Important Decisions when Selecting a Financial Planner
July 3, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
Often, people believe that selecting and finding a financial planner is more complex than it actually is. This leads to consumers not reaching out when they need help with finances and being unable to make the most financially smart decisions. Selecting a financial planner is actually easier than it may appear.
The Difference Between a Financial Advisor and a Financial Planner
The first primary source of confusion comes from the actual title of a financial planner. Many different roles have similar names, and it is important to understand what each role focuses on.
First, a “financial advisor” is a generalized term that references anyone that helps a client manage their money. They can have many different specializations, including tax planning, insurance, retirement, and any other financial industry sector.
A “financial planner” is a more specific term. This role falls under the umbrella of a financial advisor. These people help to develop a comprehensive plan to help meet long-term financial goals and make well-educated financial decisions. A “financial planner” can help edit goals, understand your current financial status, create a plan to meet goals, and provide guidance when making critical financial decisions.
What to Look for when Selecting a Financial Planner
The most important thing to look for when selecting a financial planner is a CFP or “Certified Financial Planner.” This certification ensures that the person has passed an intense exam after completing the necessary relevant coursework.
Another term to look out for is “fiduciary duty.” This term means that, in keeping with the CFP code of conduct, the individual has a duty of loyalty and care to you and must provide advice out of your best interest. This helps to ensure that your financial planner is working with you, not against you.
How are Financial Advisors Paid?
There are many different ways that these individuals can be compensated for their services. Let’s look at some of the different methods to understand what will best work for you.
Commissioned Compensation
Commissioned compensation means that the individual will be paid based on the specific products they sell. These individuals will have a set rate that they make based on each product they sell to their clients. The commission will depend on the investment and difficulty level necessary.
Fee-Only Compensation
This form of compensation is based solely on a fee, with all investments being separate. There are three ways that this fee can happen.
- An hourly fee: This covers your advisor's time to provide the service, such as meeting with clients and preparing beforehand.
- Flat fee: This can cover a bundle of services you select based on your advisor's offer. Depending on the individual and organization, it could be a package or a monthly fee.
- Retainer fee: This is paid in advance of any services provided. It could be time-related or reflect a percentage of your assets.
Fee-Based Compensation
This form of payment is a combination of fee and commission compensation. The fee portion may be an hourly rate or a retainer fee that the individual earns regardless of the investment. The commission portion depends solely on the investment and the level of difficulty involved. These two elements combined are the fee-based compensation method.
What is the Best Form of Compensation?
This ultimately depends on the type of relationship that you are going to have with your financial planner. For example, if you want to make a particular investment, you may be better off paying a commission one time to avoid any additional fees with the other methods.
However, many clients want an ongoing relationship with their financial planner. With both methods, the commission can cause a conflict of interest. The planner may offer you the option that earns them the most commission. This is important to keep in mind when deciding on a financial planner. You need someone you can trust to make the right decisions, not just the decisions that earn them the most money. Identify a financial planner who is a Certified Financial Planner (CFP) to guarantee a fiduciary standard.
If you have questions or think Complete View Financial can help you with your financial planning needs, please contact us.