Shopping for a Financial Planner

Anyone can claim to be a financial adviser, and many people do—roughly 300,000 in the U.S., according to the research firm Cerulli Associates. A good adviser can add significantly to your wealth through smart, sophisticated planning and investing. A bad one can cost you dearly. So choosing the right consultant can be as important as any financial decision you make.

Here are some things to consider when shopping for an adviser: 

Standards. Generally speaking, investment managers fall into one of two camps, with significant differences. One consists of Registered Investment Advisers (RIAs), the other of broker-dealers, their registered representatives, and insurance agents. Under the Investment Advisers Act of 1940, RIAs are held to a fiduciary standard: they must place the client’s interests ahead of their own. Broker-dealers must meet only the standard of the advice being suitable. A stockbroker’s first responsibility is to the broker-dealer, not the client. Many consumer advocates recommend RIAs for this reason.

Compensation. Many (but not all) RIAs work on a fee-only basis, with their charges commonly calculated as a percentage of assets—for example, 1 percent per year of assets under management. Members of the National Association of Personal Financial Advisors work on a fee-only basis (though not all of them manage investments). Other advisers earn commissions for products sold—for example, mutual funds with front-end or back-end loads. (No evidence exists that funds with such fees perform any better than no-load funds, which makes sense since the loads are indeed sales charges.) Consumer advocates often recommend fee-only financial planners because no potential conflict of interest exists when an adviser’s recommendations don’t affect his compensation.

Note that “fee-only” advisers are sometimes confused with “fee-based” ones. The latter may have one foot in each camp, working for fees in some cases and for commissions in others. Know what you’re getting.

Qualifications. How long has the adviser been in business? Is he or she qualified to provide advice in the areas that matter most to you, such as estate planning, executive compensation, or aircraft financing?  How many market cycles has he or she been through? As for designations, CFP (Certified Financial Planner) is the gold standard in the field. Those with the mark have passed a rigorous, two-day exam—preceded by hundreds of hours of study in core subjects like insurance, taxes, investments, and estate and retirement planning—and possess at least three years of experience. CFA (Chartered Financial Analyst) indicates a high level of investment education and knowledge.

Due diligence. Invest some time in verifying the adviser’s story. Does he hold the designations he claims to have? Is she a member in good standing in the organizations to which she professes to belong? You can check for complaints with the appropriate regulatory authority—the SEC for Registered Investment Advisers managing more than $100 million, the State Securities Regulator for RIAs managing less than that, the Financial Industry Regulatory Authority for registered representatives and broker/dealers, and the State Insurance Commissioner for insurance agents.

Ask for and read the appropriate written materials. For RIAs, these would include Form ADV Parts 1 and 2, which will provide information about the firm, its employees and business practices, fees, and any disciplinary actions.

Custodian. Be sure that your assets will be held with an independent custodian whose obligation is to you. Confirm that your ­investment manager’s authority over the account is defined and limited. In the Madoff case, such a wall between the investment manager and custodian did not exist.

So, know your facts. But, also, trust your instincts. You interviewed the potential adviser. Did you see style or substance? Did you detect transparency or evasion? Is this someone you can trust with your money?

Paul Palazzo, a Certified Financial Planner, is the managing director at New York-based Altfest Personal Wealth Management.