If you’re thinking of working with a financial planner, there are things you should know about them. Consider asking a potential financial planner questions in the following areas.
Ask them what credentials they possess. Anyone can call themselves a “financial planner”; there are, however, some designations that indicate the planner has some additional training.
• CFP stands for Certified Financial Planner. CFPs must take a series of college level courses that cover major aspects of financial planning and must pass a ten-hour comprehensive examination. They also must meet continuing professional education requirements. A CFP with a college degree must have at least three years of individual client experience; one without a college degree must have five.
• ChFC stands for Chartered Financial Consultant. ChFCs have an insurance industry background, but must also meet requirements similar to those a CFP must meet.
• ChFEBC stands for Chartered Federal Employee Benefits Consultant. ChFEBCs must take a two-day course in federal retirement and benefits. Two days may not seem like a lot of study, but most financial planners haven’t had any federal specific training.
Ask them how much and how they are compensated. Financial planners are entitled to earn a living, just like the rest of us, but how they are compensated might affect the recommendations they make. You will want to get an idea of what your investment related costs will be before you agree to work with a planner.
• Commission-based planners are compensated by receiving a commission for every investment you make. The commission often comes in the form of a sales charge or “load”. They might be more highly compensated if they sell you a certain type of investment.
• Fee-only planners charge a fee for their advice, and do not sell investments that have a commission attached. Sometimes they might charge a percentage fee based on the value of your investments with them. Though they tend to work with higher net-worth individuals than the average federal employee, more and more of them are extending their outreach to individuals with a more modest net-worth.
• Hybrid planners (sometimes called fee-based) may charge a fee and receive a commission as well.
• Salaried planners are paid a salary by the firm that employs them.
You may also wish to ask them about their investment strategy, how long it will take them to develop a plan and other items. The Securities and Exchange Commission has several helpful publications on financial planners and investment planners available on their website http://www.sec.gov.
You can also investigate a financial planner’s disciplinary record. The SEC regulates planners and firms that manage $100M or more. Individual state securities agencies regulate planners and firms that manage less than $100M. The Financial Industry Regulatory Authority also has a “broker check” feature on its website, http://www.finra.org.
Ask them if they will act as a fiduciary. A fiduciary must act solely in the best interests of the client at all times and must disclose real, or potential, conflicts of interest. Members of the National Association of Personal Financial Advisors (NAPFA) and Registered Investment Advisors (RIA) are required to act as fiduciaries. The CFP Board (which regulates Certified Financial Planners) requires that CFPs adhere to a fiduciary standard.