How to Choose a Financial Planner



by Denise Downey

Finance can be a daunting place to navigate. Mutual Funds or ETFs? IRA or Roth IRA? What is a required minimum distribution? It’s no wonder people hire professionals to help guide them through this complicated territory. Of course, then, the most important question is: how do you find a financial planner you trust?

We’ll explore the two main types of financial planners, so you have an idea of what to expect.


Financial Planner Meeting Client


Most financial advisors fall into one of two categories:

Financial planners who work for firms like Charles Schwab or Merrill Lynch offer financial services that are usually sales-based. Banks that offer financial planning services typically also leverage sales-based financial advisors.

The alternative, fee-only financial planning, has recently been gaining popularity.

I’ve worked as both a sales-based advisor and as a fee-only planner. Here’s what you should know.

How Traditional Planners Get Paid

Banks and brokerages often advertise that clients receive free financial planning services. Of course, financial planners aren’t purely philanthropic. It’s a job, like any other. So how do they do that?

In most cases, financial planners employed by banks and brokerages are paid on some form of commission. Some planners are paid entirely on commision while others receive a combination of salary with bonus.

Why is this important to know? Because it means that while you may never make a payment directly to the planner, you and your investment make up a portion of that planner’s income.

Many people find this confusing, and it’s easy to see why. People believe they’re receiving financial advice for free. In reality, these financial planners are compensated based on the amount of money you to bring into their firm or they receive a bonus getting you to invest in certain financial products.

Don’t get me wrong: financial planners deserve to get paid. The work they put into drafting retirement plans and setting up college savings plan is difficult, time-consuming and takes years to master.

However, the standard practice of compensating financial planners on selling products can create a conflict of interest. It’s easy to imagine how a financial planner who is very close meeting his quarterly sales goals might be thinking of those goals when chatting with a client about an annuity.

There are plenty of sales-based financial planners who do an outstanding job and manage to keep the client’s best interest in mind for all key decisions. However, it’s important to understand exactly how they earn their paychecks.

Compensation for Fee-Only Planners

Now that you understand how traditional financial planners are paid, let’s talk about the alternative.

As the name suggests, fee-only financial planners are paid only by the fees they charge for their services. If you want a financial planner, you can pay a fee-based provider for a financial plan. If you need two hours to help set up a college savings account for your child, you’ll pay for the time it takes for the planner to do that.

Some people hear the word “fee” and get scared off. But the idea behind the term “fee-only planner” is to make everything as upfront and transparent as possible. You get what you pay for.

Fee-only financial planners don’t receive compensation based on product sales. That means they will not face those same conflicts of interest that arise when dealing with sales-based financial planners.

Since fee-only financial planners do not receive compensation based on product sales, you can rest assured that they have your best interests in mind when they provide a recommendation. Their main motivation is to retain you as a happy client, so you’ll continue to work with them.

Suitability and Fiduciary Duty

When considering which type of financial planner is best for you, be sure to also consider what professional standards your advisor will be held to.

Sales-based financial planners are held to a “suitability standard,” which means that as long as they have determined the product is in some way suitable for you, they have met their legal responsibility to invest on your behalf.

On the other hand, fee-only financial planners are held to a “fiduciary standard,” which means that it is a primary requirement of their job to put a client’s best interests first.

You may not be familiar with these terms, but financial planners are. They know that at any point in their career, for every client they’ve had, they may have to defend their decisions to regulators, auditors, or attorneys.

Do All Financial Planners Cost the Same?

People often ask if fee-only planners are more expensive than traditional planners. I always have the same answer: it’s hard to tell.

If you are investing with a sales-based financial planner the fees are not transparent. Over the years, big firms have been able to push information about fees deeper and deeper in the fine print.

People may believe they’re receiving financial advice for free but they’re often paying an overall management fee, an annual fee, and, for mutual funds, 12b1 fees. If they own an annuity, it gets even more complicated.

On the other hand, pay structure is much more visible for fee-only financial planners. You get what you pay for. If you need an advisor for two hours to setup up a college savings account for your child, you know exactly what the advisor is getting paid for.

Their fee structures can vary. Here are a few common ones.

When researching which financial planner is best for you, be sure to consider the fee structure of each and decide what you’re most comfortable with.

How To Find a Fee-Only Planner?

Fee-only financial planners are on the rise. (You’re not the only one who feels uncomfortable with how big financial institutions do business.)

If you think a fee-only planner would be a good fit for you, then I suggest a little research.

You can start by looking at one of the two leading professional organizations for fee-only planners: www.napfa.org or www.feeonlynetwork.com.

These sites allow you to search by location or expertise area. You’ll be able to view profiles and backgrounds of various planners and find someone who meets your needs.

If you feel unsure about whether or not you are really speaking with a fee-only financial planner, then ask them these two questions:

Don’t worry, you’re not being nosy. We get asked these questions all the time.

The answers to these two questions should be easy for any financial planner to answer and especially for a fee-only financial planner. If you find an advisor who cannot provide a straight answer or who dances around the question, that’s a red flag. Time to move on to the next candidate.

Good Luck

Deciding who you want to manage and grow your money is not an easy decision. But there are plenty of highly skilled financial planners in the world. And these days, you’re not even limited by geography. So many companies offer online services that you really have your pick of the best advisors in the world.

Ultimately, when determining which planner is best for you, the question you need to ask yourself is whether you believe your financial planner will be an unbiased financial advocate for you.

The most important aspect of the relationship between you and your financial planner should always be trust. After all, it is your money and your future that you two are working to expand.