Financial planning checklist
Here are five basic things that can help you evaluate a potential financial adviser.
1. Plan ahead: The first step is often to decide what sort of financial strategy you need. Are you a saver? A buy-and-hold investor? Are you willing to roll the dice a little? Picking an adviser who is among the best in long-term thinking might not be ideally suited for your daytrading needs, for example. So figure out what your ultimate goal is, and work with someone who can demonstrate that they’ve got the expertise to help you reach that goal.
2. Ask around: Friends and family can be a great first step to finding a reliable source of financial advice. Ask around and see if anyone in your circle has an adviser they’d recommend, or tips to share. Hearing about a bad experience and what went wrong can hone your decision-making skills and help you figure out what questions to ask a potential adviser when sounding them out.
3. Get personal: Whatever you do, make sure you meet with the person face to face before making any sort of arrangement. Remember, the adviser is going to need to have very intimate knowledge of your finances, personal activities and goals, and you must be comfortable providing them with that information.
4. Follow the money: There are a number of ways that advisers get paid, and it pays (literally) to know which method yours uses. The most common is the commission-based model where the adviser gets paid a fee by the financial companies that make the products he or she sells. That’s great in principle (since the customer never has to pay directly for the service), but critics point out that it poses an inherent conflict of interest. Certain financial products pay higher commissions than others, which gives the adviser a higher incentive to move you in that direction – whether it’s a good idea for your financial plan or not. That’s led a movement toward other types of payment plans, where compensation is more up front.
Higher net worth clients often like the asset-based model, where you pay an adviser a certain percentage of your entire portfolio, so the payment grows as the portfolio grows. That gives both parties an incentive to make the portfolio increase in value.
Smaller investors might like a simple fee-based planner that charges by the hour. The cost shouldn’t be much more than about $100 or so an hour, and less and less time will likely be needed once the financial plan has been worked out and set up — perhaps nothing more than a checkup here and there throughout the year.
5. Beware the alphabet soup: From CIM, to CFA, to TEP and even RHU, there’s a dizzying array of letters signifying credentials for financial professionals. But experts say the two types that most consumers should look for are either CFP or RFP. Those stand for certified financial planner and registered financial planner. The latter is generally for more advanced investors, but they share the common trait of not actually selling any financial products. A good financial planner’s role is to guide your savings and investment strategy, not sell you individual products.