A guide for individuals searching for good overall financial guidance

First, you must be clear about what you are looking for. Do you want a comprehensive financial plan? (then you want someone who is competent at doing comprehensive plans on a fee-only basis). Do you want someone to help you with your money anxieties who can also do a financial plan, but is also trained with personal development skills, like a life coach (In this case, a financial planner who is also a financial coach may be the right choice)? Do you want someone to just get a financial check-up and see that you are on the right track? (perhaps an hourly planner would be appropriate in this case) Do you want someone to manage your money? If so, what kind of asset manager do you want? Do you want someone who will take discretionary powers and make trades and do rebalancing for you? Or do you want an investment advisor who will generate periodic reports about your money and give you advice about how to allocate your portfolio, and charge you a fee for this oversight, but you are expected to call the final shots for each change made in your account? This will affect whether you want a brokerage account manager or you just want a non-discretionary advisory account manager. Are you looking for a particular kind of financial product (in this case, a sales person might be the most knowledgeable). Once you are clear what you are looking for, your search will be a lot more efficient and effective.

The differences between “financial advisors/planners.” Some “financial advisors” mainly sell products for a living – that is, they earn a commission for getting you to invest in some particular fund. For example, Edward Jones advisors are basically sales people. Smith Barney, Merrill Lynch, Raymond James, and all kinds of broker/dealers investment representatives make their living this way.

Others might make their living purely by managing money, but not earning commissions.
These “financial advisors” (if that’s what they call themselves) are really asset managers and they earn their living by charging you a percentage of the assets under management. Their fees range from .5 to 2 or 3%, generally speaking. Asset managers and Schwab advisors tend to fall under this category.

Then there are “fee-only” planners. These tend to encompass those “advisors” that actually do some planning as part of their business. Many “fee-only” planners earn the bulk of their revenue by charging a fee for managing assets but they might do some planning for their clients as well (e.g. 1% of Assets under Management. For $1mm AUM, the fee would be $10,000) – but the client doesn’t really “feel the pain” of the fee because it is taken out of the asset returns (so they just get a lower effective return – it tends to be easier to take the fee this way than to make a client write a check for $10,000 each year – they might actually balk at the fee if this were the case!

Other fee-only planners might charge explicitly for their written financial plans. This tends to be a harder way to make a living because when the client “knows” how much it costs, they tend to be more price-sensitive! Other fee-only planners charge on an hourly basis, like an attorney, or charge a retainer fee (with some minimum fee, and then hourly above that). Other fee-only planners might charge on a project-basis (like a dentist - $800 for a crown, $1000 for a root canal, etc).

What is their incentive? The question you need to ask yourself when trying to sift through what kind of fee-only planner you want to work with is “what is their incentive?” How do they get paid? What are their motives? Why do they recommend what they recommend?

Here’s an example of why it matters “what their incentive is.” I once had a prospective client tell me they were about to sell all their well-diversified stocks and ETFs and put them in an annuity. I asked them why? And she said that the “advisor” recommended that it would be the best thing to do. So I inquired as to what kind of “advisor” she was talking to and it turned out that advisor was an annuity salesmen! So I said, of course he wanted you to sell all your stocks and put them in an annuity – how else would he make his money? But is this really the best thing for you? And she stared at me blankly like it had never occurred to her to think this way.

Here’s another example of why it matters “what their incentive is.” I had a client who wanted to buy a house, but had the bulk of her assets tied up with an asset manager. She came to me for advice about whether to buy a house. I did the analysis and it seemed like the house would be a good investment and so I recommended her to do so. But then she came back to me and said that the asset manager told her it was a terrible idea. I asked her why. She said that he told her that he could make her much more money if he kept managing it and that owning a house was a money pit and that she should continue to rent. I asked her what she wanted – she said she wanted to own her own home. And I said, factoring in reasonable and average maintenance costs and all the other costs of homeownership, the house still is expected to yield a 12%/year return to you, after-taxes! This is a great expected return, and it is unlikely the asset manager will be able to do that for you. But, of course, as expected, he didn’t see it that way! I urged her to think about what his motives really were – to figure out what kind of financial decision was in her best interest or to keep her money parked where it was? In general, it cannot be expected that asset managers can do comprehensive financial planning that is in a client’s best interest because they would never really want to advise buying a house or an annuity or a big life insurance policy or anything that will cause a lot of money to flow away from them. You might say, but I trust them. What I would say to you would be – ok, go ahead and trust them, but be forewarned that their business model does not build in any incentives for them to be holistic in orientation or to get training in planning from a comprehensive perspective. Their business keeps them busy doing what they do best – which is manage money – move money from this fund to that fund, etc.

