Financial Planners

Financial planners give you advice regarding investments, insurance, taxes, annuities, wills & trusts, and mortgages - advice tailored to your needs to help you achieve your financial goals. If you choose your planner well, he or she will become an important part of your life, and you should be together for a life-time. After all, financial planning is a lifetime activity!

The Four Ways Planners Get Paid

All planners (or their firms) are compensated in one of four ways:

• commission-only
• fee only
• fee plus commission
• fee-offset

Let's discuss each one . . .

Commission-Only

Commission-only planners are different from stockbrokers and insurance agents (who also are commission-only) because of their breadth of knowledge as well as their methodology. Where brokers and insurance agents tend to talk about products, planners tend to talk about you.

Commission-only planners say they offer the best compensation method, because you pay only for implementation. If you do not buy the investments or insurance that the planner says you need, then the plan itself does you no good and is therefore not worth paying for. And since all investments and insurance products feature some form of transaction fees, expenses, sales charges, or commissions, you'll pay twice if you pay for advice, too. So commission-only planners say they are working in the consumer's best interests: If you don't like their recommendations, you spend no money on advice you're not using.

Critics, though, say this can create a conflict-of-interest. Since such planners make money only when you buy something, they have a strong incentive to get you to do so. Could that lead to bad advice?

Fee-Only

To avoid this conflict, some people turn to fee-only planners, who do not earn commissions. Instead, they charge fees, either hourly, usually $100 to $250 per hour, or a flat fee, often $1,500 to $10,000 or more. After you get their recommendations, you go elsewhere to implement. These planners do not earn commissions, so they say they do not have a conflict of interest.

But commission-only planners argue that fee-only planners don't earn commissions simply because they aren't allowed to -- because they do not have the required licensing, training, or experience to do so. Commission-only planners also say that fee-only planners are objective to the point of disinterest: since they are paid whether you implement or not, it makes no difference to them whether your investments succeed or fail. Commission-only planners also claim that just because fee-only planners earn only fees, that doesn't mean you pay only fees. You've still got to implement, they say, and that means you've still got to pay commissions or sales charges or transaction fees - to somebody. The fact that you're paying these expenses to someone else, rather than to your planner, is small consolation.

Countering this criticism, many fee-only planners show that they are involved in the selection and management of investments and insurance - and that they steer their clients to less expensive, commission-free products that can save their clients money. Such planners also argue that they do not hold certain securities or insurance licenses merely because those licenses are needed to earn commissions - and since they are not earning commissions, they don't need the licenses.

Commission-only planners retort that the "I don't need a license" posture is a smokescreen for advisors who don't have the knowledge it takes to earn a license.

As you can see, there's a strong turf war between these two groups.

Fees Plus Commissions

According to industry surveys, more than 70% of all financial planners charge fees plus commissions. In other words, most planners do hold insurance and securities licenses. Therefore, they charge fees to tell you what to do, and they also earn commissions by selling you the investments they say you need.

Many fee-plus-commission planners also charge asset management fees, usually ranging from 1% to 3% of the value of the assets they are monitoring for you. This can be in addition to fees and commissions. Also, some fee-only planners are charging asset management fees, either in addition to their hourly or flat rate, or in place of it. (Note: some fee-only planners feel that those who charge asset management fees are improperly calling themselves "fee only"; they believe that a true "fee-only" planner earns only hourly or flat fees.)

When Fees are Really Commissions

The asset management fee is emerging as the compensation method of choice for both planners and consumers. Consumers like it because they can avoid paying up-front commissions, and since the fee grows with the size of the assets, the planner's compensation is directly related to how well those assets perform. This puts the planner on the same team as the client: If the client's investments fall in value, so does the planner's fee -- while an increase in the client's account gives the planner increased compensation. This gives the planner a strong motivation to offer good recommendations. And planners like asset management fees because fees provide a steady stream of income from current clients. Commission-only and fee-only planners are continually looking for new business so they can earn a living.

But should asset-based fees be an additional form of compensation, or a substitute? Some planners say asset management fees can be so high that clients would have been better off paying commissions or flat rates.

Fee-Offset

These planners reduce their fees by whatever they earn from commissions. Thus, a fee-offset planner will be paid one way or the other, but not both.

