It's tough to go it alone. Some people have the time, ability and drive to manage all their finances, others don't. Either way, professional advisors can provide great insight and judgment in countless instances, and not necessarily at exorbitant cost. But common misconceptions about financial planners prevent many from seeking their counsel. In this article we'll help you avoid these traps so you get the most value from your advisor. (For related reading, check out Do You Need A Financial Advisor?)
Myth 1 - Having a financial planner means I don't need to learn anything about investing.
This myth sends shivers up our spines! If you take nothing else away from this article, understand that whether or not you have an advisor, the most important thing you can do is educate yourself. Having a solid understanding of investing will ensure you understand what your advisor is doing with your money, and allow you to ask the tough questions.
Think of this scenario: you sit down for a review of your personal finances and your new advisor starts with a lecture about asset allocation and diversification and how they are recommending a certain hot new mutual fund. If you understand the terminology you can ask questions like:
- Why are you recommending a 60/30/10 asset allocation between stocks, bonds and the money market?
- How am I more diversified when I already own similar mutual funds?
- What is the MER (management expense ratio) of this new mutual fund? What compensation do you receive if you sell me this?
By asking the right questions you'll understand your portfolio better and also protect yourself from unscrupulous advisors who try to sell you something you don't need. It's just like taking your car into the repair shop and the young attendant tells you your "foo-foo valve" is shot. If you are able to explain that there is no such thing as a foo-foo valve and is therefore unlikely in need of replacing, there is no way they can overcharge you for services you don't need. (Find out more in Find The Right Financial Advisor.)
Myth 2 - A planner or advisor only gives me advice on investing.
Picking the right investments is certainly an important aspect of your personal finances, but it's not the only part. Financial planning takes into account all the varied financial aspects of a person's life: taxes, insurance, retirement, budgeting, estate planning, liquidity requirements and other life goals. It considers the various and sometimes conflicting financial aspects of our lives and develops strategies and objectives to make everything work together. For example, what good is it to pick all the right investments but then see most of your return swallowed up in taxes? It's a full-time job just to keep up with all the laws relating to investment income and taxation. With the aid of a financial planner who considers your individual situation, you'll be able to minimize the amount of taxes you pay (legally of course) and have a stronger bottom line in the end.
Myth 3 - By law all financial planners are required to be registered with a government agency.
Actually, financial planners are not required to be registered, whereas stockbrokers and investment advisors are. Before deciding on an advisor, always look up the person's registration at your local state or provincial Business Services Division. Check to see if there are any complaints or if disciplinary action has been taken against them. You should also find out how long the person has been in the profession. A good rule of thumb is to employ a financial planner with at least three to five years experience.
Myth 4 - Certification letters after the person's name mean nothing.
If you are looking for an advisor, give extra credit to those who have designations such as the Certified Financial Planner (CFP). To become a CFP, an advisor must put in hundreds of hours of studying in order to pass a grueling 10-hour exam. Furthermore, members are required to undergo background checks, agree to a code of ethics and do continuing education to keep the certification. While hiring a CFP is no guarantee of performance, it's a good indication that the financial professional is legit. (To learn more about all of the different designations available and what they mean, see Are All Certifications Created Equal? and Shopping for a Financial Advisor. For information about becoming a CFP, see Is A Career In Financial Planning In Your Future.)
Myth 5 - Only wealthy people need a financial planner.
Last but not least, this myth is extraordinarily widespread. Financial planning is about helping people of all income levels achieve short-term and long-term financial goals. Many individuals, often those not considered wealthy, assume you need to be a millionaire to get professional help. The truth is that for as little as a few hundred dollars you can have a portfolio assessment done by a fee-based financial planner. This breed of planner only takes compensation from the client and receives no compensation in the form of commissions from selling certain products. Many charge by the hour, which means you can get unbiased advice on specific issues without worrying about being forced into some investment.
Some people are confident enough to make these vital decisions on their own. Others need a helping hand. If you do choose to deal with a planner, keep on educating yourself, understand there is more to managing your portfolio that just picking hot stocks, do the homework in terms of both background checks and certifications and don't think that you can't afford advice just because your portfolio isn't seven figures. Financial planners aren't a guarantee or magic solution but they can be of help in many circumstances. (Find out more in Choosing An Advisor: Wall Street Vs Main Street.)