It's enough to make your head spin: changing tax laws, arcane estate planning rules, skyrocketing college tuitions, and a virtual encyclopedia of investment products. Complicating matters is that everyone from mutual-fund companies, insurers, brokerage firms--even your next-door neighbor--wants to become your trusted adviser. Help!
Unfortunately, because financial planners come from all sorts of professional backgrounds, there is no one degree or license that guarantees skill. And despite its 25-year history, the profession remains loosely regulated. The good news is that things are changing. More colleges offer accredited financial-planning programs. Technology has enhanced the level of service. More important, the explosion of no- and low-load mutual funds and insurance products offers consumers greater choice. So if you know where to look for information and what questions to ask, reliable advice is available.
For most people, an adviser with investment, retirement, and estate-planning knowledge is the answer. These generalists come from a variety of backgrounds--legal, accountancy, brokerage, and insurance. But regardless of what specialized credentials a planner may hold, investment expertise is the major component of any good financial plan. You'll want to find someone who is a registered investment adviser (RIA) with the Securities & Exchange Commission, suggests Jeffrey Rattiner, director of professional development for the Institute of Certified Financial Planners (ICFP). Investment advisers, except in Colorado, Iowa, Ohio, and Wyoming, must also be licensed by the state.
However, these pedigrees alone mean little. Anyone with $150 can register with the SEC as an RIA. But registration makes potential fraud easier to detect and is necessary in the event you ever need to file a complaint. Besides registration, check a prospective adviser's other credentials. The most widely recognized is the certified financial planner (CFP) mark. Standards for the license have improved greatly in the last year. CFPs have a minimum of a bachelor's degree or more than five years of financial-planning experience. They have studied financial planning at an accredited college or university and passed a comprehensive 10-hour exam. The ICFP (800 282-7526) will provide you with a list of CFPs in your area.
PUSHING PRODUCTS? Another financial-planning designation worth exploring is the personal financial specialist (PFS). Only licensed accountants who have had three years of financial-planning experience and passed an exam may use the credential. Contact the American Institute of Certified Public Accountants (AICPA) (800 862-4272) for PFS referrals. An added advantage: All but 18 states prohibit CPAs from accepting commissions. It's usually best to work with a fee-only planner who has no financial stake in the products he or she recommends. For a list of fee-only planners in your area, call the National Association of Personal Financial Advisors (NAPFA) (800 366-2732). About 88% of NAPFA members also are CFPs, but be sure to specify.
Still, getting the scoop on compensation and industry credentials is a bare minimum. The most comprehensive screening service is available from the International Association for Financial Planning's new consumer hotline (800 945-IAFP). The IAFP's database includes a broad range of information on its members, such as their education and areas of expertise and how they charge clients. The more specific your request, the greater the likelihood you will be provided with the names of suitable planners. A free detailed information sheet on each planner will be sent by mail.
Depending on your needs, you may want a planner with a few additional letters tacked after his or her name. Some estate-planning or elder-care problems may require an attorney or insurance specialist. One source of help: the American Society of Chartered Life Underwriters & Chartered Financial Consultants (800 392-6900). But remember, some specialists may have a slight bias in favor of the products or solutions they know best.
DISCLOSURE FORM. With a list of suitable candidates, you're ready to interview. Any planner worth the money will offer a free consultation, says the ICFP's Rattiner. Before you sit down and meet, ask prospective planners for a copy of their adviser disclosure form--better known as an ADV--Parts 1 and 2. Part 1 alerts you if the planner has had any legal or financial problems. The second part may reveal if an adviser is conducting another business on the side or accepts commissions.
The best way to find out a planner's area of expertise is to ask for profiles of long-time clients. "Most people are happiest when they can find a planner whose practice consists of a lot of people whose situations are similar to their own," says IAFP Executive Director Janet McCallen. Besides, a planner who claims to serve all kinds of clients may be dishonest, inattentive, or both.
When it comes to investment management services, ask what the planner's average and minimum account size is. "If you have $1 million to invest and a planner tells you their average account is $50,000, they may not be sophisticated enough," suggests Kaycee Kristy, head of the AICPA's division of personal financial planning. If the amount is far greater than what you have to invest, you might be considered a second-class citizen in their practice. A reputable adviser will turn you away if it's not a good match.
GET INVOLVED. Next, get a sense of their investment philosophy in plain English. While a planner won't be able to tell you what specific investments are right for you in this initial meeting, you should walk away with an understanding of the types of assets and the methodology being used.
During the first meeting, you also will want to request a sample financial plan. Good advisers will be able to show you a real-life example--the name of the client will be kept confidential--of the kind of work they will be able to do for you. Find out how often you can check in with the planner and whether you'll be charged for follow-up visits. Although you may be tempted to hand over your money and let the expert take charge, choose a planner who will actively involve you in the process so you understand exactly what's going on, says Bob Wacker, a fee-only planner in San Luis Obispo, Calif.
Because the chief purpose of working with a financial planner is to map out a long-term strategy, be skeptical of a planner who is aggressively pushing today's hot investments. Too many financial planners believe their job is to find this year's best funds, says Don Chambers, a principal of Mercer Global Advisors, a fee-only financial-planning firm in Santa Barbara, Calif. Some of the best-performing--and lowest-cost--funds on the market are not household names. These may be institutional funds not easily accessible to individual investors because of their high investment minimums. Most planners are affiliated with mutual-fund marketplaces such as Schwab Institutional and Fidelity Investment Advisor Group, which allow them to put your money into funds you couldn't purchase otherwise.
If your financial plan involves more than purchasing a few mutual funds, find out if the person you are considering works with other professionals. Do they have access to estate-planning attorneys, employee-benefit counselors, or tax experts? "We are trying to create the equivalent of a general practitioner who calls on specialists," says John L. Steffens, head of Merrill Lynch's private client group.
Licenses and credentials are important, of course, but as with a doctor, the most important element is how confident you feel with that person. "When it comes to your finances, it's worth searching for an adviser you can trust," Wacker says. And by asking a prospective candidate the right questions, your search need not seem as complicated as brain surgery.