The Independent Investor: Financial Planners: The Good, the Bad and the Ugly

Recently a number of clients have expressed an interest in hiring a financial planner to provide a roadmap toward retiring or saving money toward a child's college education. They asked me what they should look for when hiring such an individual. Here is my advice.

First off, one needs to understand what a financial planner actually does. A practicing financial planner looks at all aspects of your personal finance and that of your family. After understanding your goals and objectives, they create a plan that should include everything from how much money you make, spend and save, to your retirement objectives, education and insurance needs, estate and tax planning concerns and even business planning (for those who own a business).

Many older clients simply want to cut to the chase — how much will they need to retire and when. Creating a financial plan takes a lot of work and there are no short cuts. You have to put in the effort and it can end up costing you anywhere from $1,000 to $5,000, depending on what you want.

In addition, you need to spend time with the planner because they need to gather a lot of data about you and your household and it helps if you keep good records. Once the data is assembled, planners input that information into one of several financial planning software programs. The output should give you a fairly clear idea of where you are going financially.

Most of today's financial planning programs are interactive, which means that by changing assumptions (like retiring at 65, instead of 70 years of age, or saving $100 more a month rather than $50 over the next 15 years) you can generate different outcomes. Depending upon their experience and knowledge, a financial planner can come up with scenarios and solutions that best fit your circumstances. I strongly advise everyone to undergo this process and do so more than once. It could mean the difference between a happy retirement for you and your family or bagging groceries for a living to make ends meet when you are eighty.

Since there are literally hundreds of thousands of people who call themselves financial planners, how do you whittle it down to the one or two that are best for you?

One way would be to narrow your search is to select a Certified Financial Planner (CFP). CFPs must prove that they have completed a rigorous program of study on all aspects of the discipline and are then required to pass a two-day examination. It doesn’t guarantee that they are good at the job, but at least you know they have acquired the knowledge base.

My next suggestion would be to hire a "fee-only" planner as opposed to someone who is "fee-based." Fee-only planners charge you for the financial plan and that's all. Fee-based planners can and do sell a whole host of products and make commissions and fees on those products as well as charging a fee for the plan itself.

Clearly a potential conflict of interest arises when the same person who creates your plan "discovers" you need more insurance, or an annuity, or a new money manager and makes more money selling these services to you than the cost of the plan itself.

That doesn't mean that all fee-based planners are bad or all fee-only planners are good. I know, for example, excellent planners that are fee-based. I also know planners, who are not CFPs, but have vastly more experience than most CFPs. It simply means that you should be aware of these differences when shopping around and never, ever accept a planner that you have not checked out.

It is always smart to ask others for names of planners who have done a good job for them. That doesn't mean you are off the hook. You should still check references, vet the person (at least on the Internet) and find out what the charges will be before you agree to hire the planner.

If you follow this advice, you still may end up with a bad planner but chances are you will avoid a really ugly one and find someone who will provide real value for your money.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.