You Don’t Need a Financial Planner. Plenty of people become wealthy without one. The basic way to build wealth—saving and investing as much as you can—is not a lesson that requires a financial planner.
Many Financial Planners Prefer Clients with at Least $100,000 to invest (i.e., home equity doesn't count). Ordinary investors often have trouble finding a financial planner because many planners will only take clients with at least $100,000 to invest.
If you don't have 100K, don’t get mad. Save. You shouldn't be doing any complex or sophisticated investing with the first $100,000 anyway, so you don't need a planner. In the process of saving the first $100,000, you may acquire some financial literacy that will be useful if you ever choose to hire a financial planner.
Investigate the planner’s qualifications and experience. The alphabet soup credentials of many financial planners indicate levels of educational attainment. But the most important qualities for a financial planner to have are honesty, good judgment and concern for your individual needs. Interview the planner and get references.
Some employers provide financial planning services. These services are typically offered as part of a 401(k) plan, often for free or at a relatively low price. View them the same way you would view services from any other financial planner and don’t use them if you don’t like what you see.
You don’t need a financial planner to start building wealth. Many well-off people don’t have them. The financial planning industry as it exists today is relatively young. Many of today’s wealthy (who tend to be older) did not have financial planners when they started out. If you’re an ordinary investor, the most important thing to do is save steadily, as much as you can. Without capital (i.e., savings), you can’t do anything else to build wealth. Investment advice and sophisticated financial plans accomplish nothing if you have no money to implement them.
Once you have some savings, start investing in simple things that you understand. While not all investments work out, a lot of them do. This will build your self-confidence, and whet your appetite for further financial growth. After a while, you may come to understand some of the more complex aspects of investing. However, there is no reason why you should ever need to invest in anything complex. It's quite possible to become a millionaire with just stocks, bonds, mutual funds, a house and bank accounts.
Many ordinary investors are not sought out by financial planners. A fairly common threshhold for financial planners is $100,000 of investable assets. If you don’t have at least $100,000 to invest (i.e., you wouldn’t count the equity in your house), they don’t think it makes sense for you to hire them. (Stated otherwise, their fees would be so high compared to your investment returns that you’d gain little or nothing by hiring them.) That leaves you to accumulate the first 100 grand on your own.
One advantage of learning to save and invest on your own is that your financial literacy will improve. You will be better able to evaluate a financial planner’s advice if you ever decide to hire one. If you are financially illiterate, a financial planner’s proposals may seem like gibberish to you. If you take a planner’s advice when you don’t understand it, you will have violated one of the basic guidelines for building wealth: invest only in things you understand.
When you have a net worth of six figures or more, you may consider consulting a financial planner. But don’t feel that it’s essential. Plenty of people become millionaires without a financial planner.
No one can predict the future, and don’t trust any financial planner who claims to know how to maximize your future gains. It’s possible that a financial planner could find ways to increase your potential gains, but that may well involve increasing your potential risk of losses. Remember that risk and reward walk hand-in-hand down Wall Street.
Conscientious financial planners provide many clients with an education about the basics of saving and investing. That’s a valuable service. For those who can’t learn this lesson on their own, spending the money to hire a financial planner may be sensible. But make sure you find an honest one.
An unscrupulous financial planner could take advantage of your ignorance and fast talk you into investing in something that will enrich the adviser at your expense. If you are financially illiterate, you will be vulnerable and may not be able to tell that you are being victimized. It’s better to know something about money and investments before you hire a financial planner. The self-reliant tend to do better in life, and that’s certainly true in financial matters.
People who have a lot of debt and can’t seem to get it under control may benefit from consulting with a financial planner. Perhaps the planner can help you identify ways to pay down the debt and start building wealth. However, you should understand that most financial planners aren’t credit counselors. If you have a lot of debt, but only a modest income, it’s unlikely a financial planner can do much for you. A person with a lot of debt and a large income might benefit from hiring a financial planner in order to put together a combined debt reduction and savings plan. However, planners who are compensated by a percentage of the assets you invest may have little incentive to help you pay down your debt. They would earn more if you invest as much of your cash flow as possible, instead of using it to repay debt. People struggling with debt should learn to control their spending themselves (self-discipline is ideal because it's always there for you); or they should seek credit counselling.
