Last week we talked about how to decide whether you should bring in a financial planner to help you make the best decisions about your financial future.
Once you’ve decided you want to pursue hiring a financial planner, what’s next? Today we’re breaking down the process of hiring a financial planner into just five simple steps.
Before we dive in though, let’s review the differences between a financial planner (or advisor) and a broker, as well as the different obligations they have when it comes to making decisions about your investments.
Fiduciary Responsibility vs. Suitability
A financial planner is a professional you hire to choose your stocks, bonds, real estate investment trusts, and more. These planners are fiduciaries, meaning they’re legally obligated to act in your best interest. Normally you’ll pay your financial planner a flat fee or or he’ll take about 1% of the assets under management (we’ll discuss this in more detail below). This means these financial planners often have fewer conflicts of interest than brokers.
Meanwhile, a broker works for an investment firm. Her job it is to persuade clients to buy or sell stocks, bonds, mutual funds, and other financial products. Paid on commission, brokers have an incentive to sell. The broker’s standard is suitability, meaning he or she isn’t a fiduciary. While a specific investment is appropriate for you as a client, it might not be conflict-free.
If you’ve decided hiring a financial planner is most compatible with your goals, follow these 5 steps to find the best one for you.
1. Get Referrals
What could be better than getting referrals from friends, family and the trusted professionals in your life? If possible, try asking contacts with similar income/asset levels for referrals to make sure the financial planner will be comfortable with your situation.
You should interview at least three candidates, preferably at their offices. This will give you a good comparison of the candidates, their office staff and size as well as their business practices.
2. What Type Of Advisor Do You Want?
Are you looking for an investment manager or a long-range financial planner? A investment manager or broker will be solely focused on your portfolio, where as a long-range financial planner will help you create a more comprehensive financial plan. This might include considerations like insurance, retirement, and college tuition.
3. Look For CFPs & RIAs
Did you know that anyone can call herself a financial planner? Other designations like Certified Financial Planner (CFP) is the highest standard in the field. CFPs complete coursework, pass regular exams, and uphold a code of ethics along the way.
Your CFP should also be a registered investment advisor (RIA) because they must register with either the Securities and Exchange Commission (SEC) or state securities authorities. Keep in mind that RIAs have a fiduciary duty to their clients.
4. Do Your Due Diligence
When hiring a financial planner, checking references, credentials, accreditations and business practices is one of your most important steps. Ask each potential advisor for at least three references of clients with a similar financial profile to yours – and call them!
Ask for a copy of the Form ADV – this will disclose possible conflicts arising from securities trades and answers a lot of other questions. Also request a risk-adjusted performance record (in writing) going back at least five years.
Be sure to ask which custodian would hold your money. It should be an independent company and be well-known.
5. Get Clear On Compensation
A fee-only method is the most commonly-recommended way to pay a financial planner. Your financial planner is paid either a flat rate, an hourly rate, or a percentage of your assets, meaning your financial planner’s success ebbs and flows along with yours.
Another compensation option is to pay your financial planner by commission only. The financial planner takes a commission of every product they sell (stocks, annuities, insurance, and more). It doesn’t matter how well your investments do – they still get paid.
You might also consider a fee-based arrangement, which is a combination of the fee only and compensation methods.
And while you’re on the topic of compensation with your potential financial planner, don’t forget to ask if there are any hidden fees that haven’t been discussed yet!
A Financial Planner Can Provide Peace Of Mind
Now might be the perfect time in your life to bring in proven, professional expertise to map out all aspects of your financial future, taking a huge burden off of you. Follow these five steps to get you started, and remember that peace of mind is always worth investing in!
*Disclaimer: Citywide Home Loans does not provide financial planning services or any other service apart from lending. You should always consult with your legal, tax and financial advisors to determine which strategy is the most suitable for your specific circumstances.