Choosing the right doctor and mechanic are important, but selecting the right financial planner is perhaps one of the most critical decisions that people make in their lives. It’s important to find out how long the financial planner has been in practice. Be sure to ask about professional certifications or designations. Following the advice below will safeguard your money and assets.
The first question to ask concerns registration as an investment advisor. Registered, official investment advisors are required to maintain compliance with fiduciary guidelines, which means that they must always put the needs of their client first. Investment professionals who aren’t licensed or registered aren’t legally liable to act in the client’s best interest, but they are expected to promote appropriate financial products and services. Registered financial planners should clearly document how they charge for the services they provide. There are three payment methods: hourly rates, commission per transaction and fees based on portfolio value percentages. The latter is referred to as the assets under management (AUM) model and the former is the most popular because clients prefer flat fees. The level of financial oversight will determine which payment model is appropriate for you.
The Certified Financial Planner Board of Standards (CFP Board) requires CFP certification candidates to meet education, examination, experience and ethics requirements. Education can be achieved through several approved academic methods. The education must focus on advanced financial topics like creating financial plans for insurance, investment, retirement and estate planning. The CFP examination takes 10 hours to complete. The first-time pass rate is only around 60 percent. Employment experience means the candidate must have at least three years of full-time financial planning experience with individual clients. The ethics guidelines also come with a comprehensive background check.
Alternatively, the American Institute of CPAs offers a different financial planning designation called the CPA Personal Financial Specialist (PFS). These CPA licensed candidates must earn at least 75 hours of personal financial planning education before they can apply. They must also have two years of full-time business or teaching experience. Once they qualify, candidates must pass an approved Personal Financial Planner exam. Sometimes, the financial planner may only need to have membership in National Association of Personal Financial Advisors (NAPFA). This organization requires candidates to be either an RIA or a CFP. NAPFA financial advisers are fee based, so they cannot accept commissions or additional fees. In order to become a member of NAPFA, candidates must submit information on their education, experience and credentials for review. There are continuing education requirements to maintain membership.
Finally, be sure to ask about the financial planner’s approach to financial planning, investing and decision making. Some advisors prefer comprehensive plans, but others prefer ad hoc decisions and risk management.