Choosing a Financial Planner
If you want a financial planner, find one that is unbiased and who puts your interests first. Here are few thoughts about choosing a financial planner.
Beware of Offers of Free or Cheap Financial Plans
Okay, here we are giving you free financial planning information, and we warn you to beware of free financial plans. But look at who’s offering the free or cheap planning and why. This website has no strings attached—you’re not required to give us your identity, let alone pay us any money. Almost all other offers of free or low cost financial planning come from financial services firms who want to get your business. Their free or cheap plans are actually part of the firms’ marketing process. Many firms want you to open an account with them first, before they’ll give you any advice. Some have minimum balance requirements like $50,000 or $100,000, or even $250,000. Others won’t require that you open an account, but may demand payment of at least a couple of hundred dollars before they’ll lift their fingers for you. Because these firms are really trolling for customers, you have to be careful about accepting their offers.
What Are the Planner’s Responsibilities to You?
A very important question is how responsible the financial planner will be. The highest level of legal responsibility for a financial planner is to be a “fiduciary.” A fiduciary is required to put your interests ahead of his or her interests, and to deal with your affairs in the same way he or she would deal with his or her own personal affairs. A fiduciary, for example, must recommend the investments that are best for you even if he or she receives lower compensation as a result. Further, a fiduciary who takes custody of your assets should protect them as if they were his or her own assets.
This is a high standard, and not all financial planners are required to be this responsible. Those that are “registered investment advisers” have fiduciary responsibilities. You can find out whether a particular person is a registered investment adviser by going to the state securities regulator for the state where the person keeps his or her headquarters. Larger investment advisory firms are registered with the SEC (www.sec.gov) but the individual investment advisers that most ordinary investors are likely to encounter will be registered with their state’s securities regulator. State regulators are listed at www.nasaa.org/about_nasaa/2062.cfm.
Other persons who engage in financial planning or similar activities may have significantly lower levels of responsibility. For example, stockbrokers often serve as informal financial advisers and planners for their clients. They are required by law to recommend investments that are “suitable” to a particular client, in light of the client’s financial situation, investment goals and life situation (e.g., the assets of elderly clients should generally be invested more conservatively than the assets of younger clients). Furthermore, stockbrokers are obliged to make full disclosure of all material information about an investment that they recommend. That means that, not only must they tell the truth, they must tell the whole truth and nothing but the truth. However, a stockbroker is not a fiduciary, but rather a salesperson.
Ordinary investors who want to use a financial planner should hire a registered investment adviser, especially if they might hire someone who would receive commissions for selling them products (see the discussion below regarding compensation) or might take some of their money and invest it for them. When you know so little about the waters in which you are swimming, stay away from anything that might be a shark. While there are plenty of honest financial planners and stockbrokers who are not registered investment advisers, the ordinary investor is easily victimized, but would have a hard time recovering from losses.
Financial planners’ fees may be a percentage of the amount of money you plan to invest (like 1% to 3%, depending on the amount, often with lower rates for larger amounts), a fixed amount, an hourly rate, commissions for getting you to invest in financial products, or some combination of the foregoing. Even an ordinary investor should expect to pay at least a few hundred dollars for a financial plan.
The planners who charge a percentage of the assets you invest are likely to impose minimum requirements, such as you having $100,000 of investable assets. Otherwise, their fee will be too small to be worth their while. For the ordinary investor, that may be just as well. A planner who charges a percentage of invested assets may have less incentive to get you to pay down your debts, because debt repayments reduce the amount of assets you have available to invest and therefore reduce the planner’s fee. But debt reduction, as we have discussed in our section on controlling your finances, is a crucial part of building wealth.
Further, an unscrupulous planner might steer your toward riskier investments, in the hope that your account assets will grow faster and therefore increase his or her fees. However, riskier investments could more easily backfire and lead to losses (but they'd be your losses, not the planner's).
