Most people like to keep on top of their money. However, it's not always a good sign when your financial planner calls too often. It could mean you're actually working with a thinly veiled salesperson, that your planner doesn't have much experience, or worse.

To avoid these problems, it's important to understand what financial planners do, how they make their money, and what you should expect from a good planner.

In Pictures: 10 Tips For Choosing An Online Broker

Financial Planner - An Unregulated Term
The term financial planner can actually refer to a variety of financial professionals. There are some financial planners who will simply help you develop a financial system for reaching your financial goals. Others will help you invest your money, or even actively manage your money on your behalf. Finally, there are some financial planners who provide a comprehensive set of services, including financial planning, investment management, estate planning, wealth management and other services.

In addition to understanding what services a financial planner offers, it's also important to research the credentials of prospective financial planners. Many people may be surprised to learn that it does not take any financial education or investment experience in order to call oneself a financial planner. A true financial expert will have completed extensive coursework, have years of financial experience and will most likely possess relevant professional certifications. (For more, check out our Certified Financial Planner Exam Info Page.)

How Financial Planners are Compensated
Financial planners make money in two main ways. First, many planners operate under a commission model, where they make a sales commission when you buy investments. Other planners operate under a fee-only model where they charge a fixed price for their services. The fee-only model should not be confused with the fee-based model, which means that planners collect both fees and commissions.

Most financial experts criticize the commission model because it presents a conflict of interest for the financial planner. Commissioned planners have an incentive to steer you toward investment choices that pay higher commissions. They also have an incentive to buy and sell frequently in your account to increase the commissions they make. Even if your planner is honest, it can be hard to trust their advice.

The fee-only model is preferable in many ways because the planners' advice is not biased by their compensation scheme. The fee-only model means that you often pay a larger cost upfront which may make financial planning services seem less affordable for small investors. However, the hidden costs of commissions are often far more expensive over the long run. (Learn more, see Paying Your Investment Advisor - Fees Or Commissions?)

What to Expect from Your Financial Planner
A planner should spend a lot of time with you up front, getting to know your total financial situation, understanding your goals, and assessing your risk tolerance and investment preferences. They should walk you through a long-term financial plan for the areas where you need advice, and outline the major steps along the way. Finally, they should commit to review the plan with you on a periodic basis, usually at least once per year, but more often if your needs change more frequently.

Why Not Getting Called is Good
You should not expect (or want) your financial planner to call you each time the market is down. An experienced planner will have seen plenty of bear markets and has the composure to ride out the tough times and help you follow through on your financial plan. While you may think that you want your planner to keep you in the loop, there are at least three reasons why you don't want your financial planner to contact you too frequently:

1. Good investing is like a chess match. A long-term financial strategy is played out slowly as a series of careful moves made through extensive planning. If your planner is calling because he or she is frequently surprised and is constantly changing strategies, it's a sign your planner may be inexperienced.

2. Frequent calls asking you to change your investments may indicate that your financial planner is more salesperson than financial expert. Buying and selling frequently may work for hedge funds, but it is almost always a bad deal for retail investors. It wracks up high transaction fees and can bring a big tax bill each April. Both of these factors drag like an anchor on your investment returns.

3. Most financial planners have many clients and not enough time to call all of them, so no news is often good news – your money is likely doing pretty well. If your financial planner is contacting you outside of the occasionally check-in call, it may be because something has gone awry with your money.

The Bottom Line
It's only natural to be concerned about your money, and your financial planner should check in every few months to ensure you are still on track. Some people prefer to know exactly what their money is doing every day, but in many cases, not receiving a call each week from your planner can actually be a good thing. (For more tips, check out Find The Right Financial Advisor.)

Catch up on the latest financial news in Water Cooler Finance: Crying Over Spilled Oil, And Buffett Goes To Court.

Related Articles
  1. Professionals

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
  2. Professionals

    How Legacy Planning Can Help Capture New Clients

    Don’t underestimate the importance of legacy planning with your clients—it could serve as method for you to create new business with any heirs.
  3. Taxes

    The Top 10 Caribbean Tax Havens

    Discover relevant tax policy information about the top 10 tax havens located in the Caribbean, including the Cayman Islands and the Bahamas.
  4. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  5. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  6. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  7. Professionals

    How to Get Free Social Security Spousal Benefits

    Married couples should thoroughly examine whether they are eligible to collect free spousal benefits on their Social Security income.
  8. Professionals

    Career Advice: Accountant Vs. Financial Planner

    Identify the key differences between a career in accounting and financial planning, and learn how your personality dictates which is the better choice for you.
  9. Brokers

    How to Find Wealthier Financial Advisory Clients

    Most financial advisors are eager to add more and wealthier clients to their practice. Here's what it takes.
  10. Professionals

    How to Create a Retirement Co-Op in Your Community

    As the retirement boom continues, retirement co-ops are growing in popularity. Here's how to set one up in your community.
  1. Do financial advisors get paid by mutual funds?

    Financial advisors are reimbursed by mutual funds in exchange for the investment and financial advice they provide. A financial ... Read Full Answer >>
  2. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  3. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  4. What fees do financial advisors charge?

    Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>
  5. Does my employer's matching contribution count towards the maximum I can contribute ...

    Contributions to 401(k) plans come from employee salary deferral and employer match dollars. According to the IRS, employees ... Read Full Answer >>
  6. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!