The Financial Planning Association website has a very useful section called “Choosing a Planner,” which begins by stating:
Choosing a financial planner is as important as choosing a doctor or lawyer; it's a very personal relationship. In addition to competency, a financial planner should have integrity, trust and a commitment to ethical behavior and high professional standards. You want a planner who puts your needs and interests first.
This is great advice, but finding a financial planner meeting those criteria can be difficult. How do you know that a prospective planner is well qualified? The FPA PlannerSearch tool is a great start, and FINRA's Broker Check is another good tool. Too many consumers are harmed by unqualified advisers that are incompetent or unethical, and asking the right questions can identify well qualified planners.
What to look for:
- Credentials that demonstrate competence. Credentials are not everything, but they do provide a starting point for evaluating competence. For example, CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioners are required to pass rigorous exams and fulfill work experience requirements before obtaining the designation. CFP® practitioners are also required to adhere to a fiduciary standard, a client-centered code of ethics, and continuing education requirements. Other meaningful designations include the CFA, CPA/PFS, CLU, and ChFC. There are, however, dozens of other designations. Don't be swayed by letters, unless they actually mean something.
- A clean Broker Check record. If a planner holds a securities license, or has within the previous 10 years, FINRA BrokerCheck will allow you to view employment history, as well as any disciplinary action and customer disputes that have been reported. Unfortunately, not everything gets reported. Some matters can be settled before being reported to FINRA.
- Membership in professional associations. Many planners invest time in one or more professional organizations, such as the Financial Planning Association. If an adviser is not a member, you should ask why. These professional associations provide valuable opportunities for continuing education and professional development.
- Adherence to a fiduciary standard. There is an ongoing debate as to whether all financial advisers should be required to adhere to a fiduciary standard, where the client’s interest must be placed first. Currently some advisers are only required to uphold a suitability standard, which merely requires that recommendations are suitable and consistent with a client’s risk tolerance and time horizon. There is more potential for conflicts of interest under a suitability standard, because advisers are allowed to recommend “suitable” investments that place the adviser’s interest ahead of the client’s. There may be six “suitable” investments for you, and under a suitability standard the adviser can recommend the most expensive investment that is not in your best interest.
According to an Investment News article, Opinion Research Corp./Infogroup conducted a survey of 1,319 investors, and “97% said that financial professionals should put investor interests ahead of their own and disclose fees and conflicts of interest, the standard to which investment advisers adhere.”
- Expertise, not size. The recent financial crisis has cast doubt on whether a firm’s size is indicative of expertise and sophistication. Regardless, many publications still rank firms and advisers based on their size, even though there is no connection between size and expertise. Expertise is really what you should be paying for.
- A compatible adviser that is easy to work with. If a relationship does not feel right, it is not going to work. Do not be swayed by a "sales" personality. Many advisers focus on sales more than anything else. An adviser with a large book of business may be a great salesman, but not necessarily a great financial planner.
What to avoid:
- A product-centered adviser. Some advisers will try to sell you products before knowing much about you. One size does not fit all.
- Products that seem too good to be true. If something sounds too good to be true, then it probably is too good to true.
- Products which are difficult to understand. You should not invest in anything that is too exotic or complicated to understand.
- Dinner seminars. Expensive products with big commissions are often pitched at dinner seminars.
- Recommendations to switch insurance policies. Sometimes the best course of action is to switch to a new policy, but there are advisers that will recommend a switch because they benefit, not you. If the benefit of switching policies is not absolutely clear, do not make the switch.
- Lack of liquidity. Be cautious with recommendations that involve financial penalties if you need to access your money.
By FPA member Tim Sobolewski, CFP®, The Financial Planning Center, Amherst, NY.