Let’s start with a definition of what is a financial planner.  A financial planner is someone who takes a “big picture” view of where you are today, helps you define the goals you want to reach in the future, and then works with you to develop a roadmap to get there.  A comprehensive financial plan will normally cover budgeting, debt reduction, personal insurance (life, disability, health, long-term care), property and casualty insurance,  taxes, retirement planning, investments, estate planning, real estate (primary residence and investment properties), and college funding (for children and grandchildren).  Sometimes a financial planner will be asked to focus on a single financial issue, however, it should be done in the context of your overall situation.

Before hiring a planner or if you’re working with an advisor now, ask yourself what you are looking to get out of the relationship?  Is it a comprehensive plan or ongoing comprehensive advice covering your entire situation, or are you looking to address one area of your financial life, such as investments, insurance, or estate planning?

The other area to consider when choosing a financial planner is how you will be charged for the planning advice.  There are a few ways that a financial planner or a firm can be paid:

1)      commissions for the sale of products, such as insurance or investments, to implement your financial plan,

2)      fee-based, which traditionally has meant a combination of commissions and fees paid direct by the client, though some individuals and industry definitions are now using this interchangeably with fee-only, and

3)      fee-only, which can mean an annual percentage of assets under management or financial planning based on hourly advice, including projects and retainers.

When working with a planner you should ask about all the various charges that both the individual planner and the firm will receive for the business that you do with them.  Some firms, generally the larger ones, may receive ongoing fees paid direct by you for managing your investment accounts and also receive additional revenue based on the securities purchased in your account.  Not all of the revenue the firm receives is disclosed on your statements, so it’s up to you to ask.

Our next article will focus on the primary certifications held by financial planners and provide a questionnaire to use when selecting an advisor.

To contrast that, Registered Investment Advisors and Certified Financial Planner professionals are held to a “fiduciary” standard meaning that when they advise their clients, they must put their clients’ best interests first.  The difference is that if there were two comparable investments with the same objective, one with a high commission being paid to the firm (and the financial advisor) versus another low-cost, no commission fund, a financial advisor held to a “suitability” standard could legally recommend the fund with the higher commission because it was suitable for the client, even if it was not in the client’s best interest due to the high commission!  A proposed law would require that all financial advisors be held to the same fiduciary standard.  What is interesting is that an article in the Wall Street Journal (WSJ) on July 19^th (http://online.wsj.com/article/SB124536973514629609.html) reported that these changes to put the client’s best interest first could “upend” Wall Street!  I think most people working with a financial advisor already assumed their needs were being put first, even if that was not the case.  Fascinating how this change to better the investor’s experience could cause such turmoil!

Another article more recently in the WSJ on August 29, 2009 stated “Wall Street finally has agreed to put its brokers under the tougher fiduciary standard for their dealings with customers. Now a fight looms over how tough that standard will be.”  I vote to make it as tough as possible.  Investors deserve to know that their interests are always put first.