Your guide to hiring a financial planner
Lots of times taking control of your finances is about going it alone. But once in a while, “taking control” means asking for help — like hiring a financial planner. But when does it make sense to seek professional help with your money? And when is it best to do it yourself? Erica Sandberg, editor-at-large for Bankrate.com’s money and credit management website, offers this Financial Planning 101.
When should you consider hiring a financial planner?
“When you feel ready. If you’ve got a lot of questions and you really need some guidance, someone to help you develop a plan and just kind of a path to help you get to where you want to go — financial planners are terrific. That’s what they’re there for,” says Sandberg.
Explainer: How do I choose a financial planner?
There’s no easy answer to that question — a lot depends on your net worth and your needs. But the first step is to understand what’s out there in the financial planning world. Read more.
What little red flags pop up that might indicate you need a financial planner?
“If you don’t have a will. If you’ve got some cash that you want to give over to your children, really a financial planner is going to be there for you. You also are going to want to have some really solid advice regarding insurance, tax planning, investment advice — that’s what a financial planner does,” says Sandberg. “You could be the smartest person in the world, but… They’ve got more information. You could get more information too, but it takes time. So if you don’t have the time, trust in a professional.”
Does it make sense for someone with lower income to hire a financial planner?
“It depends,” says Sandberg. “If you’re financially strapped and you really don’t have cash, for goodness sakes, go do it on your own. Get as much information as you can from really reputable sources for free. There is so much out there.”
- Bankrate: Financial planning for low-income people
- Kiplinger: Financial Planning for the ciddle class
- MSN: 3 money tips for every income
How can you decide if it’s really worth it to get a financial planner?
“If you’ve got a lot of extra cash you want something very specific to your situation. So for example, you’re going to throw at them everything having to do with your assets and your income,” says Sandberg.
“What you’re going to leave there with — let’s just say it’s fee-based and you’re going to get this plan that’s developed for you — you’re going to have kind of a good, solid plan that’s made up for your situation. It’s a road map,” Sandberg adds.
How do you find a financial planner you can actually trust with your money?
“A little bit of research. I would not go with just the first one and say ‘OK, that’s who I have.’ Talk to a few. It’s personality driven. How often is it that we go to somebody — I don’t care who it is — and they just kind of throw you into what they think is right? You really, really need to have someone who listens to you and says ‘OK, I get it. This is what you’re syaing to me, this is where I want you to go, this is how I can help you.’ And if they’re not saying that, walk away. There’s a million.”
- Consumer Reports: What to expect from a financial planner and how to find a good one
- SmartMoney: How to find a good financial adviser
Which type of financial planner should you hire?
“A lot of times it really comes down to consultations,” says Sandberg. “There is a difference between fee-based and whether they’re commission-based. Generally speaking, a fee-based financial planner is the way to go, but not always.”
NOTE: A fee-based planner can charge you a fee, but also sell product. Another type of planner is fee-only. They cannot earn a commission or accept referral fees. By law, fee-only advisers have a fiduciary responsibility with the individual they’re working with. Commission and fee-based planners may have licenses with some kind of broker.
To help you understand the various ways in which a financial professional can be compensated, here’s some information from the National Association of Personal Financial Advisors. How compensation is received may affect the advice you receive, if that planner faces hidden conflicts of interest. The three most common models of compensation are:
Fee-Only Compensation
This model minimizes conflicts of interest. It is the required form of compensation for members of NAPFA. A Fee-Only financial advisor charges the client directly for his or her advice and/or ongoing management. No other financial reward is provided by any institution—which means that the advisor does not receive commissions on the actions they take on the clients’ behalf. Compensation is based on an hourly rate, a percent of assets managed, a flat fee, or a retainer.
Fee-Based Compensation (fee and commission)
This form is often confused with Fee-Only, but it’s not the same. Fee-based advisers charge clients a fee for the advice delivered, but they also sometimes receive payments for products they sell or recommend. In some cases, commissions are credited towards the fee, giving the appearance of a lower-priced option, but any outside compensation lessens the adviser’s ability to keep the client’s best interests first and foremost.
Commissions
NAPFA has always maintained that an adviser who is compensated through commissions is primarily a salesperson. A client working with a commissioned sales person must always ask himself: Is this advice truly in my best interest, or is it the most profitable product for the advisor? Unfortunately, often the answer is the latter. In fact, a commissioned adviser usually is required to put the best interests of his employer ahead of the best interests of his client.
Why would it ever make sense to go with a commission-based financial planner?
“I have friends who are financial planners who get paid on commission, so they represent an insurance company or an investment firm. So they’re going to present those as your options,” says Sandberg. “There is a slight bias. A fee-based is hourly, just like you would pay an attorney.”
What will a financial planner cost you?
“A newbie who’s out there, the financial planner, they just got their CFP credentials, they could charge us $100 an hour. It could go up to $200. It could go up to more.”
- Forbes: How much do advisers cost?
- CNN Money: Cost of a financial planner
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