A Certified Financial Planner can help you and your family save more money over the years or even decades. They can help you make the kind of smart financial decisions that will help you get out of debt or retire early. The wrong one, however, can cause you a world of trouble. A successful relationship with a financial planner will be a long-term one, and that means you should do your homework before choosing one.
If this is your first time picking a financial planner, you may be wondering exactly what you need to know before settling on your choice. There are several questions you will want to ask anyone you are considering, and this article will cover several of the most important ones.
1. Are You a Fiduciary?
A fiduciary is defined as a trustee, someone whom you can place your faith in. So you should ask this question hoping the answer is “Yes.” Fiduciaries earn their living solely from fees paid by their clients. This means that their income is tied directly to their clients. They do not earn money if you do not earn money, so they will work that much harder on your behalf.
Non-fiduciaries make their living from commissions earned when you agree to use certain financial products. Their loyalty will always be to these products, which leaves plenty of room for conflicts of interest. A non-fiduciary may make more money by offering you a certain product even if that product will cost you more in the long run than another option. If you want to keep as much of your money as possible, you will want to work with a fiduciary rather than a non-fiduciary.
2. How Long Have You Been Practicing?
When you enter into a relationship with a financial planner, you are handing over control of your savings to that person. You definitely do not want to give that kind of control to a rookie. Look for someone with at least four years of experience as a Certified Financial Planner.
Some planners may have experience in other industries, such as banking or mortgage. This experience does not necessarily translate to the realm of financial planning though. Your planner will need to have a wide breadth of knowledge on various investments and how they affect one another. It might be tough, but when it comes to your savings, you should set a high bar of experience for any potential planner to clear.
3. How Do You Get Paid?
This question goes hand in hand with the first entry on this list. A non-fiduciary may try to answer it with boilerplate like, “You won’t pay any fees.” If you want to keep things clear and simple, pick fee-only planners to interview. “Fee-only” means they earn income only through the fees their clients pay them.
Some planners will advertise themselves as “fee-based,” which means they earn money through a combination of fees and commissions. If you meet with a fee-based planner, ask them to explain the different ways they get paid. If you can’t understand their answer or feel they are trying to obfuscate, they may earn a significant portion of their income through commissions. This will cost you more in the long run. The right financial planner will be able to clearly and transparently explain how they get paid.
4. Have You Ever Been Sued?
If the financial planner you are meeting with tries to dodge this question or answers in the affirmative, it is time to head for the door. It means they have mistreated, misled, or otherwise failed clients in the past. You do not want to be next.
One way to avoid this situation is to get references for potential planners. You may choose to only meet with people you have been referred to by family, friends, and trusted colleagues. You can even ask the planners you meet with for contact information for a few of their clients. That way, you can gather a little more information directly from people who already work with the planners you are considering. This is a great way to ensure you only meet with trustworthy planners.
5. What Services Do You Perform?
Before visiting any potential financial planner, you should first consider what you want your eventual choice to do for you. Are you looking for someone to manage your investment portfolio? Are you looking for a more hands-on approach with a planner who will help you with your taxes, retirement and estate planning, and insurance? Understanding what you want before the meeting will help you make the right decision.
Another way to ask this question is to ask who a typical client is. That way, you can see if your needs align with the needs of the kinds of people your potential planner normally works with. A planner who is used to your situation will be more effective than one with little experience in your areas of need.
6. What Do You Charge/Total Costs?
Fees paid to your financial planner are only one part of your all-in costs. There are other fees involved, and you should make sure you know what they are before you settle on someone.
If you are not paying attention, even fees that seem small could end up taking you to the cleaners. You stand to lose as much as half of your net worth if you end up with predatory fees, so be careful and make sure you know what every fee means and how it will affect your bottom line.
7. Who Is Your Custodian?
A trustworthy financial planner will have an independent custodian on hand to hold your investments. A custodian like Fidelity will also give you an important safety check on your chosen planner: they can send you a statement, and you can easily go online and check it against your Fidelity statement.
In a worst-case scenario, a planner who acts as their own custodian can leave you open to fraud. There is a very famous example of a planner who did this very thing, taking millions from his clients: Bernie Madoff.
8. What Asset Allocation Do You Use?
Asset allocation refers to how your investments are spread across various categories: stocks, bonds, and cash. It is how you create a diversified portfolio, and it drives the bulk of your returns. You want a financial planner who knows how to diversify; beware of anyone who plans to invest chiefly in large US-based companies, for example. Look for someone who will invest in both international and domestic stocks, and in companies of all sizes.
The diversification of your assets will also depend on what stage of life you are in. If you are young and looking for your first house, for example, pouring all of your money into bonds will not be as helpful as keeping more cash on hand. If you are twenty or thirty years out from retirement and looking to build a strong nest egg, a diversified stock portfolio might be the right plan.
9. What Investments Do You Recommend?
A good financial planner will want to invest your money in things like index funds, highly rated bonds, CDs, and money markets. If they respond with investments like managed funds, reverse mortgages, and individual stocks, you might be dealing with someone who has conflicts of interest. Hedge funds, directly owned real estate property, and high-cost annuities should also be red flags.
If you are visiting a financial planner because all the above terms are foreign to you, it is best to bring along someone who can explain them to you or write them down so you can ask someone about them later.
10. Do You Think You Would Be a Good Financial Planner for Me?
The right financial planner will share the same goals and philosophies as you. They will listen closely, answer your questions, and explain how they will help you achieve what you want to achieve. If you two are not on the same page, this question should make that clear. If you are still on the fence, ask them why they think they are the right person for the job.
This might seem like a lot of questions, but your life savings are on the line when you choose a financial planner. The right pick will welcome these questions and appreciate that you are knowledgeable, know what you want, and that you did your homework. They will share your values and goals and be eager to help you grow your nest egg, not trying to sell you on financial products and services.Approach this process less like a potential customer and more like a hiring manager: you are hiring someone to be the Chief Financial Officer of your life. Take notes, shop around, and do not commit to anyone until you have gone through all of your options. You are onboarding someone who will help you work toward your financial goals for years to come. It is not a decision to take lightly.