How to Choose a Financial Planner

Four years ago, Eddie and Eugenia Russell of Williamsburg, Virginia, found themselves with a little extra cash from their real estate investments. When their title professional inquired about what they planned to do with the money, the Russells looked at one another and shrugged. “The guy from the title company handed me a business card from a financial planner he’d been working with,” says Eddie Russell, “so I decided to give her a call.”

Prior to that, Russell says the only financial planning he’d done was investing with a previous employer, opening a money market bank account, and purchasing a couple of certificates of deposit (CDs). He made the phone call to Katherine L. Brown, a financial planner in Newport News, Virginia, and says he was “immediately impressed with her presentation and the way she thoroughly went over the entire financial planning process.”

Unlike the type of financial planners who invest a client’s money and then receive a commission for their efforts, Brown is a fee-only planner who is paid by her clients either via hourly fees or a retainer fee based on their assets. Russell says he opted for the fee-only planner to avoid front-loaded fees (which concentrate the bulk of the fees in the “early” period of the investment) and to ensure his planner would make the best possible investment decision and not just push specific products in trade for a commission.

In exchange for the fees (Brown charges about $150 per hour), the Russells received a complete portfolio makeover that included a variety of investment options. “Our planner detailed for us everything that she was going to do with the money,” says Russell, “and meets with us upon request to discuss the portfolio’s performance and tweaks it every quarter.”

Some of the criteria that Russell used when choosing a planner had nothing to do with money management or credentials. In reality, he says the fact that Brown was humble and patient ranked among her most impressive qualities. She returned calls quickly and operated from a modest, non-showy office. “After combining those traits with her financial expertise,” says Russell, “we decided to give her a shot.”

The Right Choice
The key is to find a competent, qualified professional whose approach fits your needs. But, the selection process isn’t always easy.

One of the biggest differentiators among planners is the way they’re paid. The Russells’ planner, for example, is an independent professional who works on an hourly rate. Known as fee-only planners, these individuals sometimes alternately charge fees based on a percentage of a client’s assets and/or income.

Fee-only planners are appropriate for anyone who can afford to spend $150 to $400 per hour, or the flat rate, in exchange for a planner who is “on call” and able to create a comprehensive plan that includes investment advice, retirement planning, wealth management, college savings, and other financial services. Such planners pride themselves on giving “independent” advice that’s not based on the sale of a certain product or service.

Commission planners, on the other hand, sell products (such as life insurance) and are typically paid by the third parties that develop those products. Such planners can be appropriate for individuals who are just getting into the investment scene and lack the funds needed to pay a fee-only planner’s rates.

Brown, who is president of The Advisory Firm of Katherine L. Brown L.L.C.

, has worked both as a commission-based and fee-only based planner, and says the consumer with substantial investable assets (say, more than $1 million), might opt for a fee-only planner. A commission-based planner may be appropriate for new investors with little or no investable assets who might find a fee-only planner’s hourly rates expensive.

When deciding which planner makes the final cut, consumers should consider both their current financial picture and future goals. If, like the Russells, you’re concerned about investments that come with heavy fees, and if your end goal is to possess a comprehensive portfolio, then a fee-only planner will likely be worth his or her salt. But if you don’t mind paying commissions on securities products, and you need items such as permanent life insurance and long-term care insurance, “then a commission-based adviser may be your best choice,’” says Brown.

Althea DeBarr-Johnson, an attorney in Atlanta, says she advises her clients to pick a financial planner who is licensed to work on commission and hourly or flat rates, or the “hybrid” option. This will give you access to a wider variety of products and services from a single source, she says.

When shopping around, consumers should ask about credentials and licenses, and seek out a professional who will serve as your fiduciary or “trusted adviser,” and not just a product salesman. Ask for client references and don’t be afraid to call them up to find out about their experiences dealing with the planner.

Russell, who is satisfied with his choice of a fee-only planner, advises investors to avoid planners

who are trying to “push products on you,” and to seek out those that can discuss your complete financial picture, including retirement, college, insurance, and long-term care. “Do your homework before you go in and meet with the person,” says Russell. “Know what questions to ask and what you want out of the relationship.”

Having the right questions for a planner is critical. Here are six questions to ask before you decide to work with one:

1. What experience and qualifications do you have?
Find out how long the planner has been in practice and for an overall career history. Ask the planner to briefly describe his or her work experience and how it relates to his or her current practice. Ask the planner whether he or she is recognized as a certified financial planner (CFP), a certified public accountant-personal financial specialist (CPA-PFS), or a chartered financial consultant (ChFC). You can verify whether the planner is certified and/or licensed as a registered investment adviser at www.cfp.net or www.fpaforfinancialplanning.org.

2. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?
Several government and professional regulatory organizations, such as the Financial Industry Regulatory Authority or FINRA (www.finra.org), state insurance and securities departments, and the Certified Financial Planner Board of Standards Inc. (www.cfp.net) keep records on the disciplinary history of financial planners and advisers. Ask what organizations the planner is regulated by and contact these groups to conduct a background check.

3. What services do you offer?
Generally, financial planners can’t sell insurance or securities products such as mutual funds or stocks without the proper licenses. They can’t give investment advice unless registered with state or federal authorities.

4. How will I pay for your services and how much do you typically charge?
The planner should tell you–in writing–what type of payment they accept for services. Even without a clear sense of your particular needs, the financial planner should be able to offer an estimate of costs.

5. Do you work with an independent custodian?
Whether your adviser is managing your money or you are the person who signs off on each financial decision, your adviser should not be holding your funds. Your money should be held by an independent custodian company. Make sure you know the name of the company, how to contact the company, and your account numbers.

6. Will I be able to review all transactions?
The answer should be, “yes.” When you receive your statements, be sure you look at all transactions. Make sure you understand each purchase, sale, deposit, and withdrawal and why it was made. Like any relationship, your interaction with your planner should be based on trust, honesty, and openness.

The Do’s and Don’ts of Picking a Financial Planner
Do find out about the planner’s experience and qualifications are.
Don’t jump into the relationship without doing your homework first.
Do keep tabs on all transactions and other dealings related to your portfolio.
Don’t assume that your friend’s financial planner will be the right one for you.
Do seek out a new financial planner if your first choice isn’t working out.
Don’t feel that you have to work with the first financial planner you interview.

This article originally appeared in the December 2009 issue of Black Enterprise.