Subject: Financial Planning - Choosing a Financial Planner

Last-Revised: 20 Apr 1998
Contributed-By: James E. Mallett (jmallett at

Virtually anyone with moderate wealth or a decent income could benefit from the services of a financial planner. By a financial planner, I mean someone with the expertise to produce a comprehensive financial plan for an individual household. This plan should cover the household's financial goals, budget, insurance and risk review, asset allocation, retirement plan, and a review of an estate plan. Such detailed planning is unlikely to be meet by brokers and agents interested in commissions on financial products they sell.

A financial planner has a broad knowledge of areas such as tax planning, investments, and estate law but is unlikely to be the financial professional you require in these individual areas. Rather the financial planner can help coordinate your financial planning with your accountant, insurance agent, investment professional, and estate lawyer. The broad expertise that a professional financial planner possesses will help insure that your financial goals are met and that all areas of your financial life are reviewed.

Hiring a planner will help you avoid expensive financial mistakes that could seriously damage your financial health. It would not be difficult for most financial planners to find serious gaps in most household finances, gaps that are easily worth the cost of the

planner's services. Even individuals with expert knowledge in one finance field such as investments can overlook areas such as insurance or estate planning. Few people have the time, desire, or expertise to do a complete financial plan for themselves.

Saying that most would benefit from using a financial planner is not to imply that there are not wide differences in abilities and costs among planners. Few areas will pay richer rewards for the public than gaining basic knowledge in personal finance. If one is not careful, fees and commissions could negate much, if not all, of the benefit of using a financial planner. This article lists a few issues to consider when choosing a financial planner.

The first step in looking for a financial planner is to limit your search to someone who is certified in financial planning. Two certifying associations that I would recommend are the Certified Financial Planner and the Personal Financial Specialist (given to qualifying Certified Public Accountants). The second step is to seek out recommendations from people that you respect for names of financial planners and interview these planners. Your aim is to find someone who meets your needs and who will look after your interests. A problem that exists in selecting financial professionals is that what is in your best interest may fall a distant second to what is in their interest of making a profit.

The third question you need to ask is how does the financial planner receive compensation and what will this compensation cost you annually. In calculating the costs, one must consider fees, commissions, transaction costs, and (if any) what are the annual fees of the financial products that they recommend (such as mutual fund management fees). It is quite possible that after adding sales loads and management fees, the after-expense return that you receive from equities will not justify the risk. Recent high market returns have served to mask the fleecing of many American investors.

Financial planners fall into two broad types: fee-only financial planners and commission and/or fee-based financial planners. While some give the nod automatically to fee-only financial planners, it will depend on your particular circumstances as to which one will be best for you.

If you only need a comprehensive financial plan and you are willing to invest your funds yourself, than a fee-only financial planner who charges by the hour may be your best choice. If you want the financial planner to manage your money, than many fee-only financial planners have moved to an asset-based fee, normally 0.5% to 1.5%, of your assets. Two factors should be kept in mind. One is that this fee is charged annually. Second, most financial planners put your funds to work in a mutual fund and that means you continue to pay the mutual fund another management fee annually. Since evidence and theory suggest that none of these efforts will result in outperforming an index mutual fund, one might wonder why not go directly there and save about 2% in management fees. Plus, on average, you will have a mutual fund that will outperform most professionals.

With commission-based financial planners, individuals run the risk that the commissions charged on the financial products that they recommend will add greatly to the cost of the financial planning. The risk of conflict of interest arises when the planner receives greater compensation based on what financial products that they recommend. It may be possible, however, for some individuals that the free or reduced-cost financial plan would not be offset by the higher commissions. For example, the one-time load on the mutual fund might be cheaper than paying the annual 1.5% fee to a fee-based financial planner. You must compare all of these costs when deciding which financial planner is the best for you.

Given this information on financial planners, it is clear that knowledge on the consumer's part is very important. While many households will spend a great deal of time shopping for an automobile, the decision of whom to trust with their wealth too is often made without much thought. As a result Americans spend many billions more on financial services than what is really needed.

For a list of important questions you should ask before hiring a financial planner, visit this government site:

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