Sometimes, financial planners are paid commissions for the products they sell, by the companies offering these products. These planners may give you some financial advice, but they are primarily sales people who make money selling investments. They could be tempted to steer you toward the investments that pay them the largest commissions, even if those investments aren't in your best interests.
Other times, financial planners are paid through a combination of fees and commissions. Some get both fees from clients and commissions on products they sell to clients. Certain planners, called “fee-offset” planners, receive a fee but reduce it by any commissions they earn selling you investments. Be careful about comparing the cost of a fee-only planner to one who is compensated in part or in whole by commissions. The “fee” portion of the commission-receiving planner may be lower than the fee-only planner’s charges, but you’re indirectly paying the commissions, too. (They come out of your investment, so you ultimately pay those commissions.) When you add those commissions to the fee, the total charges may compare unfavorably to the cost of the fee-only planner.
Needless to say, you have to be cautious about taking advice from someone who wants to sell you something. Every car salesperson will tell you his or her products are absolutely fabulous. But we all know that some cars are better than others, and nothing a salesperson says changes that. The same principle applies to financial products. We have already discussed how financial products have risk, and that means downsides as well as upsides. How will you get a clear, objective explanation of the risks from someone who profits from persuading you to take the risks?
The ordinary investor should look for a fee-only planner. Since the ordinary investor will often be at an enormous informational disadvantage to a financial planner, the potential for being victimized is great. There is little sense in increasing that risk by going to someone whose motives will be to sell you something that perhaps serves their interests more than it serves yours. While not all commission-based planners are unethical or dishonest, people are human and might respond consciously or subconsciously to incentives like that. If you hire a fee-only financial planner, your money pays this person’s rent and you are more likely to have his or her full attention and loyalty.
Those fee-only planners who charge a percentage of one’s investable assets may not even take on an ordinary investor as a client, because 1%, 2% or 3% of $5,000, $10,000 or even $20,000 isn’t much. Instead, look for a fee-only planner who either charges a flat fee or an hourly rate. Get an estimate of how much your plan will cost and a description of what information and advice you will get.
If you want to hire a financial planner who is paid in part or in whole through commissions, make sure the planner is a registered investment adviser. That way, the planner will be legally required to put your interests ahead of his or her interests.
You may encounter financial planners with a variety of titles or qualifications. Among them are: CFA (chartered financial analyst, awarded by the CFA Institute), CFP (Certified Financial Planner, awarded by the Certified Financial Planner Board of Standards Inc.), ChFC (Chartered Financial Consultant, awarded by American College), and CPA/PFS (Certified Public Accountant/Personal Financial Specialist, awarded by the AICPA). These designations are awarded when the planner has met prescribed educational requirements and, in some cases, has a certain amount of work experience.
Providing financial planning services to ordinary investors is not rocket science and, if you are early in the process of building your wealth, you don’t need to find a financial planner with decades of experience managing wealth for the Forbes 400. While good credentials matter, experience with life is probably more important. A person who has lived the rough and tumble of the real world, and who can empathize with your problems, is more likely to be helpful than someone who can only spout alphabet soup credentials, statistics and product information. For example, a person who spent years as an airline pilot and then watch her career collapse when the airlines consolidated, declared bankruptcy, laid employees off and terminated pensions, may have hard-earned wisdom that could make her a better financial planner than a whiz kid with a bunch of nicely framed diplomas. The most important quality for any financial planner is honesty. Next come judgment and concern for your individual needs. There are no credentials for these qualities.
Checking out someone’s honesty isn’t always easy. At a minimum, verify with the issuing body whether or not he or she really is a CFA, CFP, ChFC, etc. Consider calling the college or university from which the planner claimed to have graduated—many will give you basic information about whether or not the individual is or is not a graduate. If the person claims to be an attorney or a CPA (Certified Public Accountant), the state bar association or state board of accountancy where the person claims to be licensed should be willing to verify the license.
