Getting Your Financials Right

If it's ever occurred to you how complex and vital 'getting it right' is when it comes to saving, investing, maximizing the value of your wealth and planning for a safe, comfortable retirement, you've probably asked yourself if you should employ a financial planner or advisor.

Similarly, if you've felt the pressure of deciding on a big investment, such as a home or education—or felt overwhelmed with the financial details after a wedding, the birth of a child, divorce, death of a spouse, or major illness—you've probably wondered about finding someone to advise you.

Services of Advisors and Planners

According to a 2019 CNBC and Acorns Invest survey, over a third of Americans don't have a good understanding of what a financial advisor actually does. That figure balloons to 46% for Millennials.

So what kind of services do financial advisors and planners provide? Broadly, they can help you manage your financial life using a variety of strategies and products to both manage your wealth and improve your financial habits.

Types of Financial Advice

Not all financial advisors are the same. Some specialize in certain practice areas, types of clients, income levels, investment strategies, and products. Some work with clients all over the country, while others focus on clients in their town. Some can help you with your taxes, insurance needs, or estate planning and others will focus on retirement planning. There are advisors for the younger client and some specialize on retirees. You can find a planner to help with life stages planning, estate distribution strategies, and business planning.

From managing every aspect of your personal or business financial life to simply suggesting directions, there are specialized professionals available to help.

Reasons to Seek Financial Advice

You may need an advisor for many reasons. For example, perhaps you just received a considerable sum of money from a relative who died or a windfall from the state lottery. As a person goes through different stages in life, their need for a financial professional will change.

Perhaps you just had a baby and want to ensure their future in case the worst happens. Many parents seek help for college savings for children and setting up estates that can convey wealth to future generations.

The approach to investing at or during retirement is different than that of a young worker. As you near retirement your risk tolerance level will change, and your style of investing should change as well. Perhaps your company is offering a too-good-to-resist early-retirement package, and you want to make sure the money lasts.

Any of these events (and many others) could naturally trigger the desire for some professional help in managing your financial affairs. 

1:43

7 Steps To Evaluate A Financial Advisor

How to Find Good Financial Help

How should you go about finding the right advisor? The first step is to figure out what sort of professional financial help you need. Like many people, some of your deepest financial thinking comes at tax time. So if you just want someone to dole out tax advice and preparation, a good old Certified Public Accountant (CPA) will probably suffice. That CPA may or may not also be a financial advisor.

Investment Management—Financial Planners

Financial planners are professionals who help businesses and individuals create investment plans that meet long-term goals.

Say you're looking for help in creating a savings plan, devising investment strategies for your investment portfolio, getting out of debt, and start saving for a house. In short, if you want someone to look at your entire situation, you should seek the help of a comprehensive financial planning firm or an individual financial planner.

Firms typically have a staff of professionals that includes a financial planner. Solo-practitioner planners may not be able to provide you with the full range of services that a firm can, but many will work hand-in-hand with other professionals who can provide those services.

Financial planners can carry designations such as:

  • Certified Financial Planner (CFP®)
  • Chartered Financial Analyst (CFA®)
  • Certified Fund Specialist (CFS)
  • Chartered Financial Consultant (ChFC)
  • Certified Investment Management Analyst (CIMA)
  • There are many other designations as well

Each of the specific designations will require a different set of experience requirements as well as the successful completion of an exam or series of tests.

To locate a planner, start with referrals from colleagues, friends or family members who seem to be managing their finances successfully. Another avenue is professional recommendations. An accountant or a lawyer might make a referral. Professional associations can sometimes provide help. The Financial Planning Association (FPA) will also be able to help you locate a planner in your area.

Managing Money—Financial Advisors

A financial advisor is a broad term that covers many types of professionals. They may help you manage your investments by facilitating the buying and selling of securities. These individuals include bankers, accountants, stockbrokers, insurance agents, and estate planners. Financial advisors handle a wide range of money matters for individuals and businesses while a financial planner handles more specialized matters.