Fee-offset planners say that by charging fees, they have the same objectivity of fee-only planners. But because they are fully licensed, they can implement their recommendations. All they are doing, they say, is reducing their compensation for the benefit of the consumer.

Fee-only planners, though, accuse fee-offset planners of being commission-based in disguise, while fee-and-commission planners claim the fee-offset group cannot afford to maintain such an aggressive fee schedule indefinitely. In other words, they say, fee-offset planners either must change to fee-plus-commission or they'll one day be out of business.

You'll have to decide for yourself which compensation method you prefer.

Industry Designations

You may come across planners with a variety of credentials. The most common are:

• CFA - Chartered Financial Analyst
• CFP - Certified Financial Planner™
• CFS - Certified Fund Specialist
• ChFC - Chartered Financial Consultant
• CLU - Chartered Life Underwriter
• CMFC - Chartered Mutual Fund Counselor
• PFS - Personal Financial Specialist
• QFP - Qualified Financial Planner
• RFC - Registered Financial Consultant

All these designations are awarded by private organizations. While they suggest that a planner has a certain amount of experience or training, none is required or recognized by any federal or state government or regulatory agency. Planners voluntarily choose to obtain these. Many talented planners hold no designations; other talented planners hold several.

Federal Securities Licenses

To sell securities, planners must hold a federal securities license, offered by the National Association of Securities Dealers. Most planners hold either the Series 7 (which cover all forms of investments except commodities) or the Series 6 (limited to mutual funds, unit investment trusts and closed-end funds.)

State Insurance Licenses

Advisors wishing to offer life insurance and annuities must pass state-administered insurance examinations.

Registered Investment Advisors

Any person who provides financial planning services for compensation must be registered with the Securities and Exchange Commission or their state regulatory authority. Stockbrokers, insurance agents, attorneys and accountants are exempt, provided that their investment advisory services are merely incidental to their work. All other planners must register as investment advisors. Therefore, do not work with any planner who is not registered.

Planners who hold an NASD securities license are registered with a broker/dealer, and it is through that firm that they buy and sell investments for their clients. The B/D has the responsibility of supervising the activities of the advisor, and verifying that his recommendations are suitable for the client. Consequently, NASD-licensed planners may place his/her NASD license with only one broker/dealer. Many who work within the B/D framework complain about what they consider to be massive amounts of regulatory scrutiny on their practices - all done in the name of consumer protection - while many others, both within and outside the broker/dealer community, complain that NASD and B/D supervision is inadequate to properly safeguard consumers.

Planners who hold state insurance licenses are actually licensed not by the states, but by individual insurance companies; passing the state exam permits the companies to grant agents a license. An agent is permitted to hold licenses with multiple insurance companies, and most planners do, enabling them to offer the products of many insurance companies. Thus, planners who hold both NASD and insurance licenses process their investment transactions through their B/D and their insurance transactions through one or more insurance companies (one of which, by the way, might be their B/D!).

Confused yet?

Ten Taboos Between You and Your Planner

1. Never write a check made payable to your planner, other than for his fee. Your checks should be made payable only to mutual funds, brokerage firms, or insurance companies. No legitimate planner would ever allow a client to write a check for investments or insurance payable to him personally or to his firm.
2. Never allow your planner to list himself as a joint owner or beneficiary on your accounts. The only place your advisor's name should appear on documents is as the advisor of record.
3. Never lend money to your planner.
4. Never give commission-based planners discretionary authority. When you establish a discretionary account, you're giving the advisor permission to buy and sell investments on your behalf without obtaining your consent prior to each transaction. This is generally not a problem when the advisor is compensated by fees (of whatever type), because such advisors are not paid to execute trades (and thus, they have no incentive to do so). But granting discretionary authority to a planner who earns commissions can be dangerous, because such an advisor will earn money every time he executes a trade. If you give him permission to trade at his discretion, he could earn a lot of commissions while your account falls in value.
5. Never let your planner sign your name to any document.
6. Never let your planner allow you to sign a blank form or contract. Cross out sections that do not apply.
7. Never let your planner use his address on account statements instead of yours. You should receive periodic statements directly from the mutual fund, brokerage firm, or insurance company. Never allow your planner to have such documents go to his office instead of to you.
8. Never let your planner sell you an investment that isn't available from others. Advisors who want you to buy proprietary products usually earn additional compensation for doing so.
9. Never let your planner share in your profits. I'd never let an advisor share in my profits unless he was willing to reimburse me for my losses.
10. Never let your planner assign any agreement with you to another advisor. If your planner retires or sells his practice, you immediately are relieved of any and all contractual obligations you may have had with your planner.

