I was speaking with someone recently about finding a good financial planner. His problem was that he knew the questions to ask potential advisors, but he could not properly assess the answers he received.
For example, he knew that he should ask what credentials the planner possesses. But how to compare a CFP, PFP, RFP, SFC, CA, CFA, CPA, CLU, CFC, CSWP, etc., etc., etc.? It is a virtual dog’s breakfast of designations out there. And that is just Canada.
The issue of finding the right financial planner is kind of a catch 22. You really need to know the financial services industry in order to understand and differentiate the responses from potential advisors. But if you know the answers, you probably do not need to interview a bunch of professionals.
So what should a teacher, fireman, nurse, engineer, home builder, etc., do?
There is plenty of information on how to find the right financial advisor or planner for your unique needs. Some decent, some quite weak. To try and separate the wheat from the chaff I shall add my own thoughts.
Financial Advisor versus Financial Planner
First, I want to differentiate between an “advisor” and “planner”.
Financial advisors cover the whole gamut of people who provide financial advice. Bankers, accountants, tax lawyers, brokers, asset managers, insurance agents, etc., etc. Someone who provides a financial related service.
Financial planners are a subset of financial advisors. They can provide a variety of services, but financial planning should focus on developing long-term planning programs for financial success.
In reality, a little more complex than that and there is often overlap and grey areas. But the point is, a financial planner is a financial advisor. A financial advisor is not necessarily a financial planner.
When I write, I tend to use the term “advisor” rather than “planner” as the former is more encompassing. If I limit my commentary to “planner”, just remember the distinction.
Questions to Ask a Potential Financial Advisor
There are many different lists out there with things to consider when interviewing a financial advisor. Some have more considerations, some have less. Key issues are usually the same.
For this post, we will go through the US Certified Financial Planner (CFP) Board’s “10 Questions to Ask Your Planner”. They focus on planners, but most of the points relate to all advisors.
Just to add to your confusion, please note that I hold a Canadian CFP designation. Similar in nature, but legally different than a US CFP. And I am governed by a different professional organization, the Financial Planning Standards Council.
Here are the US CFP questions you should ask prospective advisors.
- What experience do you have?
- What are your qualifications?
- What financial planning services do you offer?
- What is your approach to financial planning?
- What types of clients do you typically work with?
- Will you be the only financial planner working with me?
- How will I pay for your financial planning services?
- How much do you typically charge?
- Do others stand to gain from the financial advice you give me?
- Have you ever been publicly disciplined for any unlawful or unethical actions in your career?
Not a bad list.
I Would Also Add
What relevant professional organizations are you a member?
Are you acting in a fiduciary capacity?
Can I have it in writing?
You Will Want to Dig a Little Deeper
While the US CFP article offers good advice, you need to dig a little deeper in your questioning and comprehension. For example, question 4 asks, “What is your approach to financial planning?”.
The article states:
“Make sure the planner’s investing philosophy isn’t too cautious or overly aggressive for your needs. Learn how he will carry out recommendations or refer tasks to others.”
Yes, it is important to find an advisor who shares your risk perspective. An overly aggressive advisor will provide sleepless nights of stress. An overly cautious advisor will frustrate you. But there is much more to one’s “approach to financial planning” (or advising) than caution or aggression.
Questions and Concerns are Interrelated
Over time, we will dig deeper into what you should consider when assessing potential financial advisors.
Qualifications
One key area is the advisor’s technical qualifications.
Qualifications and credentials will usually determine one’s approach to advising and specific services offered. I would expect to see a tax accountant providing personal tax planning strategies as a priority. I would not expect an insurance agent (at least one with no personal tax qualifications) focussing on preparing income tax returns.
Advisors with formal financial designations normally are members of recognized professional organizations. These organizations provide oversight and guidance to its members.
That may include ongoing professional education requirements to ensure members maintain a base competency. It may include standards of conduct and ethics which the member is required to follow, including whether the advisor acts as a fiduciary. It may include a complaint and disciplinary process for members who violate codes of conduct. This oversight may provide clients with a level of comfort in that they have some recourse in the event of problems with their advisor.
Experience
A second key area is the advisor’s experience.
Technical qualifications are one thing, having the actual experience to properly deal with a client’s needs is another. Financial advising covers a wide range of topics. It is difficult for one advisor to excel in many areas simultaneously. Either work with a firm that provides experts in a variety of fields. Or when assessing advisors, focus on those who meet your primary needs.
Offering
The third key area is the service offering.
Among the 10 questions listed above, you should consider the advisor’s overall approach to financial planning (or advising). Then the actual products and services provided. Finally, the type of clients served.
An advisor’s skill set, experience, and (most definitely) employer will drive these items. I consider the overall approach, products and services offered, and type of client served, collectively as the service offering.
For example, perhaps you deal with a financial advisor working for a bank. Probably lots of emphasis on tax-deferred retirement accounts. With suitable investments typically being a fund or other investment product created and vended by that bank. Further, if you are working with a generic advisor based in a small, retail branch, his or her clients are mainly those with lower asset volumes and less complex needs.
We will look at the service offering later. The big thing is to find someone that has experience with clients of your asset volume and objectives. It is more than simply whether the advisor matches your aggressiveness.
Compensation
Finally, advisor compensation is always an issue.
In broad strokes, you will see three forms of compensation. An advisor may be commission based, where you are not directly charged for the advice or planning. Instead, the advisor is compensated by his employer and/or commissions and/or retrocessions on product sales.
Advisors may charge fees. These may be hourly rates, a flat fee per engagement, or a combination where the flat fee is a minimum or a maximum. In this case, the client pays the advisor directly for his work.
For example, an advisor may charge $300 per hour for advice. Or he may estimate that the engagement requires 10 hours of work and quotes a flat $3000. Or he may provide a buffer in case of unforeseen issues flaring up or work going smoother than anticipated. So he may provide a quote that indicates a flat fee of $3000 with an additional charge of $300 per hour for any work in excess of 10 hours. Or, from the other perspective, an hourly rate of $300 with a cap of $3000.
If you are a potential client, knowing the maximum possible fee is nice.
Advisors may also be compensated in a hybrid approach. They charge clients for some work and receive compensation from employers and/or third parties (e.g., mutual fund companies) for other services.
Be sure you clearly understand how fees will be charged. If you expect a bill for 10 hours work, totally $3000, and suddenly you receive an invoice for 20 hours and $6000, it is a problem for you.
Suddenly, commission based advisors with their “free” advice may look good. Perhaps. But as we shall see, there is no such thing as a free lunch. Someone is paying for the product or service. At the end of the day, that will be you. What you often end up paying in the long run for “free” advice can be expensive.
One other point on compensation. If your advisor outsources a portion of your work, understand if there are any referral fees involved.
For example, your investment advisor refers his clients to a local tax accountant to prepare tax returns for his clients. This expands the service offering and may be a nice add-on for clients. Yes. But determine what financial arrangements, direct or indirect, are in place for the referrals. Are you being referred to a competent third party or simply someone who kicks back a percentage of the fees on the referral?
Get It in Writing!
Not necessarily a question, but when assessing prospective advisors always obtain the terms of service in writing. Something that lays out what services will be provided for the fee. And how that fee will be assessed. It minimizes misunderstandings and can serve as a template for work moving forward.
Okay, enough generalities, let us now take a look at some areas in more detail.
