The Perils In Picking A Planner

Quick: Why is personal financial planning like easy-fit jeans and family vacations? Because it's being aggressively sold to baby boomers, whose sheer numbers and rising affluence promise a killing for providers. From mutual-fund marketers to out-of-work stockbrokers, self-styled experts want to help the boomers save for retirement, put the kids through college, and weave a safety net against emergencies. Whether or not you're a member of this generation, you'll do well to arm yourself with information against the onslaught.

Formerly a service aimed mostly at the wealthy, financial planning took off in the mid-1970s and 1980s. One big reason was the proliferation of investment products that caused consumers to seek guidance. Then came financial shocks: the 1986 tax bill, which wiped out dozens of deductions, and the 1987 stock market crash, which wiped out thousands of investors. Now, the shrinking of government and corporate benefits has scared many people into taking charge of their financial security. And few feel qualified to manage their money without professional assistance.

If you're shopping for a planner, the first thing you should know is that the industry is fraught with abuse. By some estimates, 50% to 90% of most financial planners' income is derived from undisclosed commissions on products sold to clients. "There's a poor flow of information," says John Markese, president of the American Association of Individual Investors. Because the industry is only loosely regulated, a planner who advises you to buy, say, a variable-rate deferred annuity has no legal obligation to tell you that he or she may earn 3% to 5% of your premiums.

LOAD PUSHERS. That inherent conflict of interest exists whenever an adviser recommends a "load" product and gets a piece of the load. Insurance policies, real estate partnerships, securities, and mutual funds can all generate rich commissions. Furthermore, the riskier the investment, the bigger the seller's cut. So it's important to ask direct questions about how a planner is compensated before you sign up with one. If you know income is commission-based, ask for a written disclosure statement that describes how much the planner earns for each type of product sold.

Beware of the term "fee-based," which is not the same as "fee-only" compensation. Fee-based planners charge a flat sum for advice plus commissions, or fold the commissions into the up-front sum--like the wrap fees charged by big brokerage houses. Members of the National Association of Personal Financial Advisors are compensated on a fee-only basis, charging either a percentage of assets managed or a time-based flat rate. You can call the association (800 36-NAPFA) for names of fee-only planners in your area. The group also provides a free brochure with questions to ask, especially about disclosure, when interviewing potential planners.

But there's a problem with flat fees, too: They tend to be high, and it's hard to evaluate whether you're getting your money's worth. Averaging 2%-3% of your portfolio value, they make sense only if you do a lot of trading. And don't be fooled if a planner tells you that 3% is a good deal on a portfolio that's returning 30%. "If you make 30%, it usually means you've accepted high risk," says Markese. "You should still demand lower expenses."

Some planners admit the difficulties with fee structures. "I've looked at them all," says George Finnegan, president of Hudson Financial Advisors in Ossining, N.Y., "and they all have pluses and minuses." Finnegan, a registered financial planner who specializes in retirement advice, favors what he calls the low-load approach: emphasizing investment in long-term programs that generate only moderate commissions.

BLOOPERS. Compensation isn't the only pitfall. Again, because of loose regulation, assessing a planner's credentials is next to impossible. The letters after a so-called adviser's name may be more confusing than revealing. "Frankly, I don't think the initials mean a great deal," says Finnegan.

A number of professional organizations bestow different designations on financial planners of all stripes. Members of the Institute of Certified Financial Planners are CFPs, who get licensed by a body called the International Board of Standards & Practices for Certified Financial Planners (IBCFP). Licensees must pass an exam, take continuing education, and have some professional experience.

But CFPs may also be licensed to sell insurance, real estate, or securities, and they may be compensated according to their specialties. "The CFP designation isn't a guarantee of competence or ethics," says Barbara Roper, director of investor protection at the Consumer Federation of America. She points out that math mistakes have been found in the teaching materials at Denver's College for Financial Planning, which administers the two-year, $2,000 curriculum for the cfp's education requirement. Says Roper: "That raises serious questions about the quality of training at what is acknowledged to be the basic course" for financial planners.

Roper adds that although the IBCFP has a code of ethics, its language on fiduciary duty is weak. The board recently reviewed its standards, and the results were disappointing. Instead of requiring full disclosure of compensation, either by dollar amount or percentages, the rules find it acceptable for planners to reveal only very general information on commissions.

CFPs at least spend some time and money to earn their degrees. RFPs, or registered financial planners, can join the Registered Financial Planning Institute and get their designation after two years' experience in any field, from law to banking to accounting, and just 30 hours of accredited course work. There's no restriction on how they are compensated. The International Association for Financial Planning is simply a trade organization. Virtually anyone can fill out an application, pay some dues, and put "member of IAFP" on the stationery.

BIG-NAME ABUSE. The initials to scrutinize are the ones that tip you off to a planner's real profession (table). For example, a registered investment adviser (RIA) has voluntarily registered with the Securities & Exchange Commission: He's a broker who wants to give overall financial advice. A chartered life underwriter (CLU) is a licensed insurance agent, regulated by a state insurance board.

If you don't understand a planner's credentials, do some homework. "You should check disciplinary history through a state regulator, even possibly check up on a few things like education and references," says Roper. And don't assume that because someone is affiliated with a well-known name, either on or off Wall Street, that you're in good hands. Some of the biggest arbitration awards to bilked investors have been paid by blue-blood brokerage houses.

Certified public accountants would seem to be the most benign of financial planners, as they traditionally work for hourly fees. But they are not immune to conflict of interest. In some states, they are allowed to sell securities. Another problem is their conservatism. "Accountants lean so far over backwards to avoid risk that they often don't weigh potential reward," says Finnegan. Finally, keeping up with tax law is a time-intensive job, and not all CPAs are au courant with developments in other fields.

If all these caveats have persuaded you that the only financial planner you can trust is yourself, books and software abound to help you get started. Steer clear of self-help guides to instant riches. The best books are weighty, comprehensive tomes that offer worksheets on cradle-to-grave planning, plus individual chapters on stocks, bonds, insurance, real estate, and other investments. The best computer programs should let you key in a lot of variables--from your age and risk tolerance to your income and expected Social Security earnings--before it spits out its suggestions.

GRAPEVINE. Investing in such educational tools is worthwhile even if you hire a planner. "You have to know enough to recognize bad advice when you hear it," says Roper. "You can't relieve yourself of responsibility." That doesn't mean you have to study every newfangled financial instrument invented. But you should never take a recommendation you don't understand.

Word of mouth from someone you trust is probably the best way to find an honest planner. Your lawyer or accountant, or another professional with whom you have worked, can be a good source of names. High marks from someone you respect are worth more than all the accreditation in the world. And remember that a smart and ethical planner can come from any field. Finnegan, for example, used to edit magazine articles very much like this one.


      These initials          ...stand            ...and mean
      after a planner's           for...          the planner
      name...                                        can...
      CLU                   Chartered life          Sell insurance
                              underwriter           products
                            Chartered financial     Sell insurance
      ChFC                       consultant         products, give advice
                            Registered investment   Sell securities,
      RIA                   adviser                 give advice
      APFS                  Accredited personal     Prepare tax returns,
                            financial specialist    give advice
      RFP                   Registered financial    Be licensed to sell any
                            planner                 number of products
      DATA: BW
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