11 Keys to Selecting a Financial Planner

Selecting a financial planner with a rudder - boat

What do you look for when selecting a financial planner?
You need to find a financial planner with a rudder. What do I mean by a rudder?

A lot of financial planners consider it smart to travel on the "fast track." They've set their sails, and they're moving full speed ahead a hundred miles an hour with the wind in the sails. So, how do you find one with a rudder that can stay on course?



Unfortunately, many two- or three-man financial planning companies latch onto the latest fads. They're the ones sailing full speed ahead while large, national financial institutions seem to lack speed in comparison.

They're old and stodgy. But what's really happening? Conservative companies are steering with the rudder. They're conservative because they have a reputation to maintain. Because they don't want to get sued. Because they have the backup -- the legal and financial support staff -- to provide the rudder for their financial advisors. They don't get tossed by the whims of financial fads.

Contrary to what the popular press may say, never assume that so-called objectivity and independence are the supreme virtues. Of far greater supremacy are conservatism, integrity, competency, trust. Of greatest importance is a rudder set to timeless correct principles.

Select a financial planner with a rudder, one whose competence, integrity, outlook, and philosophies are well determined. You will want one who has the character traits presented in Money Happiness, and who cherishes his individual freedom the way you do yours. A financial planner who isn't already on the road to security and success, can't lead you there.

One who doesn't know how to set goals and achieve them himself will be ineffective in helping lead you toward yours.

A couple of tell-tale questions:

  1. Does he/she think you should borrow out your home equity and invest it so it is "working harder"? If yes, stay away.
  2. Does he believe you would be better off if you replaced your whole life policies, bought term insurance, and invested the difference? If yes, politely excuse yourself and leave. Your meetings with us have hopefully taught you how to discern sense from nonsense.


Here are the key questions to ask when selecting a financial planner:

How Much and What Kind of Service Do I Need?

Are you looking for comprehensive financial planning? Portfolio management? Estate planning? Insurance advice? Retirement planning? Asset protection strategies? Tax advice? Or something else? You need to find an advisor that specializes in the services you need-or that is part of a firm large enough to provide specialists for you. The vast majority -- 80 to 90 percent -- of financial planners come from organizations of five or fewer. Many are not trained in areas other than life insurance sales or stock trading.

A financial planner may be able to provide you additional and broader services if he has a relationship with other financial planners within a large organization or a major financial institution. (For some, an affiliation with a major financial institution is looked upon as an evil conflict of interest. But, I often observe that such an affiliation provides an anchor and a rudder, which is preferable to having a loose gun on the deck of your financial ship.) Don't discount the value of these services.

Is the Financial Advisor Properly Licensed?

To become a financial planner, certain state requirements must be met to show minimum knowledge of the industry. Financial planners may give investment advice, and if so must become registered as investment advisors. Financial planners may offer various insurance and securities products, and if so they must also pass the state insurance exam and several exams given by the FINRA. Financial planners must also meet state and federal continuing education requirements for most designations and licenses.

What Is the Advisor's Designation?

The advisor's designation tells you about his educational background. Designations include Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP), Certified Public Accountant (CPA), Chartered Life Underwriter (CLU), or attorney (JD), among others. These signify backgrounds in finance, business, accounting, insurance, and law.

Remember, though, that background is only one aspect of a planner.

For example, you might naturally assume that CPAs have greater background in income tax than other professionals. But that's primarily due to their experience, not their CPA designation. Did you know that the CLU exam has more questions about taxation than does the CPA exam? As another example, the ChFC exam is clearly a broader and more rigorous exam (and therefore accredited like other colleges and universities) than the CFP designation, though CFP is marketed better and is more popular.

Even areas of specialty don't mean everything. CPAs, for example, major in accounting. College accounting courses take a historical perspective.

They look at recorded historical data -- which the CPA then records, puts on a form, and prepares as a financial statement or a tax return. Every business owner should have a good CPA who can assist with financial statements and money management. But that's not the same as a financial planner. Even colleges recognize finance and accounting as different majors. Financial planning is applied economics. It takes a futuristic approach. It is analytical and has a long-term strategic perspective.

It's proactive, not reactive.