How to Find a Planner

One of the first questions to ask when interviewing them: How are they compensated? Make sure you understand how they earn a living and what your costs will be.

Interview two or three planners. Get references from neighbors, friends or co-workers. But before you ask someone for the name of their advisor, make sure the person you're asking is similar to you in age, income, net worth, and objectives.

10 Points to Ponder About Prospective Planners

1. How many years have they been in business, and how did they get started? Don't assume that a grey-haired advisor has decades of experience; many people become planners after leaving (or retiring from) other careers.
2. What kind of people do they work with most often? Ask the planner to describe their typical client. If they describe you, it could be a good match.
3. What is the ratio of support staff to professional staff? Too few means the advisor has trouble getting work done. Too many means you're paying for the firm's big expenses. A good test: The planner should not be answering his own phone, but phone calls should be returned within one business day.
4. What is the planner's reputation in the field and in the local community? Planners who have roots tend to be more careful than someone who just blew into town. Look for someone with a solid reputation.
5. When setting your appointment, go to the planner's office instead of inviting him to your home. Inspect the office. How often does the phone ring before it's answered? Is the office organized? Is there a bustle of activity? Don't be taken in by offices that are too opulent, for clients pay the rent! If you see piles of papers all over, remember that one day, your file will be somewhere in that mess!
6. Do you understand what they tell you? If you understand what they're telling you, you should be able to repeat to others what they've said.
7. Does the planner have a clean record? Call the regulatory authorities - the NASD and the SEC - to find out.
8. Ask about the planner's investment methods. What types of investments does he work with? Is your money accessible or are there restrictions? Who makes decisions about investments - you or the planner? Can the planner execute transactions without your prior approval? Make sure you're comfortable with all the answers.
9. Get referrals. But keep in mind that no planner will give you a negative source. Use referrals to verify basic facts, such as what it's like to work with the planner, and whether she returns phone calls timely. Are mistakes often made or difficult to get corrected? How quickly and effectively are questions answered? Questions about style can tell you a lot about substance.
10. Must you sign a contract? What does it obligate you to do? Never sign one that doesn't let you cancel in 30 days or less. Never pay more than 50% in advance. When paying asset management fees, never pay for more than one year in advance.

What to look for in a Financial Planner:

• Someone who has been providing advisory services for compensation for at least 5-yrs.
  
• Someone who is a member of the Financial Planning Association.
  
• Someone who is well regarded by others in the field.
  
• Someone who has a clean regulatory record.
  
• Someone who handles at least $20 million in assets for clients.
  
• Someone who has at least 100 clients.
  
• Someone who has worked often with people similar to you.
  
• Someone who routinely provides recommendations in the same areas that are of concern to you.
  
• Someone who takes the time to learn of your needs before offering recommendations to you.
  
• Someone who considers the tax implications of their strategies before recommending them to you.
  
• Someone who will review your overall status in major areas of personal finance, including investments, insurance, taxes, real estate & mortgages, college and retirement issues, employer-provided benefit plans, and estate planning, and offer you recommendations as warranted.
  
• Someone who never disparages others in the field. The best in the field are true financial planning professionals. But too many so-called "planners" and "advisors" consider others to be competitors instead of colleagues. Be wary of those who spend much of their time explaining why they are better than others, or why others are not good. True professionals will explain why their advice differs from that offered by others, but most often, the conversation will be "good vs. better" instead of "good vs. bad." (There are, after all, many ways to achieve financial success, not just one.) Of course, professionals, if needed, will warn you against those who are widely regarded as crooks or incompetents. But if your personal financial advisor has a position everyone else is a crook or incompetent, you'll be better off working with a different financial advisor!

Finding a financial planner will take lots of work and research.

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