Financial Planning – No Longer an Option
September 20, 2010
Because of the financial turmoil of the past few years, we have learned that planning for our futures is no longer an option. The harsh reality is that you can’t depend on the government and you can’t depend on your employer. Financial security is an individual responsibility and the earlier you get focused, the better.
Everyone needs a financial plan. Some people can do it themselves with assistance from online calculators, financial planning literature, and investment research. Others choose to work with a financial planning professional, because they recognize that they do not have sufficient time or a keen interest in doing the necessary research to make their planning decisions on their own.
Choosing a Financial Planner
If you decide to seek out a competent financial advisor, there are several factors to consider. First and foremost, you want an advisor who is ethical and who is willing to take on the responsibility of being a fiduciary, which means the planner always puts your interests first. In addition, you should seek information about his/her educational background and experience; how the planner will work with you; and how he/she gets paid for their services.
· Client Interest First. You want a planner who is a fiduciary. As a fiduciary, an advisor has a legal obligation to put the client’s interest first, rather than their own. Some advisors, particularly those that work for a brokerage firm, are only required to meet a suitability standard. Under the suitability standard, the investment advice need only be considered appropriate for the client, but beyond that, a client must rely upon their own due diligence to ensure that they are receiving the best advice. Don’t be timid about asking your potential advisor which standard of care is required of them.
· Education and Experience. When interviewing the potential planner, understand their education background and their experience level. Most financial planners today began their careers in the investment, insurance, accounting, or banking industry and received a large amount of their knowledge and experience on the job. Since financial planning is now offered as a degree program in many colleges and universities, in the future, a greater number of planners will have received a significant portion of their knowledge from the classroom. The background of the planner may influence their area of specialty. You want a planner with the experience that matches your needs.
There are several professional designations that require a candidate to have specific levels of education and experience to qualify. For example, the Certified Financial Planner ä certification requires competency in over 100 financial topics, passing a comprehensive ten-hour exam, and three years of experience working with clients prior to publicly using the CFPâ certification mark. To maintain the certification, the planner must complete thirty hours of continuing education every two years and adhere to a code of ethics and practice standards.
· Planning Process. Determine how the planner will work with you. Ask the planner to explain the steps that he/she will use to understand your situation, provide the analysis, and make the recommendations. Ask whether a written plan is provided and the type of follow-up that you should expect. You will also want to understand whether the planner will assist in implementing the recommendations. The planner may provide certain services in-house, such as investment, insurance, or tax preparation, or he/she may work with other professionals to ensure the action items are completed. You should expect your planner to work with your existing professional advisors as necessary to assure the recommendations are implemented on a coordinated basis and that all professional activities compliment each other.
· Compensation of planner. There are three ways that planners are compensated: fees from clients, commissions paid by a third party, or both fees and commissions. During your initial contact with the planner, either by phone or in person, you should seek specific information concerning the planner's compensation structure. If the planner indicates they do not charge to do a plan, you may want to determine how comprehensive their service is and whether it will meet your needs.
1. Fee-only Planners. A fee-only planner is paid by the client for the services provided. The fee may be based on an hourly rate or project fee reflecting the complexity of the issues to be addressed in the plan. Some planners may base their fees on a formula using a percent of investment assets or net worth as a means to determine the fee.
2. Commission-only Planners. Some planners will receive their compensation for working with you through commissions paid by a third party. These are generally commissions earned for the initiation of investment transactions or insurance sales.
3. Fee and Commission Planners. A fee and commission planner may also be referred to as a "fee based" planner. Generally a fee is charged for the creation of the financial plan and commissions are earned if the plan is implemented with products that the planner offers.
Regulatory Issues
Every financial planner is required to be registered as an investment adviser unless he/she qualifies for an exemption. The registration is either with the Securities and Exchange Commission (SEC) or the Securities Commissioner of the state in which the planner practices. The planner is required to disclose to you information about their practice and all professional staff. This information can be provided either through a brochure that has been approved by the SEC or the "ADV Part II" form that the SEC provides.
The SEC or the state Securities Commissioner will audit each planning firm periodically. You can determine whether the planner has incurred any violations by contacting the appropriate office. If the planner is also a licensed insurance professional, you can contact the state Insurance Commissioner to ask about any irregularities or violations that may have occurred in the planner's past.
Where to Start
Choosing a financial planner is an important task. Secure the names of several planners either through referrals from friends or business associates who use a planner or through your own research. Interview each candidate either on the phone or in person. Ask your questions and review the information they provide. As important as selecting a planner that matches your needs, is selecting one that you are personally comfortable with. After all, you will be sharing your information with this person and putting your future financial well-being in their hands.
There are several financial planning membership organizations that will provide names of planners in your geographic area. Both the Financial Planning Association (www.FPAnet.org) and the National Association of Personal Financial Advisors (www.NAPFA.org) provide a referral service. The CFP Board of Standards (www.CFP.net) can also provide helpful information about the financial planning process as well as allow you to confirm the status of a CFPâ certificant.
Summary
Your financial security is your responsibility. You cannot expect the government or an employer to provide a guarantee that you will have the money you need during your retirement years. It is up to you to get focused today, because financial planning is not an option. It is a requirement for achieving financial security.