Financial advisors may work in independent practices or part of a firm or financial institution. All advisors who work with the public must have a current Series 65 License. The National Association of Personal Financial Advisors (NAPFA) is a good place to start your search for help.

Fee-Only vs. Fee-Based

A fee-based structure can be hourly, project, retainer or a flat ongoing amount that is derived from the percentage of assets being managed; usually, the greater the assets, the lower the percentage. Commission-based means the advisor charges a straight commission every time a transaction occurs or a financial product is purchased. 

Commission Based

Although most of the big retail brokerages offer financial planning services, be cautious with their personnel. While many are highly trained and can be trusted, others may just be glorified stockbrokers hired by large wirehouses to sell proprietary mutual funds and stocks. Known as fee-based, they are incentivized, sometimes even required, to push these products, which are owned by their firm—and for which they receive top commissions. And with some wirehouses, it's all about quantity, not quality. The more buying and selling that a broker does in an investor's account, the higher his commission payouts.

Fee-Only

Another type of advisor is the fee-only advisor. These professionals carry designations such as registered investment advisor (RIA) or investment advisor representative (IAR). They are held to a high degree of accountability, and you'll typically find them knowledgeable. They are also required to provide to all potential investors upon request a Form ADV Part II. This form is a uniform submission used by advisors to register with state regulators and the Securities and Exchange Commission (SEC).

Form ADV Part II—which must be completed each year—contains information about the individual. Among other things, this will allow you to determine whether your advisor has ever applied for personal bankruptcy and their investment in other financial institutions. The form identifies the individual's investment style, officers of the firm, and the firm's assets under management (AUM).

The Debate Between the Two Structures

Fee advisors claim that their advice is superior because it has no conflict of interest. Commission-based professionals, they argue, can compromise an advisor's integrity, affecting the selection or recommendation of products (some companies might compensate the advisor better than others).

In return, commission advisors respond that those who get paid based on their assets under management (AUM) are more likely to recommend financial strategies that increase their AUM, even if they aren’t in the client's best interest. They argue that commissions keep their services affordable (though the costs of these commissions are born by you the investor and serve to reduce your returns).

Each year, more investors are shifting from the traditional commission set up and moving towards the modern fee-only approach. Because set fees are new to many investors, some common questions have risen, such as:

  • "What is a fair fee?"
  • "How will I be billed?"

With the average mutual fund still charging an expense fee of approximately 1.4%, it's safe to say that a total fee of 1.8% to 2% is fair. If you can find an advisor who can package an investment program that includes the cost of the investments, trading, custody, and the advisor's professional services for 1.8% or less, you're getting a sweet deal. Most fees are now billed quarterly, so you'll need to know whether they will be pulled in advance or in arrears.

A combination of payment methods may also occur. Before you sign on to work with an advisor, you should make sure that the rates, fee structure, and commission schedules are clearly laid out (preferably in writing, as RIAs are required to do by law) so there are no surprises later.

Evaluating the Professional

Anyone can call him or herself a financial analyst, financial advisor, financial planner, financial consultant, investment consultant or wealth manager, warns the Financial Industry Regulatory Authority (FINRA). In fact, an individual could drop out of high school, rent some office space, pass a FINRA general securities exam and be selling stocks—all within a couple of weeks. While exams such as the Series 6, 7 and 63 satisfy the industry regulatory requirements, they do not offer the advisor experience when it comes to real-life situations.

The financial industry is also rife with professional designations, many of which can be obtained with little or no effort. However, it does have three leading certifications that have significant educational and ethical requirements:

  1. A Chartered Financial Analyst (CFA) has a wide range of expertise in securities, financial analysis, investing, portfolio management and banking. The testing regimen for this certification is long and rigorous.
  2. A Certified Financial Planner (CFP) must hold a bachelor’s degree and must have completed “a college-level program of study in personal financial planning, or an accepted equivalent.” In addition, a CFP has booked at least three years of industry experience and passed a series of comprehensive tests, abides by a code of ethics, and meets continuing education requirements. You can check the CFP Board’s website to verify that your advisor or financial planner belongs to this group.
  3. A Chartered Financial Consultant (ChFC) holds a certificate that uses the same core curriculum as the CFP but does not require a comprehensive board exam and does not require that he or she abide by a code of ethics.