Second, check to see if the planner has a history of disciplinary problems. Of course, ask the person about any such problems. Then try to verify what you are told. The National Association of Securities Dealers, Inc. (www.nasd.com) provides some information and links about stock brokers and investment advisory firms. To check out individual investment advisers, try the securities regulator for the state where the individual maintains his or her headquarters. A list of state securities regulators is available at the website of the North American Securities Administrators Association: www.nasaa.org/about_nasaa/2062.cfm. Of course, try searching the person’s name over the Internet. While Internet searches can be time-consuming, and accuracy may be elusive, you never know what you might learn.
Ask the planner for references, and call them. Focus on whether the clients feel that the planner listened to them and truly served their personal needs. Try to interview several planners before selecting one. Look for someone who pays attention to what you want, but beware of someone who tries very hard to tell you what you want to hear. As we have discussed in this website, there are some hard truths about saving and investing that no one, not even the best financial planner, can change. If the planner tells you everything will be milk and honey, and that you can eat your cake and have it too, put your hand on your wallet and take a long walk outside--long enough that you don't return. Stay away from anyone who promises you a rose garden. Honesty and conscientiousness on the part of the financial planner are far more valuable to you than promises he or she cannot keep.
Be careful about hiring a planner who claims to be able to help you with other financial issues, such as tax and estate planning, and funding college expenses. These subjects can be complex (especially tax and estate planning) and expertise in all these areas is rarely embodied in a single person. While most financial planners will probably be familiar with the basics of college savings accounts like 529 Plans and Coverdell accounts, the ins and outs of the financial aid process are best known to the people who spend their lives dealing with them. The college(s) that are interested in your child will have financial aid offices, which would be a good place to start your search for aid. If you have accumulated some serious money and need to deal with tax and estate planning issues, consult with tax accountants and tax attorneys. While a financial planner may be able to suggest potential ideas in the tax and estate planning area, almost nothing in these areas is simple or obvious, and you should consult with experienced tax and legal practitioners before plunging ahead.
Ask a financial planner you’re thinking of hiring about his or her policies concerning client confidentiality. Any financial planner you hire may end up with your Social Security number, bank and securities account numbers, credit card numbers and other sensitive information. Some financial planners may be tempted to sell client lists to generate income. Various financial services firms and other companies will buy names of people who fit certain financial profiles in order to call or e-mail them with sales pitches. Most people would prefer not to receive those calls. It’s perfectly okay to ask the planner to agree in writing to a level of privacy with which you are comfortable. If you can’t get the written assurances of privacy to your satisfaction, try another planner.
Employer Sponsored Financial Planning
Employers sometimes offer financial planning services to 401(k) plan participants. This is worth checking out, but you have to be careful. You may get computerized planning services, in some instances. Other companies provide consultations with live human beings. Many employers pay for the consultations, although others require employees to foot the bill. Some employers go one step farther and offer managed accounts, where a financial professional actually chooses investments for you instead of just giving advice. Consider the cost of these services against other alternatives. They aren’t necessarily cost effective or the best deal around. For example, if you or your spouse have significant assets outside your 401(k) account which you don't care to reveal, the financial planning advice you get could be off the mark. In such a situation, you might be better off hiring an independent financial planner with whom you are willing to share all your financial information.
As with any financial planning service, beware of conflicts of interest. The financial services firm managing the 401(k) plan may try to steer you into mutual funds and other products that it offers. Or the person giving you advice may receive commissions for selling you certain products. Inquire about these issues.
Another potential problem is that the firm managing the 401(k) plan may be reluctant to recommend that you sell your employer’s stock, since your employer gave it the contract of managing the 401(k) plan. Many employees are too heavily invested in their employer’s stock and should diversify away from it. Numerous Enron employees who put all or a large portion of their retirement money into Enron stock learned the hard way about the need for diversification. Your fortunes are already heavily tied to your employer. Don’t tie your retirement to your employer.
While ordinary investors need not have a financial planner, many persons in their 40’s and 50’s might benefit from mid-life counseling.