Two Key Decisions for Selecting a Financial Planner

May 21, 2020 Author: Tess Downing, MBA, CFP®, Complete View Financial

Complete View Financial

Selecting a financial planner is often made out to be more complicated than it needs to be.

And, sadly, that may be keeping some people from getting the help they’d like to fulfill their financial goals and dreams.

Financial advisors versus financial planners: What’s in a name?

One of the first challenges is understanding the names given to those who provide financial advice. Many terms are used loosely and interchangeably. We hope to provide the clarity to move forward with confidence as you seek advice.

“Financial advisor” is an umbrella term that refers to anyone who helps clients manage their money. An advisor might specialize in investment management, retirement planning, estate planning, tax planning, insurance, debt repayment or any other area of the financial industry.

A “financial planner” is one specific type of financial advisor. This professional works with you to design a comprehensive plan so you can reach your long-term financial goals. A planner helps you clarify your goals, assesses your current financial situation, and then provides guidance and strategies to get you to those goals.

When you are selecting a financial planner, you’ll want to look for a “Certified Financial Planner” or CFP. The CFP certification ensures that the person has completed relevant coursework, passed a rigorous exam and has the requisite years of full-time financial planning experience. (A ChFC, or chartered financial consultant, provides the same assurance.)

What differentiates CFPs from other advisors is the expression “fiduciary duty.” This phrase should be significant to you. In keeping with the CFP code of conduct and ethics, having a fiduciary duty means the person has a duty of loyalty and care to you and must always provide advice based on your best interests and not their own.

[You’d think all advisors would be required to do that, but that’s not so. Those who do not need to meet the fiduciary standard only have to make recommendations that are suitable for your particular situation, based on a basic understanding of your financial situation. The word “suitable” means that there could be better investment options, but the recommendation meets a suitable or reasonable solution.]

A financial planner may round out the services offered by being skilled in investments, retirement, taxes, education, estates, cash flow, employee benefits and risk and insurance. Selecting a financial planner is easier than it looks.

How are financial advisors paid?

Something else makes people hesitate to hire a financial advisor: they don’t understand how advisors are compensated. You’ll want to understand the different options because your choice not only affects what you’ll have to pay but also the terms and conditions of the relationship between you and the advisor.

So, what are the options?

The three terms you’ll hear related to compensation are “commissioned,” “fee-based” and “fee-only.”

Commissioned compensation

Advisors who sell products related to financial services may receive only a commission, based on the specific product they sell. They might sell investments, real estate, loans or insurance products. The commission will depend on the investment made, such as a fund that charges a commission of 5%. For a $20,000 investment, you would pay a commission of $1,000 – upfront – and the balance of $19,000 would be invested.

Fee-based compensation

While it may not sound like it, “fee-based” compensation is a combination of fees and commissions. The term was developed by the brokerage and insurance communities to replace “commission and fees.” The fee portion could consist of an hourly fee, a flat fee or a retainer fee. Say, for example, that your advisor charges an hourly fee of $200 and requires eight hours to develop an investment plan for you. If the plan includes a $15,000 investment in a mutual fund that charges a 4% commission, then $600 in commission will go to the advisor upfront, $14,400 will go into the mutual fund and you will owe the advisor an additional $1,600 for the investment plan.

Fee-only compensation

This form of compensation is exactly what it says: a fee only. In all three cases, any investments are separate. However, the fee can take one of three forms: hourly fee, flat fee or retainer fee.

An hourly fee covers the time your advisor dedicates to providing the service, whether time spent with you or working for you. An hourly fee may make sense if you only need input on limited investment topics.

A flat fee usually covers a bundle of services that you select from what the advisor offers. This could be a monthly or quarterly fee. Or, an advisor might offer a $2,000 package to analyze how much you will need for retirement and to provide a plan for you to reach that amount.

A retainer fee is an amount you pay the advisor in advance, regardless of the services provided. It may be time-related, such as a $2,000 retainer fee for 10 hours at $200 per hour, as the time estimated to perform a particular service. Retainers can also reflect a percentage of your assets (say 1%), your net worth, your assets under management, your income or some combination.

What form of compensation is best?

Depending on the services you require, different forms of compensation could be more advantageous or less advantageous. For example, if you just want a particular investment made, you might be better off paying a commission one time to the advisor and avoiding additional or ongoing fees.

But, for many, the overarching decision-making factor is the nature of the relationship between the advisor and the client.

In the two forms of compensation that include a commission (commissioned or fee-based), the relationship is not purely between you and the advisor. There’s a third entity: the commission. So, the system creates the possibility of a conflict of interest.

Say your advisor has the opportunity to suggest a financial product that pays a commission versus one that doesn’t. The incentive to recommend the commissioned one may not be in your best interest. Or, if your advisor is part of a broker-dealer, your choices may be limited to just those products affiliated with the company.

In the case of fee-only, the advice and the compensation are entirely independent of the financial products recommended, regardless of the type of fee paid. According to the National Association of Personal Financial Advisors (or NAPFA), fee-only is the compensation method that most aligns the consumers’ interest with their financial advisors.

So, what is the best combination?

In summary, what is your best chance of getting unbiased and transparent financial advice? Identify a financial planner who is a Certified Financial Planner. (That guarantees you the fiduciary standard.) And, select a Certified Financial Planner whose compensation is fee-only. (That ensures that no conflicts of interest are being introduced into your relationship.)

If you think Complete View Financial can help in your financial planning needs, do call us for an initial consultation.