options without getting murdered on taxes. Or perhaps
your portfolio's bear-market performance was so poor and its rebound so lackluster, that you've realized you need guidance to get it back on track.
Or maybe, to paraphrase the title of a current bestseller, you're just not that into it.
Whatever the reason, you've decided to seek the help of a financial planner. I'm not going to try to talk you out of it. True, I believe that many individual investors can
assemble perfectly decent portfolios on their own, provided they take the time to educate themselves on the basics of investing. (That is the purpose of The Short
Answer, after all!) But if you have no time, interest, or aptitude for financial matters and many very smart people fit one of those descriptions, I'll be the first to
concede that you're better off leaving your investment planning to someone who does.
Unfortunately, your work isn't over once you've decided to ask for outside help. Certain Web sites, including www.fpanet.org and www.napfa.org, can help you find a
financial planner in your geographic area, and you might also consider asking friends and relatives if they've found a planner they trust. But even if a financial
professional comes highly recommended, you owe it to yourself to conduct your own due diligence to ensure that the person is a good fit for you and your goals.
Here are some key steps to take as you go about evaluating whether a certain planner is right for you or not.
1. Determine what you're trying to accomplish.
Before you set out to find a planner, an essential first step is determining your goals. Are you looking for assistance with every stage of your financial life, from
selecting insurance to investment planning to managing your taxes? Or are you seeking help with a specific problem, such as a one-time portfolio overhaul?
Knowing how much or how little assistance you need will go a long way toward finding the right person to help you reach that goal.
2. Understand the different types of advice.
Wealth manager. Financial consultant. Financial planner. Welcome to the Wild West of financial advice.
Because there are currently very few regulations surrounding the credentials one needs to proffer financial advice, don't let a fancy title lull you into a false sense of
security. Certain individuals calling themselves financial planners are primarily in the business of selling securities and may have little substantive educational
background in providing financial advice. Additionally, they are not necessarily bound by a fiduciary duty to put you in the best investments for your needs.
In a similar vein, you shouldn't be unduly impressed if there's an alphabet soup of designations following a certain individual's name. Some financial planning
related designations require an extremely rigorous course of study and ongoing education, while others do not.
Finding an individual with the right background and educational experience gets back to what you're trying to accomplish. If you're seeking broad financial-planning
assistance, your best bet is to seek out a Certified Financial Planner (CFP), a Chartered Financial Consultant (ChFC), or a Certified Public Accountant-Personal
Financial Specialist (CPA-PFS). Individuals who have earned the right to use one of those designations have passed a series of courses and/or exams relating to
a broad range of financial-planning topics, including taxes, investments, and insurance.
If your planning needs are more focused, you might seek out individuals whose designations relate specifically to that area. For example, if you need tax-planning
help, look for a Certified Public Account (CPA) or enrolled agent. If you're looking for someone with specific expertise in analyzing individual securities, you'll
probably want to look for someone who has earned the right to use the Chartered Financial Analyst (CFA) designation. Many financial professionals have earned
more than one of these designations, and many large financial-planning firms employ individuals with a broad range of specialties and designations.
3. Check up on regulatory and disciplinary history.
In addition to checking up on credentials, take the time to make sure that any planner you're considering has never faced disciplinary action for unlawful or
unethical behavior in his or her profession. Unfortunately, this can be tricky work, as not all planners and advisors are regulated by the same entities. Registered
investment advisors must file what's called a form ADV with either the state or the SEC. In it, you can see details about the advisor's practice as well as any past
regulatory transgressions. The NASD's Web site also has a handy tool that lets you view a given broker's employment history and find out if he or she has ever run
afoul of NASD regulations.
4. Assess experience level.
In addition to making sure that an individual has completed a rigorous course of study in financial planning and hasn't run afoul of regulators, you'll also want to
interview prospective planners to ensure that they've had hands-on experience with your specific problem or issue. How long has the individual been in practice?
Does the profile of his or her typical client match yours? Ask the planner to provide you with references. Call those references. True, few planners will give you the
names of any dissatisfied clients. But by asking clients what type of advice the planner provided and whether they were satisfied with it, you'll have a better sense of
whether that planner is a good fit for you and your needs.
5. Understand the costs.
Figuring out how much good financial advice will cost you is almost as confusing as discerning what the various designations mean. In general, planners and
advisors get paid in one of three ways. First, they can charge you a percentage of your assets on an ongoing basis (say, 1% a year, not including brokerage costs
or any expenses associated with mutual funds). Other planners charge a dollar rate on a per-job or hourly basis. Finally, others earn commissions on any products
they sell you. Some planners may use a combination of these fee structures for example, a planner might charge you an hourly rate to set up your plan and also put
you in funds on which he or she earns a commission.
Knowing which fee structure makes the most sense for you relates directly to your needs and what you're trying to accomplish. If you're seeking soup-to-nuts asset
management on an ongoing basis, it may be more cost-effective to pay your advisor an annual percentage of your assets rather than paying for advice a la carte. If,
however, you need help with a focused goal say, a one-time portfolio overhaul you may want to seek out a planner who charges a flat fee. If you're not investing a
huge sum of money, it may be more cost-effective for you to pay for financial-planning advice via commissions.
When interviewing prospective planners, don't be shy about asking for details about how they're compensated. You should also feel comfortable asking for an
estimate of the costs of any work to be performed. Insist that the estimate be inclusive of any commissions the planner will earn when buying and selling the
specific securities he or she is recommending.
6. Ask about investment approach.
If you're seeking help with your investments, ask the planner some questions about his or her investment philosophy. What criteria does he or she use to pick
individual securities? It can be a red flag if the planner is focusing strictly on past performance and not considering more fundamental factors, such as the quality of
the fund family or manager. What role do expenses play in the advisor's fund selection? (If the answer is "none," that's another red flag.) What would prompt the
planner to sell a given fund? Does he or she employ a buy-and-hold philosophy or trade frequently? (I'm definitely biased toward buy-and-hold strategies, as I've
rarely encountered investors who can add value by trading frequently.)
7. Weigh the intangibles.
Last but not least, ask yourself how well you and this person click on a personal level. No, your planner needn't be someone you'd want to hang out with in your free
time. But you should feel that you can trust this person. If you don't, move on to someone you can.
Christine Benz is Morningstar's associate director of fund analysis and editor of Morningstar Mutual Funds. She can be reached at
christine_benz@morningstar.com.
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