The latter two are often considered best for creating a general financial plan. If you are looking for someone with more of a retirement focus you may want to seek out a Chartered Retirement Planning Counselor (CRPC), who have completed intensive training in retirement planning through the College for Financial Planning.

If your concerns are dominated by taxes, try a Personal Financial Specialist (PFS) who is a CPA but has also undergone additional education and testing, thereby offering more expert financial planning qualifications. For insurance and estate-planning matters, you might want an advisor who has attained mastery as a Chartered Life Underwriter (CLU).

FINRA's Broker Check Site

You can check for any regulatory blemishes on the advisor’s record at FINRA’s broker check site. One thing to keep in mind, however, is that an isolated complaint or infraction does not necessarily mean that the planner is dishonest or incompetent. Any charge brought against a broker or planner will go on the person's record, regardless of whether the planner is in the right. But if the record shows a long-term pattern of violations, customer complaints or charges of a serious nature, then you should probably find someone else.

Importance of Fiduciary Standard

Whatever sort of services you need, make sure that advisor is held to fiduciary standards, which charges them with the responsibility of acting in the best interests of an investor. In the investment world, RIAs are required to abide by a fiduciary standard; stockbrokers generally only have to abide by the less-rigorous suitability standard. However, the Department of Labor's Fiduciary Rule partially phased in on June 9, 2017, greatly expands the types of professionals who are expected to comply with fiduciary standards.

Registered investment advisors are either registered with their state of residence or the SEC. They are regulated under the Investment Advisors Act of 1940.

Questions to Ask

Once you've identified a firm or individual to work with, make sure you understand all of the services that are available. At a minimum, consider the following:

  1. Will they track your investment cost basis for you?
  2. Can they file your tax return and help you with other tax-related questions?
  3. Do they look at insurance products including life insurance, long-term care, and annuities?
  4. Can they help you plan your estate and distribution of wealth?
  5. Will they refer you to another professional if the firm cannot provide the service itself?
  6. Is there a succession plan, in case something happens to your advisor?

Ask About Communication

It’s also important for clients and prospective clients to understand how their financial advisor communicates with clients and the frequency of those communications. How often will you meet to review your portfolio and your overall situation? Quarterly, semiannually, annually or as needed? Will these meetings be done in person or perhaps over the phone, or via a service like Skype? It's becoming more and more common for clients to work with their financial advisor remotely.

Additionally, does the advisor typically communicate by phone, email, or perhaps text message? Any or all are fine, and both your preferences and the advisor may be based on your age and digital comfort level.

Ask About Financial Expertise

It's also good to ascertain if your situation is typical of the advisor’s client base. For example, if you are a corporate employee looking for help planning for the exercise of your stock options, you should ask the advisor about their knowledge and experience in dealing with clients like you. A financial advisor who deals primarily with clients at or nearing retirement might not be a good choice for you if you are a 30-year-old professional looking for a financial plan.

The Bottom Line

Good financial planners and advisors are compared to "life coaches" because they can help you with many of your complex financial decisions throughout your life. A financial advisor can offer tips on buying a car, saving for college and refinancing your home mortgage, just to name a few. They deal with other financial professionals on a daily basis, and they typically know if you're paying too much for something or not getting a competitive rate.

Great financial planners will not only help you make money on your investments but will also help you reach your goals, avoid undue investment risks, and save money on insurance and other major decisions throughout your lifetime.

To maximize your experience with your planner or advisor, you should meet with the person regularly, share your concerns and goals, and allow your advisor to review all of your financial and legal documents regularly.