The worst financial advice comes from journalists. They are notorious for describing an extreme market position, emphasizing the sensational in order to sell magazines. In my view, journalists are more concerned with making a story than reporting one. Seldom do I read the complete facts as given to the reporter, but rather a hazy half-truth intended to make a warped yet sensational point. Seldom do I find good judgment. Usually I find a pickle-sucker sitting on the fence pointing his finger of scorn at those in the arena who live with media judgments day to day. No wonder consumers feel like ping pong balls.

Planning your financial future by a magazine is like reading a medical dictionary and then performing surgery on yourself.

Is the Financial Planner Competent?

When selecting a financial planner, ask how long the advisor has been in business -- and the breadth and depth of his experience. An exam, degree, or designation will not make anyone an expert in financial planning. Even the designations listed above provide only a basic level of knowledge about financial planning. Expertise is seldom acquired under the tutelage of any professor, book, or designation. It comes only after long years of advanced studies combined with many years of intense application in the real world.

I regularly discover financial planners with years of experience and who have participated in extensive in-house training programs who have more prudent insights and judgment than others who simply hold the recognized designations. I'll take experience over designations anytime, though I would prefer a planner who had both.

But of more value than either designations or experience, is a rudder, an anchor, a philosophical commitment to timeless principles of wisdom, prudence, balance, and freedom.

Does the Financial Advisor Have High Ethical Standards?

Look for membership in at least one industry organization that enforces a code of ethics.

How do you deal with conflicts of interest, which exist with every professional, not just financial planners? Everyone has biases, philosophies, professional opinions shaped by years of experience and exposure to ideas. For example, a physician may recommend medication instead of surgery if he owns the pharmacy attached to his clinic. Architects and contractors have conflicts of interest as they prescribe building approaches. CPAs and attorneys have conflicts of interest as they recommend services. Journalists would have us believe that they are the only ones without a conflict of interest (all they have to do is to sell newspapers and magazines). But, do any of the examples above indicate that the professional acted improperly? No.

So how do you deal with them? Ask. Have them disclosed to you. Request a comparison of various fees, loads, charges, and expenses that might be associated with each particular recommendation from your financial advisor. After understanding the impact of the up-front transaction costs of each alternative recommendation, you are in a better position to make a sound decision.

In my experience, contrary to what some would have us believe, the answer to this dilemma is not the legislating away of potential conflicts of interest, but reasonable disclosure. Attempting to legislate away potential conflicts of interest once again puts the government in the position of knowing what's best for the consumer. I believe that, with disclosure, the consumer is perfectly capable of choosing how to do business. He realizes that he may be buying convenience, simplicity, service or a whole host of other things when he chooses to do business.

Is the Financial Advisor Committed to Continuing Professional Education?

Laws governing finance and taxes are complex and constantly changing. Now add the fact that the economy fluctuates regularly. How many hours each year does the advisor spend staying on top of things? If he holds a professional designation or maintains membership in a professional association, he is probably required to complete a number of hours each year in formal continuing education.

Is There a Satisfied Client Base?

Before you select a financial advisor, ask if the advisor will give you client referrals. Want an easy way to find out if clients are satisfied? Find out how long the average client stays. advisors may be hesitant to disclose the names of many clients for reasons of confidentiality or because they don't want them called all the time. In that case, perhaps some clients have allowed themselves to be quoted in a firm brochure. If you really need to talk to someone, go ahead and ask. The advisor should give you several names.  Having said this, in recent years privacy legislation has been passed that makes it more difficult to give names of clients.

What Is the Average Client Like?

Assume you earn $50,000 a year. If the advisor primarily deals with people who earn $150,000 a year, will you get the attention you need? Does the advisor primarily work with professionals, business owners, middle-income clients, women? Do you fit the profile? Will the advisor meet your specific needs -- or is he part of a firm that's large enough to handle all types of clients?

Is the Financial Planner a Full-time Professional?

When selecting a financial planner, be wary of people who are part-time, lack membership in professional societies, ignore continuing professional education, and criticize others who do commit to high standards. There is a proliferation of those types -- they are multiplying like rabbits.

Beware the friend who took a quickie course, got a quickie insurance license, and now wants to replace all your existing policies. You may be better off to write him a quickie check for a thousand bucks and send him on his way. It would be a lot cheaper.

How Is the Advisor Compensated?