And then I always have clients who have gotten themselves into a mess with all kinds of variable annuities and stock funds that have high ongoing expenses and high exit fees and high surrender fees. So they are basically “locked” into funds that a “salesmen” sold them that really don’t work in their best interest – and getting out of them is costly as well. It’s sad, but true. Many people don’t really understand what they are getting themselves into, they tend to “trust” salespeople masquerading as a “financial professional” and “buy” things they shouldn’t own – that are literally bad for their financial health – and it costs them millions of dollars every year.

So you need to ask yourself – how do they make their living? What is their business model? What then are their natural incentives? How will this affect the way they advise me? And is the advisory model that I want to work with? Then, what are their credentials? Are they qualified to do what they say they are going to do for me? Can they produce references on demand?

For me, my incentive is to drum up business helping people do comprehensive financial planning and make a living doing this. Beyond this, my incentive is to do the best job I can writing a financial plan that is consistent with your life, your stated goals and purposes, your behavior patterns, your relationship with your wife, to answer your questions, address your concerns, empower you to engage with your finances and to stay engaged, and to have someone to turn to when a big financial issue comes up – like a house purchase or sale decision, or retirement, or a divorce, or a windfall, or a big inheritance, etc. comes up – to become a trusted advisor in the truest sense. To help you become more aware about how you relate to money in healthy and unhealthy ways, and basically to make you such a satisfied client that you refer me to your friends. Because I have no agenda for continuing sales, except to say that periodic check-ups might be a good idea, my business totally revolves around high customer satisfaction.

Ok – so hopefully you get the idea that you shouldn’t get your financial planning advice from a salesperson or an asset manager, and that you want to find someone whose interests are not in conflict with yours, at least at the obvious level.

What is the quality of advice? What are their credentials? If you are like me, you might have once thought, aren’t all doctors the same – they’re all doctors. But if you’ve ever gotten tangled up in the medical system, you might have wizened up quickly. Some doctors know what they’re talking about. Others don’t. I was once admitted into the ER at a local hospital and one of the ER doctors wanted to put me on a big bag of saline solution even though I was bloated. It turned out to be a completely inappropriate thing to order and luckily a more competent infectious disease doctor intervened and saved me from an awful fate.

Same thing goes for the financial industry. All doctors are not the same. And all “financial advisors” are not the same. There really is a dramatic range of abilities, competencies, skill levels, and quality of advising that exists in this industry.

Here are some websites to use to locate financial planners.

www.cfp-board.org
www.fpanet.org
www.napfa.org

Once you identify some financial planners, you should find out if these so-called “planners” are really salespeople masquerading as financial planners.

Next, find out if they manage assets. If they manage assets, then you might want to inquire further about what kind of plans they do, and how frequently, and for all their clients or just when it is requested. If it is just done on an occasional basis, you might want to inquire about their level of competence in this kind of comprehensive planning. Is it really their staple, bread and butter competency or is it a side-note for them? If it is not a core-competency of theirs - beware. Because there are a lot of things that can go awry if someone is not properly skilled to do this kind of complex comprehensive planning for a client. I will illuminate this for you more below. If you are satisfied that they are competent at doing comprehensive financial planning, you should try to find out what their philosophy is. Why do they do this kind of comprehensive planning? (To attract more AUM clients?) Why do they believe it is important to do? How does it fit in to the way they view investment planning, etc. (Do they believe that it is important to do a comprehensive financial plan before designing an investment plan or does that not matter to them?) Do they discuss your personal life goals and dreams and help you to integrate your financial situation with your personal life? Do they take a holistic approach or do they do planning in a black box where they only inquire about the “numbers” and “facts” and nothing more? As you can see, not all planners are the same. Not all “advisors” are the same. You need to educate yourself about the differences so that you can find the right advisor for you.

To sum up the steps for finding the right financial planner for you:

First, you must be clear about what you are looking for.
Second, understand the differences between different financial “advisors.”
broker/dealers who sell products and earn commission for a living, people who manage money for a fee for a living, and then hourly/retainer/or project-based financial planning fees for a living.
Third, understand their incentive and feel comfortable that their motives and interests are not in conflict with yours.
Fourth, determine whether their qualifications are sufficient or high for what they purport to do. That is, try to discern the quality of advice they can give you.
Fifth, determine if their philosophy for financial planning is in alignment with yours.
Sixth, make sure their way of working is in alignment with your way of working – can you communicate effectively with this person? Do they insist on doing everything in person when you want to be able to have certain meetings over the phone or via email or instant messaging? Are they tech-savvy or technologically backwards or challenged? Are they too aggressive with technology when you would be more comfortable using the phone and the postal service and fax machine? These practical and operational are important for your happiness and peace of mind as well.
Lastly, can you afford their fees or are you willing to pay their fees? The problem with hiring a planner that charges a flat fee is that you “see” the fee and it might feel like a lot, but it might just be worth it, in peace of mind and saved costs elsewhere. It is important to find a person who actually has the expertise to guide you in overall, financial decision making, and who isn’t just trying to sell you a product.