There are a lot of questionnaires out there and it’s important to use one that is asking the questions that matter to you. I’ve linked a few below from a couple financial planning organizations who support a fee-only fiduciary business model: National Association of Personal Financial Advisors (NAPFA) and Garrett Planning Network.

Before using a questionnaire, look it over yourself and think about the answers that you’d like to hear (the long questionnaire from NAPFA has an answer guide). Do you want to work with someone who is not a fiduciary (see previous post on why you should care)? What about if they accept commissions? Is that ok to you if you want to receive all financial planning services and implementation from one person?  Or is hourly financial planning or a fixed retainer what you wanted?  Do you want a written plan? Do you feel they should be a Certified Financial Planner™ professional if they’re providing a comprehensive plan to you (see alphabet soup post)?

Maybe you’ll want to take questions from all three (and other questionnaires out there) in order to address all your concerns. It’s your money and your goals, make sure you get the answers you need to feel comfortable with who is providing you advice!

Garrett Planning Network (fee-only hourly planning network) financial planner interview questionnaire

National Association of Personal Financial Advisors (fee-only planner network) – Short Questionnaire

National Association of Personal Financial Advisors (fee-only planner network) – Long Questionnaire

Although I enjoyed all of those classes, I found my passion with personal finance.  I realized I could have a career where I worked directly with people to define their goals and create a plan to meet them, then got to dive into the numbers through spreadsheets and analytics which I love, too.  Perfect blending of both worlds!

The CFP® is the top designation for financial planning and is the most rigorous to achieve.  It requires education through a board-certified program offering a certificate or degree, three years of experience in the field, an agreement to abide by the code of ethics, and successful passing of the 10-hour exam.  Then there are 30 continuing education hours required to complete bi-annually.

For those providing comprehensive financial planning, this is really the designation to have.  Other designations focus on different specialties within the industry and I’ve outlined some of the others that you may see:

CFA – Charted Financial Analyst – This is the top designation for those that manage money.  You’ll often see this designation held by mutual fund managers and by those at firms that specialize in money management.  Very rigorous series of exams required to complete.

CIMA – Certified Investment Management Analyst – This designation is not as rigorous as the CFA and is meant for those providing investment advice but assisting individuals in setting their asset allocation and screening money managers or mutual fund managers for those individuals.

CLU – Charted Life Underwriter – For those offering insurance services, this is the designation you may see.  This designation requires that a series of classes be completed offered by The American College.

Other designations that are not as rigorous to obtain, but indicate an interest or specialty in different areas:

CDFA – Certified Divorce Financial Analyst – Planners that can assist in the divorce process from a financial perspective to plan and educate for an equitable splitting of the assets.

CCPS – Certified College Planning Specialist – Planners that specialize in planning for college utilizing grants, scholarships, loans, investment options and tax strategies.

There is a smorgasbord of additional financial-related designations (over 80 that I last saw) that you may come across.  Be careful about being influenced by the “alphabet soup” after some people’s names.  Ask about the requirements for obtaining the designations and the continuing education requirements as well.  Honestly, I’ve seen that some designations don’t require that much work to achieve (other than perhaps a large check to the institution administering the designation), and then there isn’t any continuing ed requirement to stay on top of the changes in that area.

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.

From a financial planning perspective, cash management, or budgeting, is the first step to get control of your finances. Where is your money going every month? Are you in the positive and saving, or are you relying on credit cards to get by each month and pay required expenses? If you’re newly married or starting a family, what are your future goals, such as purchasing a house or saving for your child’s college education? Budgeting can tell you what you can afford to pay in extra monthly expenses or savings, and how long it will take to reach those goals. If you’re approaching retirement, how much do you need to withdraw from your savings, investments or retirement accounts to meet your needs? It’s important to understand the difference between a “need” and a “want”, especially if you have to cut back, such as in this volatile economy.

Some financial experts will tell you that your first step is to take a notebook with you everywhere you go for a month, writing down every expenditure – specifically the cash ones – from your daily latte at Starbucks to the magazine at the store and other “luxury” items. Others will tell you that you need to buy software such as Quicken or Quickbooks and download or enter your bank, credit card, and investment statements into the software then categorize every expense in order to produce graphs that show you where your money is going. Both are good ideas, however, I think the idea of all that work scares a lot of people away from the concept of budgeting. Although keeping track of all of your expenses in a software would be good, truly only 9-10% of all people consistently keep up with it. Most of us don’t have the time or interest to keep it up.

So at a high level, what are the key questions to ask yourself first about cash management?
1) Are you putting away money each month for your future goals?
2) Are you avoiding accumulation of ongoing credit card debt each month?
3) Do you feel in control of your finances?
4) Do you have a good idea of where your money is going every month?

Where do you go from there? When you want to get into the details, there is a great budgeting article written by Liz Pulliam Weston, a personal finance writer, that is available on MSN Money: How Much Should You Spend On… (concept based on a book written by Harvard bankruptcy professor Elizabeth Warren and her daughter Amelia Warren Tyagi called “All Your Worth: The Ultimate Lifetime Money Plan”) The gist of the article is that you need to review your current expenses to determine if they fall into the 50/30/20 budget.

The basic idea is that 50% of your total after-tax expenditures should go towards your “must haves” or your required monthly commitments, such as mortgage payments/rent, utilities, minimum loan and credit card payments, insurance, child care and transportation.

Then 30% is your “wants”, which includes vacation, clothing, eating out, and entertainment. This is the area that can be cut back, if necessary, when times get tougher.

Finally, the 20% should be savings towards goals and debt repayment.

I’ve seen a lot of budget guidelines over the years and this seems to be a simpler way to make sure that you are spending prudently and putting away money to meet future goals. As Liz Pulliam Weston says, “It’s simple, if not easy.”

If your “must haves” far exceed 50% or you’re having trouble keeping to your personal monthly budget, then it makes sense to take a closer look at your budget and at that point one of the more in-depth budgeting tracking tools could be used for awhile to assess your spending habits. If needed, there are other methods of budgeting to control the spending of your “wants” through withdrawing that designated amount in cash each week or moving those funds to a separate account to make sure you stay within your budget.

Obviously, we all go through life transitions where we can’t stick to our long term plan, whether it’s a job change, illness, disability, or debt has accumulated to the point of necessitating drastic measures such as debt consolidation or bankruptcy. The 50/30/20 budget gives us some guidelines to follow when we aren’t dealing with those extremes.

I’d love to hear your comments about your experience with budgeting or what you think about the 50/30/20 budget.