Financial planners may receive fees, commissions, or both, in four possible ways. This distinction is important to you, because it may affect your cost and the service you receive. "Fee-only" planners charge a fee for their services, but don't receive a commission when you purchase a product. The advantage is that you may get more objective advice. The disadvantage is that the planner may have little incentive to make sure you follow through by implementing the plan, and may lack the ability to coordinate all facets of its implementation.

He may also be inexperienced when it comes to actually implementing the plan-dealing knowledgeably with insurance companies, stock brokerages, etc. And you will probably end up paying the product company an additional fee for implementation -- after already paying the fee-only planner. In essence, you're paying twice for the same service.

"Fee-based" planners charge you a fee that's enough to fairly compensate for planning work, but they may also get a commission on any products you purchase. By law, their "engagement letter" must disclose conflicts of interest and all terms relating to the engagement, allowing you five business days for a full refund of any fees paid. The disadvantage here is that you will need to be sure you understand fees, loads, charges, and expenses of any recommendations offered. The advantages will probably include increased convenience, one-stop service, broader competencies, and increased influence when it comes to representing your needs with major financial institutions. And you'll probably not be paying double when it comes to implementing recommended product purchases: both a fee to the planner for oversight and a commission to the product salesperson.

"Fee-plus-commission" planners sometimes charge a fee, but most of their compensation comes from commissions. So, what's the difference between a "fee-based" planner and a "fee-plus-commission" planner? In my experience, the fee-based planner initiates virtually every engagement by charging a fee significant enough to provide a comprehensive financial plan. By contrast, the "fee-plus-commission" planner is set up to charge fees, but seldom does it unless you insist on paying him a fee -- 99 percent of the time he is commission only. As a result, although he will suggest a comprehensive engagement, he must be focused more on insurance and investment products.

"Commission-only" planners don't charge any fees; their only pay is commission from the products you purchase. (Remember, even most commission levels are government-regulated to balance consumer and industry interests.) Commission-only "planners" are seldom planners at all, but are focused solely on the products they sell. (Having said that, I have usually found very competent, thorough, and ethical CLUs, ChFCs and CFPs.)

Find a Planner Who Will Perform

What difference can the right planner make? Consider the following scenario: Chris was a CPA, had spent time with a "Big 6" accounting firm, and had risen during his 30-year career to become Chief Operating Officer of a company that employed many thousands. We visited, and I explained our services. We met in his home to gather some data, and as I was leaving he said, "Hank, by the way, here's a copy of a financial plan prepared by the accounting firm I was with years ago. We still use them for our corporate work. Maybe you'll find this plan helpful in your analysis." I looked at the plan, which was less than six months old. I asked Chris, "Why don't you work with them? How much did you pay for this?" "Well, Hank, even though I paid $5,000 for this plan, it's just been gathering dust on my shelf. No follow-through. I'd rather start over with someone who'll get the job done." True story, no kidding. He had the right CPA firm for the big corporate work, but they didn't get the personal job done. (Ironically, I had just finished an engagement with that Big 6 firm a year previous to teach them how to add a "Personal Financial Planning Division" to their practice).

It's important that you understand the differences in compensation, but don't get hung-up on it. Keep it in perspective with the other eight criteria for selecting a planner. It's far more important to hire a planner who cares, who can be trusted, who is competent, who shares your philosophies, and who gets you ahead financially. This can't be stressed enough.

No one approach to planner compensation instantly converts anyone into a paragon of virtue, competency, and trustworthiness. Stay away from those self-righteous individuals who have the audacity to judge someone else's integrity by how he is compensated; they are usually projecting onto someone else their own cynical thinking and motives. A competent and trusted commission-only planner who gets you ahead is forever better than any fee-only planner who loses your money. Don't be self-defeating and small-thinking, like the person who focuses more on what the planner earns, than on what he's earning by following the planner's advice. A good financial planner will be worth every penny he earns.

It's like the sign on the wall: "I have no argument with others who sell their services for less. They know what their services are worth."

There are many things to consider when selecting a financial planner.  Remember to select a financial planner that not only fits your needs and situation, but also has a rudder set to timeless correct principles.

Hank Brock, CPA, MBA, CLU, ChFC is President of Brock and Associates, LLC and author of "Your Complete Guide to Money Happiness." Hank has been in the financial planning industry since 1979.